Real Estate Forum - February 2008

Adding to the market uncertainty is the decline in new CMBS issuance anticipated this year. Duca says there was a significant drop in new paper issued during the fourth quarter and it has not picked up so far this year. In addition to lenders’ capital constraints, he notes that historically wide spreads and investor uncertainty are also keeping new loans at a minimum. “At current spread levels, CMBS lenders are not competitive in the commercial real estate finance arena,” he says.

Moody’s expects to see less than $100 billion of CMBS issuance this year, less than half the $230 billion recorded in 2007.

Yet that doesn’t mean traditional conduit lenders have completely exited the financing arena. “The CMBS market represents a large share of overall real estate finance,” Duca explains. “If the CMBS lenders aren’t helping to fund commercial real estate loans, who will? Banks and insurance companies are only going to be able to do so much business, and that will probably affect the rates they’re able to offer. At the point where they can no longer meet the demand for financing, perhaps

CMBS lenders will become more competitive again.”

But for now, the lack of active lenders has severely reduced liquidity in the market and could ultimately drive asset prices down, he adds. “Commercial real estate prices increased significantly with the infusion of liquidity the market has seen the past few years,” he says. “With the trend reversing, we could see prices declining.”—Jennifer McCandless

CEOs’ Outlook Upbeat
Despite Credit Collapse

In spite of the massive disruption in the capital markets, CEOs and senior executives toiling at real estate firms and related companies are fairly optimistic about the year ahead due to solid fundamentals. Those opinions came to light in the second annual Leading the Enterprise 2008 survey sponsored by the Real Estate Roundtable and FPL Advisory Group.

The shifting view of the economy was perhaps the most striking finding of the survey, which polled nearly 200 top-level executives in late 2007. In the previous findings, 63% reported a positive outlook

for the overall economy, with 9% saying they had a “strongly positive” attitude. Twelve months later, only 38% maintained a positive position, with less than 3% opting for “strongly positive.” The number of those in the neutral camp rose from 25% to 29%. Also up from last year was the percentage of respondents who say they are “not very confident,” a figure that rose to 32% versus 12% in 2006. By sector, the most confident are executives in the equity REIT, investment management and private equity business, while homebuilders, investment bankers and developers are the least confident.

Nevertheless, 69% forecasted increases in revenues in 2008, with 71% anticipating a hike in profitability. Although those figures are lower than the prior results—85% and 80%, respectively—they still indicate an optimistic consensus, say the report’s authors.

Jeffrey D. DeBoer, president and CEO of Washington, DC-based RER, says generally stable fundamentals in terms of supply and demand and rent rolls play into the executives’ cautiously optimistic stance. “The overall picture you see from our survey is some slowdown, but optimism about the future.”