2011 Looks Like ‘Transitional’ Year

NEW YORK CITY-Concerns ranging from the prospect of a double-dip recession to the workload faced by special servicers hang over the near-term outlook for commercial real estate, Fitch Ratings’ Adam Fox said in a webcast Thursday. Yet he added that there are also many encouraging signs in the current market, and summed up the forecast by saying, “2011 looks to be a transitional year” in which vacancies and rents for all property types will at very least stabilize nationwide.

Senior director at Fitch, Fox cited a number of positive developments that support the view that next year will mean progress on the road back from the downturn. Overall, property fundamentals are at or near bottom, he said. And while the smaller-than-expected volume of distressed properties hitting the market may have proved disappointing to would-be investors hoping to take advantage of a deluge, the flip side is the market stability that it points to.

Conversely, trophy assets have enjoyed strong pricing, Fox said—although other experts have attributed this in part from the supply/demand imbalance for such assets. The greater availability of credit is another factor; indeed, PricewaterhouseCoopers’ Susan Smith recently told GlobeSt.com that respondents to the latest PwC Korpacz investors’ survey have expressed surprise at how quickly the capital markets have rebounded.

The revival of the CMBS market in 2010, while still a long way from the issuances seen at the market’s peak, is another plus, said Fox. As for legacy CMBS, although Fitch and other ratings agencies have predicted that the delinquency rate will approach 12%, Fox says the increase in delinquencies is tapering off. At the same time, the volume of loan resolutions is on the rise, he said.

On the subject of delinquencies, Fox noted that multifamily loans tied to CMBS have seen higher default rates than those issued by Fannie Mae and Freddie Mac. That said, multifamily Fox’s colleague Steven Marks said REITs in the multifamily sector’s outlook have already been rated “stable” by his agency, a milestone no other sector has reached as yet.

“Even if job growth improves, it is realistic to assume there will be a lag” between improving employment and growing consumer demand for single-family housing, said Marks, managing director at Fitch. That bodes well for rental apartments, he said, adding that the currently low prices in single-family housing aren’t likely to impair multifamily demand.

Among the other property sectors, Fox offered reasons to expect that stabilization is in the cards for next year. Office’s outlook is buoyed by job growth in the private sector, he said. The fact that the foreseeable future doesn’t appear to hold large-scale retail bankruptcies—the kind that led General Growth Properties to Chapter 11 protection and left massive vacancies where Circuit City and other big-box chains once did business—bodes well for that sector.

The hotel sector, despite its challenges, has seen positive RevPAR growth and will be among the first to recover, said Fox. In the industrial realm, increased consumer demand has led to higher inventory levels, thus brightening the sector’s outlook for next year.