Fears of another recession, global debt levels, uncertainty regarding taxes and regulation are confidence-killers among US companies that must drive a fundamentals-based recovery to heal the consumer sector. The recovery may be lacking momentum, but evidence suggests contraction is unlikely, barring an unexpected shock. Companies have wrung maximum productivity from their operations and need more help, leading to improved, if below-average, job growth in 2011. Election results should contribute to reducing uncertainty and move the political agenda more to the center, with likely compromises on key issues. The impact of the Fed’s bond purchases may be questionable, but the message of readiness to shore up near-term conditions is clear.
The apartment recovery rallied above expectations in 2010 thanks to the release of pent-up renter demand, lower tenant rollover and job growth. Occupancies in other property sectors are at or close to bottom, and gradual recovery will begin in 2011, led by industrial and retail, then office properties. The concentration of sales in the upper end of the market reflects an intense flight to safety. In 2011, investors will likely move down the quality spectrum as premium property returns dip and the cap rate/interest rate gap, along with locking in cheap debt ahead of rent growth, provide a safety net. Financing will ease further, but tight underwriting is here to stay, even as the commercial mortgage-backed securities market expands and banks become more willing to lend.
Lender response to distressed real estate has played out quite differently from the early 1990s. In the current cycle, lenders have minimized fire sales, especially for quality assets, thus limiting large-scale opportunistic buying and frustrating many vulture and opportunity funds. In 2009 and year to date, more than 80% of the distressed property sales were under $5 million. In the third quarter of 2010, new additions of troubled assets totaled $13.7 billion, a 61% decline from the same period last year and were offset by $11.3 billion in workouts and restructured loans, minimizing the net increase in outstanding distressed assets to the smallest in two years.
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