Capital Markets Still Waiting for Job Growth

NEW YORK CITY-A year after panelists described “light around the bend” for commercial real estate, that light has grown considerably brighter. Experts convened for the 2011 edition of the Real Estate Capital Markets Conference at the Times Center, cosponsored by Columbia Business School and Goodwin Procter, found much to cheer about: debt and equity becoming more available from a variety of sources, low interest rates, an uptick in the GDP.

A major stumbling block, though, remains the sluggish pace of new job creation. “A jobless recovery is not good for real estate,” said M. Leanne Lachman, president of Lachman Associates LLC, a panelist during the “Real Estate Fundamentals and Macro Trends” discussion.

She noted that corporations have become highly profitable, but that has come through cost-cutting. In order to grow their earnings potential, they’ll need to start hiring again. Forty-five percent of audience members evidently agreed, citing high unemployment as the biggest challenge commercial real estate faces at present.

A more business-friendly stance from Washington would be a big help in this regard, panelists agreed. “The anti-business environment has got to stop,” said Wendy Silverstein, EVP of capital markets at Vornado Realty Trust. That could include meaningful progress on tax reform, although panelist Sam Chandan, global chief economist and EVP of Real Capital Analytics, expressed doubt about Congress’ current ability to reach consensus on the issue.

Chandan said this in particular about the “extraordinarily far-reaching” plan from a bipartisan committee co-chaired by Alice Rivlin, who later delivered the conference’s closing keynote. However, panel moderator Henry Cisneros, former Secretary of Housing and Urban Development and now executive chairman of CityView, opined that “this could be the moment” for tax reform.

Prior to the start of the “Macro Trends” panel, audience members were polled on questions that included the relative standings of private and public equity in the market. Fifty-seven percent voted that publicly traded companies will continue their three-year rule, although 76% of the audience then said private equity will start pulling ahead in 2012. It was a point that panelists in the “On the Ground” discussion explored in more detail.

Private equity has largely sat out the early stages of the resurgence of the transaction markets, deploying in 2010 a small fraction of the capital that dominated the market in 2007. That’s likely to change as investors regain their confidence, “On the Ground” panelists said. Equity capital is “at least convinced that we’re at the bottom,” said Mary Ellen Egbert, managing director and head of the restructuring group at JPMorgan Chase.

Also poised to re-enter the domestic market in a big way this year are sovereign wealth funds. “The money is just there,” David Hodes said of the funds. “The question is how to deploy it.”

Partly answering that question is the fact that non-distressed sellers are now more likely to sell. “People that own stabilized assets see this as an opportune time to exit,” said Hodes, founder and managing partner of Hodes, Weill & Associates. The challenge, he added, is the large number of assets that haven’t reached that status as yet; the focus is on getting them stabilized.

Other panelists took a geographic approach. Ric Clark, president and CEO of Brookfield Office Properties, noted that the key East and West Coast markets are in better shape than the heartland, but later added that Brookfield had shied away from some acquisitions recently in its own New York City backyard, on grounds that the company is looking for higher yields.

Alan Leventhal, chairman and CEO of Beacon Capital Partners, said a closer look at the fundamentals would reveal that we are seeing growth in the economy. In particular, he cited markets that are abundant in what he called “the scarcest resource”: intellectual capital.

The concluding keynote by Rivlin, former vice chair of the Federal Reserve board and founding director of the Congressional Budget Office from 1975 to 1983, applauded the “moderate optimism” of the “On the Ground” panelists—then threw some cold water on it with a warning about the federal government’s rising debt level. Taking bipartisan action now to keep the debt from growing faster than the GDP, as it’s now doing, would stave off the possibility of a sovereign debt crisis in the US, which she said was “no longer unthinkable.”