Real Estate Community Greets Growth with Caution

WASHINGTON, DC-Today the Commerce Department released GDP figures that showed a 3.5% growth in Q3 – the fastest pace in two years. The news did not come as a surprise; both public, private and non-profit economists have been forecasting positive growth for the rest of the year and into 2010, prompting talk that the recession has unofficially ended. In a recent survey by the National Association of Business Economics, 34 of 43 economists polled said the recession is over. Federal Reserve Chairman Ben Bernanke echoed similar sentiments. “From a technical perspective, the recession is very likely over,” he said recently.

Still, though despite the macroeconomic gains, few economists are expecting to see dancing in the streets at such pronouncements. Undeniably, there is still plenty of pain that must be worked through, starting with the high unemployment figures. Analysts predict unemployment will not peak until mid 2010 even as growth picks up.

Certainly the real estate industry, viewed by many as the center of gravity for the economic pain and dislocation, is taking little solace from the numbers.

“While it’s great that the GDP is going up, until we start to see a move on jobs; there aren’t going to be any improvements in the commercial real estate market,” Howard Ecker, CEO of commercial tenant representation firm Howard Ecker & Co., a tenant rep company, tells GlobeSt.com.

“Commercial property values will continue to fall as along as there isn’t positive job growth. Without positive net absorption there is very little reason, if any, for values to stay where they are or improve.” Ecker, one of a handful of industry participants contacted by GlobeSt.com to discuss the state of the industry, thinks it could be anywhere between two to five years until the situation reverses and there are significant improvements in the commercial real estate market.

Ecker was among the more positive respondents to our informal survey. That said, the larger point, many explained, is that commercial real estate is a lagging indicator. So if nothing else, the GDP figures suggest an end is in sight for the industry’s woes – albeit further off than the rest of the economy.

“The official, technical end of a recession is by definition a good thing for commercial real estate, but we have to view it in context,” Dennis Russo, who represents lenders and developers as a commercial real estate partner at Manhattan-based law firm Herrick, Feinstein, tells GlobeSt.com. “The commercial real estate market tends to be a lagging indicator of the overall health of the economy — in good times, bad times, and times when the various markets are moving toward good or bad. So when the overall economy went sour, it took a while for real estate to show the effects of that. Likewise, now that the larger economy appears headed in a better direction, it will take the commercial real estate market some time to bear the fruits of an economic recovery.”

This lag period does not help the industry psychologically, which is clearly in a funk.

“Real estate families, funds, developers and owners have to regain confidence to buy and develop. They have to perceive that prices of commercial real estate have settled at reasonable levels with no material downside,” Russo says. “The final layer is that banks and lenders have to regain that same confidence and form those same impressions.”

Getting to that point is going to take several years, if on-the-ground observations are accurate.

Attorneys in McKenna Long & Aldridge’s Los Angeles office are discounting the GDP growth, at least in terms of positive impact on the commercial real estate industry.

“There is not a sign of improvement,” Tony Canzoneri tells GlobeSt.com. “Loans are generally not available on workable terms and we are looking at an impending avalanche of commercial loan maturity and performance defaults.”

Another real estate partner at the firm Timothy Scott agrees, noting: “With the overhang of both the loss of equity and maturing loans, the commercial real estate industry probably has not yet seen the real bad times.”

Indeed the state of the capital markets, which are obviously key to an industry recovery and which are only now starting to show signs of a thaw, was referred to over and over in interviews.

“There remains a massive overhang of maturing CMBS debt that encumbers US commercial real estate,” Michael Goldsmith, the head of the commercial real estate group of BBK, tells GlobeSt.com.

“Properties remain overleveraged and the fundamentals still suggest that prices will need to decline to spur significant transactions. Our view remains that the lenders will first need to recognize the disconnect between values and debt loads, write down the loans to realistic levels, and allow the market to clear the problem.”

John Sullivan, chair of DLA Piper’s Boston real estate group seconds this view.

“One of the biggest impediments to unclogging the market is the massive amount of debt scheduled to come due over the next year or two,” he tells GlobeSt.com. “Fitch recently reported that over $36 billion of securitized commercial real estate loans have been transferred to special servicers so far this year and estimates that this number could reach $100 billion soon.” The bottom line is that a difficult de-leveraging process still lies ahead.

On the other end of the spectrum is Abe Schear, co-chair of Arnall Golden Gregory’s Real Estate Group in Atlanta, who notes that “private equity is beginning to find its way into the market, especially foreign money which is looking to take advantage of the marriage of reduced pricing and a favorable currency exchange.” International interest in the in the United States real estate market is much stronger than it was in the over-heated market of just a few years ago, he tells GlobeSt.com.

If commercial real estate is the center of gravity for the economic downturn, then new construction and development is at its very vortex. Thus signs of life spotted by Andy Frankl, president of IBEX Construction, are particularly telling.

“The industry is still in a downturn – but recently I’ve seen some reasons to hope it will end soon,” he tells GlobeSt.com. He has been picking up more retail work lately, for starters – and high-end retail at that. “We work with the top brands such as Cartier and Nordstrom. We are getting more calls in this space, especially from European and Asian companies. They want to invest right now.” In fact he recently met with French and South Korean retailers about space in SoHo.