New Survey Reveals Increasing Optimism in Gateway Commercial Markets, Less Cheer in Non-Gateway Cities

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Senior commercial real estate executives' are feeling relatively positive about current and future conditions in the commercial real estate market, according to a first quarter 2013 Sentiment Index put out by the Real Estate Roundtable. But these upbeat sentiments relate mostly to commercial real estate in so-called Gateway markets, where valuations, equity and capital availability are recovering more quickly, particularly for Class A assets, than for B and C properties in secondary and tertiary markets.

In addition, respondents to the survey remain concerned about the slow pace of economic recovery, sovereign budget deficits, including that of the US government, and the possibility that interest rates will go up.

Reflecting the industry's slow recovery, 8 percent more survey respondents rated current conditions as "somewhat better" than those of a year ago (compared to the fourth quarter 2012 survey), while 16 percent more respondents said they expected "somewhat" or "much better" conditions a year from now.

Although all three indices rose in the current survey and, while the overall trajectory of the survey remains positive, the index has not recovered to where it was two years ago, before the 2011 debt ceiling crisis and the downgrading of the US credit rating by S&P.

Whereas the "Overall Index" hit a high mark of 77 in the first half of 2011, according to the first quarter Real Estate Roundtable survey, it stands at 69, up from 65 in fourth quarter 2012. The "Current Conditions Index" which rose slightly in the first quarter survey, from 68 to 70, also remains a little stronger than the "Future Conditions" index which increased from 62 to 67 between fourth quarter 2012 and first quarter 2013.

Many survey participants said they were concerned about potential interest rate increases, which could lead to higher mortgage payments and lower asset values--a combination that could threaten the market's recent progress. Renewed pressure on property values would also have negative effects on  local government tax revenues, bank balance sheets, especially smaller, community banks, and retirement accounts held in US pension and 401 (K) plans, according to the Real Estate Roundtable survey.

"The latest survey underscores the need to accelerate US job creation--still the most important metric driving property fundamentals--and the need for appropriate flows of capital and credit for commercial real estate transactions," said Real Estate Roundtable President and CEO, Jeffrey DeBoer.

"To get business off the sidelines--expanding their plants and payrolls--there must be predictability, certainty and balance in public policy going forward, whether the issue is promoting sustainable, secure energy sources; simplifying and restructuring our tax code; implementing financial regulatory safeguards under Dodd-Frank; or addressing the nation's immigration problems," he added.