Archive for January, 2011

U.S. Real Estate Optimism Not Rooted in Fact

Friday, January 14th, 2011

The American entrepreneurial spirit is a wonderful thing, and for decades that “can-do” attitude has made the United States the leader in innovation and economic results. This outlook is also responsible for the fact that, each January, we witness a wave of optimism across America – bold confidence in the upcoming year that borders on giddiness.
Everyone in the real estate industry wants to believe good news, particularly now, as we begin a third year of depressed real estate conditions. But wanting something to be true doesn’t make it so, and as much as I dislike saying it, the recent optimism surrounding the real estate market is based more on hope than fact.
The facts reflect a national unemployment rate of 9.4% according to Trepp LLC [http://www.trepp.com] research. That number is alarming on its own, but when you isolate out the burgeoning employment created by government bureaucracies in Washington, D.C., one has to wonder how that number might grow. Real estate will not pickup in either residential or commercial properties unless and until substantial new jobs are created. So far this has not happened.
On the residential side, recent facts published by RealtyTrac [http://www.realtytrac.com] data service reveals that over one million homes were repossessed in 2010, an increase of 14% from 2009. Keep in mind that this number was reduced due to the stalled foreclosure proceedings in the last two months of 2010 resulting from the foreclosure document brouhaha. Last year set a record high for new bank-owned properties. Newly released year-end 2010 facts about real estate from the Federal Reserve Beige Book [http://www.federalreserve.gov/fomc/beigebook/2010] describe the real estate sector as sluggish overall, citing lack of employment growth and difficulty in obtaining credit as the two main impediments to improvement. Due largely to the decline in the real estate market, our states and municipalities are facing reduced revenue, and having to make strategic and severe cuts in spending. Furthermore, the FDIC reports that 157 banks failed in 2010 – 17 more than in 2009 – so even employed people will find it more difficult to buy a home, because their financing options are reduced.
For commercial real estate, 2010 facts provided little foundation for optimism, unless one of two things happened: you owned and sold an institution grade property in Washington DC or New York City, or an A or B multifamily property in a 24/7 city (this is where foreclosed homeowners and job-seekers are moving). It is true that transaction activity in 2010 for properties over $5 million increased 109% from the previous year, reaching $46 billion [Source: Real Capital Analytics], but those numbers must be kept in perspective. We were climbing out of a pit. Remember 2008, when the last quarter numbers were already depressed by the grinding recession? That year, transactions were at $154 billion. New commercial construction, according to the Federal Reserve’s latest Beige Book, is “subdued or slow” overall, indicating ongoing lack of demand and an inability to absorb existing vacant space. And, while there has been discussion of the potential for as much as $30-40 billion in new commercial mortgage backed security (CMBS) activity in 2011, issued by Wall Street firms like UBS AG (NYSE:UBS), Deutsche Bank (NYSE:DB) and JPMorgan Chase & Co (NYSE:JPM), the fact is that there is an estimated $49+ billion in CMBS loans coming up for refinancing in 2011. Data firm Trepp reported that December 2010 delinquency for CMBS reached a new height at 9.2%. Underwriting has tightened up and as a result, only the best, institutional grade real estate will qualify for new CMBS loans. That leaves the majority of commercial real estate searching in vain for refinancing.
2011 will see a small improvement in real estate markets, both residential and commercial, up from steep declines in previous years. However, words like “soar”, “blockbuster” and “turnaround year” – all from recent headlines – must be understood to reflect our need for good news, as well as the general spirit of entrepreneurship that exists here in America. Taking these banner exclamations at face value requires either collective amnesia or inking – and neither is good policy when it comes to investing your money.

Susan Lawrence is an inherently optimistic but practical real estate consultant and President of Real Estate Strategies, Inc. [ http://www.restrategies.net].

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