COVER STORY, JANUARY 2012

EXCLUSIVE SURVEY: A SILVER LINING IN THE GOLDEN WEST
Respondents expect to see more activity in 2012 but remain wary of economy and presidential election.
Nellie Day

The beginning of a new year always feels like a natural time to take our industry’s pulse. And who better to do that than the commercial real estate professionals who read this magazine? Over the past few weeks these on-the-ground-floor experts have been submitting their thoughts on lending, development, and leasing and sales activity via an online survey that was included in WREB’s bi-weekly newsletter.

The results of these surveys, along with some of the respondents’ personal opinions, are below. We would like to thank everyone who took the time to complete our surveys, and sincerely hope you find their results as useful and informative as we did.

Optimism is in the Air

Most respondents, which included owners, developers, brokers, lenders and related professionals, displayed a solid, if cautious optimism about 2012. More than 83 percent of lenders expected their firms to close more loans this year than last, and more than 71 percent of brokers anticipated an uptick in transaction volume.

Though these numbers show promise, a majority of respondents were conservative when estimating just how much improvement the West’s commercial real estate industry may experience. “I think that the market will improve, but at a steady pace,” one broker wrote. This respondent’s sentiments were echoed throughout the surveys, making it clear that although players may be returning to the market, they’re more likely to dip a toe in the water than execute a full-fledged cannonball.

“The Denver market has experienced a gradual recovery in virtually every product type over the past 24 months, including office, industrial, retail and multifamily properties,” noted R.C. Myles, senior vice president in Cassidy Turley Fuller Real Estate’s Denver office. “It is clear that the market fundamentals are heading in the right direction and will demonstrate greater velocity in 2012 and 2013.”

Nearly 43 percent of lenders who believed their activity would increase this year said it was likely to do so by more than 20 percent. When asked what type of loans would comprise the bulk of their lending activity, however, 46 percent pointed to refinancings — a sign that sales transactions haven’t quite returned to healthy levels.

“The quality of the product to be financed is slowly getting better,” one lender survey participant noted. “Credit quality is more important than ever, and will continue to keep the production pace slower than desired.”

The surveys’ 287 total respondents cited a variety of reasons for the reserved confidence that seemed to emanate through the West’s commercial market. Among lenders’ chief concerns were the health of the economy, state of the CMBS market, cost of capital, and the fates of Fannie Mae and Freddie Mac. Those who relied on lenders to get their deals and projects approved pointed to the lack of available financing to explain the less-than-stellar projections.

“Financing is still the biggest issue for new development and alternate financing sources take much more time to obtain,” wrote one development survey participant. “One of our biggest issues is negotiating a purchase contract that provides sufficient time to close the financing.”

Another primary concern was the impending election. Respondents were at best dismayed and at worst disgusted with the current administration and its effects on the commercial real estate industry.

“The CRE market is in a deplorable state primarily, in my opinion, because of the lack of leadership in Washington, D.C., and their apparent inability to recognize the depth and severity of the nation's business problems and develop meaningful, long-term solutions,” one broker respondent lamented.

“California has been steadily raising property taxes during the last five years. That, combined with fees and unfair and unjust government policies and regulations have chased businesses out to other states. We look for a continued loss of business during 2012, in addition to a continued depleted tax base and loss of business revenues,” stated another.

The 2012 election is still far from decided, but it’s fair to say our outspoken survey takers would opt for change — and not the kind Obama promised.

“If a conservative Republican is elected, and the European and Asian economies perform well, the U.S. economy will improve accordingly with a resultant increase in jobs and exports,” wrote John S. Filli, senior vice president of NAI Horizon’s Phoenix office.

“If the current administration remains in the White House we will be in for another four years of uncertainty and continued economic free market decline,” declared a second brokerage expert. “Capital markets will continue to be hamstrung, and job growth will be stalled while Washington wrestles in the political finger-pointing that keeps anything from getting done to bring our country back...If we have a change in political leadership and a clear direction with rules that business can count on, then 2013 can see real growth in the real estate sector.”

Bright Spots on the Horizon

Aside from campaigning for their desired candidates, there’s little anyone in the industry can do to expedite this election or the politics in Washington. Instead, many chose to turn their attention to the safest bets in the West.

According to broker survey respondents, this included (in order of popularity) multifamily, industrial, medical office, and retail grocery- or drug-anchored properties. More than 20 percent of brokers believed that each of these product types would experience a high volume of sales activity this year.

Naturally, many professionals believed Class A properties in core markets would be one of the year’s top investment vehicles.

“The high amount of non-performing CMBS-based debt still coming due for higher class inventory…continues to drive our strongest investors to purchase the best opportunities for 2011 through 2012,” wrote Judd Dunning, director of Newmark Knight Frank Capital Group in Los Angeles. “Solid retail opportunities and core office in solid locations [also] remains stable.”

In addition to Denver — which was cited by Myles as experiencing a healthy, if gradual recovery — other major metro areas garnering optimism included Phoenix and the Los Angeles submarkets of Orange County, Long Beach, the Inland Empire and the South Bay. Most respondents who mentioned these areas pointed to their active industrial markets.

“We are seeing more tenants touring our available industrial listings in Orange County than in 2009 and 2010, which is resulting in an increased number of proposals to lease and purchase the buildings compared to the prior two years,” stated Gregory Ozimec, president of Newport Beach, Calif.-based Industrial Brokers.

The industrial sector’s popularity does make sense. All four regions have premier access to some of the nation’s largest ports, railways, highways and airports. However, the call-out may also be due to the fact that half of the broker respondents listed industrial as one of their specialties, among others.

Room for Improvement

As core markets remain in favor with brokers, lenders and developers, secondary and tertiary markets remain sore spots, respondents say.

“Suburban areas such as Simi Valley, Riverside and the Antelope Valley [California] are showing slower recoveries than areas of relatively high population densities like El Monte, Commerce and Long Beach [California],” one noted. “[It] seems that the number of people is more important than higher median income.”

In fact, suburban office was cited as the product type least likely to experience a high transaction volume this year. Retail malls, another notorious suburban offering, was listed as the second least attractive product type, according to more than half of our brokers.

On the development side, exactly half of our respondents believed the bulk of their revenue growth would come from property management and leasing. Only 11.7 percent thought it would result from asset sales.

Interestingly, construction levels should pick up in 2012 if our respondents are to be believed. Half of the experts — 51 respondents — said they had projects in the pipeline that are scheduled to break ground in 2012. Multifamily and single-tenant retail were the most likely projects to commence this year. These industries experienced healthy activity levels in 2011, and are likely safe bets for investors and developers if the past is any indication of the future.

Subdued or not, there is definitely a renewed vitality echoing through the West. While we could sum it up ourselves, one of you said it best.

“We have transcended this terrible market by getting back to basics and fundamental real estate principles,” an insightful, yet nameless participant noted.

©2012 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.