Commercial outlook sunny with a few clouds
WASHINGTON – Aug. 11, 2014 – According to the Real Estate Roundtable's third quarter Sentiment Survey, U.S. commercial real estate markets continue to enjoy a steady recovery.
However, that recovery is threatened by some policy-related risks, such as the scheduled expiration of the federal Terrorism Risk Insurance Act (TRIA) on Dec. 31, and the prospect of higher interest rates.
The slight upticks in two of the survey's indices, "Overall" and "Current," (to 70 and 72, respectively) since the second quarter are in line with overall economic growth outlined in last week's positive report about higher-than-expected gross domestic product (GDP) in April, May and June, and the creation of an average 240,000-plus jobs during each of the past six months.
The "Future" index is back up to 67 after a two-point drop last quarter, but that's one point lower than at this time last year, reflecting "a lingering wariness among industry executives about prospects for a sustainable economic recovery," according to the Real Estate Roundtable.
"Commercial real estate remains on a generally positive path, yet there is significant concern about Washington inaction on a range of policy matters affecting our industry," says Roundtable President and CEO Jeffrey D. DeBoer. "The most pressing of these is TRIA, whose potential expiration could trigger a wave of technical defaults, renewed problems for banks and bond holders, and lost jobs as financing for new and existing projects dries up."
The Senate voted overwhelmingly (93-4) for a seven-year reauthorization of the terrorism insurance law on July 17. House legislation proposing a five-year extension – as well as program reforms – cleared a key committee in June, but it remains in limbo until Congress reconvenes in September.
"Survey respondents also cite interest rate policy – and the broader issue of borrowing costs – as a 'wild card' that could hurt property valuations," DeBoer adds. Assets in some markets are still recovering from declines of as much as 40-50 percent during the Great Recession.
Capital availability is reportedly strong, but DeBoer says access to capital is still predominantly weighted toward urban "gateway" markets, highly rated assets and borrowers with pristine credit scores. As for reports of increased inflows of foreign capital, DeBoer said real estate's share of investment from overseas remains low compared to sectors such as manufacturing, financial services and energy.
The Roundtable continues to urge reform of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) as a means of attracting new capital that can be used to facilitate debt refinancing, energy efficiency retrofits in commercial and multi-family buildings, and major infrastructure projects.
Bipartisan congressional support for FIRPTA reform continues to grow, while the Obama Administration has recognized FIRPTA reform as a potentially positive tool in funding transportation infrastructure repair and modernization.
"Given the uncertainty over TRIA, which is already affecting policyholders … and the prospect of higher borrowing costs … the lackluster outlook expressed in the latest survey about the coming year is not very surprising," says DeBoer. What is needed, he says, is for "U.S. policymakers to work toward creating a more attractive overall climate for job creation and investment, since these are critical to real estate's health."
For the full survey report and The Roundtable's 2014 Policy Agenda (Together: Real Estate, Jobs, Economic Growth) and 2014 Annual Report (Leadership-Action-Solutions: Celebrating 15 Years), visit them online.
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