WASHINGTON, DC–The Real Estate Roundtable's Q2 2017 Economic Sentiment Index registered at 52, three points down from the last quarter. The Overall Index averages Current and Future Indices and a look at these two indices is even more telling: The quarter's Future-Conditions Index of 50 dipped five points from the previous quarter, while the Current-Conditions Index of 53 decreased two points from the previous quarter.
In other words, even though respondents view the current market conditions as stable, many are concerned, or at least wary, about future conditions. The reason? Uncertainty in domestic policy.
“As the Trump Administration and Congress continue to consider ideas for tax reform, infrastructure investment and financial regulatory overhaul, [the index] is tempered by anticipation about what consequences the details of any eventual legislation could have on commercial real estate,” Roundtable CEO Jeffrey DeBoer, says in a prepared statement.
Indeed, consider the tax reform guidelines that the Trump Administration recently released. Granted, they are just guidelines with the full plan expected in June, but they are missing some key proposals that the commercial real estate community desperately wants to know, such as what the administration wants to do about depreciation, like kind exchanges and expensing.
Read GlobeSt.com's FAQ On Trump's Tax Proposal
A Stable Market
This is not to understate respondents' current view of the market. Many participants reported they viewed market fundamentals as stable and predicted a continued period of slow but steady growth. Participants were nearly unanimous in their belief that the current real estate cycle has room left to run.
What Respondents Said
I think the real estate market feels okay. Sure, there's geopolitical uncertainty out there, but we're still pretty stable. I will say, six months ago it felt like the market was getting overbought, but now it feels good.
We don't think there will be a recession this year. Maybe in 2019, when we see prices falling, but not this year.
I think we'll see continued stability of fundamentals, but I'm not so sure we'll see robust growth. I don't buy the rhetoric that changes in regulation will change growth rates.
Capital Exercises Discipline
Respondents noted that even as capital remains plentiful for the best deals, equity and debt sources have become more disciplined for riskier investments. Such deals are more expensive and may require multiple sources of capital.
What Respondents Said
Availability of equity is good. There was a frenzy; more capital than deals. The market has moved into a risk and price sensitive mode. It's a healthy market. If you're in the market for debt, you're seeing the same thing; risk sensitivity and pricing to match. Again, healthy.
Debt pools are being created, not unlike during the last ride-up. I think it's a little scary.
For good deals, you can find good rates. A good deal is still a good deal.
The US is still a safe and desirable destination for foreign capital. Uncertainty elsewhere keeps pushing more money here.
Capital is plentiful, but discerning.
More and more, you're seeing lenders say they'll offer what you need, but we're at a time in the cycle when you have to be careful what you ask for.
Alternative debt funds are making a greater impact. They're expensive, but if you have a deep value-add play, they can be very useful.
Banks are tightening up; they want some regulation relief. With that said, Fannie, Freddie, life companies, CMBS; there are many solutions in the market right now. You have to pay for risk and it's good. Discipline is a good thing.
Asset Pricing Reaches Equilibrium
The question is, exactly how long is the runway for the current real estate cycle. The survey suggested that asset pricing and valuations have clearly hit their peak, with 48% of respondents saying they expect asset values in one year to be “about the same” as today, while only 15% reporting that they expect values to be somewhat higher one year from now.
What Respondents Said
We're seeing pricing in the cities doing well, even mid-tier cities. Rural locations are seeing a stable to downward trend in pricing.
With pricing this well set, it's hard to have conviction you're betting correctly on which way an asset's going to go. We'd like to see some volatility.
Asset pricing feels okay, but it's certainly expensive.
Pricing is starting to smell like perfection.
We've seen flat development on prices. No major increases in the last two quarters of watching prices.
Simply put, buyers can't buy and sellers can't sell with pricing as it stands.
WASHINGTON, DC–The Real Estate Roundtable's Q2 2017 Economic Sentiment Index registered at 52, three points down from the last quarter. The Overall Index averages Current and Future Indices and a look at these two indices is even more telling: The quarter's Future-Conditions Index of 50 dipped five points from the previous quarter, while the Current-Conditions Index of 53 decreased two points from the previous quarter.
In other words, even though respondents view the current market conditions as stable, many are concerned, or at least wary, about future conditions. The reason? Uncertainty in domestic policy.
“As the Trump Administration and Congress continue to consider ideas for tax reform, infrastructure investment and financial regulatory overhaul, [the index] is tempered by anticipation about what consequences the details of any eventual legislation could have on commercial real estate,” Roundtable CEO Jeffrey DeBoer, says in a prepared statement.
Indeed, consider the tax reform guidelines that the Trump Administration recently released. Granted, they are just guidelines with the full plan expected in June, but they are missing some key proposals that the commercial real estate community desperately wants to know, such as what the administration wants to do about depreciation, like kind exchanges and expensing.
Read GlobeSt.com's FAQ On Trump's Tax Proposal
A Stable Market
This is not to understate respondents' current view of the market. Many participants reported they viewed market fundamentals as stable and predicted a continued period of slow but steady growth. Participants were nearly unanimous in their belief that the current real estate cycle has room left to run.
What Respondents Said
I think the real estate market feels okay. Sure, there's geopolitical uncertainty out there, but we're still pretty stable. I will say, six months ago it felt like the market was getting overbought, but now it feels good.
We don't think there will be a recession this year. Maybe in 2019, when we see prices falling, but not this year.
I think we'll see continued stability of fundamentals, but I'm not so sure we'll see robust growth. I don't buy the rhetoric that changes in regulation will change growth rates.
Capital Exercises Discipline
Respondents noted that even as capital remains plentiful for the best deals, equity and debt sources have become more disciplined for riskier investments. Such deals are more expensive and may require multiple sources of capital.
What Respondents Said
Availability of equity is good. There was a frenzy; more capital than deals. The market has moved into a risk and price sensitive mode. It's a healthy market. If you're in the market for debt, you're seeing the same thing; risk sensitivity and pricing to match. Again, healthy.
Debt pools are being created, not unlike during the last ride-up. I think it's a little scary.
For good deals, you can find good rates. A good deal is still a good deal.
The US is still a safe and desirable destination for foreign capital. Uncertainty elsewhere keeps pushing more money here.
Capital is plentiful, but discerning.
More and more, you're seeing lenders say they'll offer what you need, but we're at a time in the cycle when you have to be careful what you ask for.
Alternative debt funds are making a greater impact. They're expensive, but if you have a deep value-add play, they can be very useful.
Banks are tightening up; they want some regulation relief. With that said, Fannie, Freddie, life companies, CMBS; there are many solutions in the market right now. You have to pay for risk and it's good. Discipline is a good thing.
Asset Pricing Reaches Equilibrium
The question is, exactly how long is the runway for the current real estate cycle. The survey suggested that asset pricing and valuations have clearly hit their peak, with 48% of respondents saying they expect asset values in one year to be “about the same” as today, while only 15% reporting that they expect values to be somewhat higher one year from now.
What Respondents Said
We're seeing pricing in the cities doing well, even mid-tier cities. Rural locations are seeing a stable to downward trend in pricing.
With pricing this well set, it's hard to have conviction you're betting correctly on which way an asset's going to go. We'd like to see some volatility.
Asset pricing feels okay, but it's certainly expensive.
Pricing is starting to smell like perfection.
We've seen flat development on prices. No major increases in the last two quarters of watching prices.
Simply put, buyers can't buy and sellers can't sell with pricing as it stands.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
