As we sink into August doldrums when everybody goes away and summer days get more precious, uncertainty and pessimism cloud outlooks and depress temperaments. Reality sinks in—at best the economy will struggle to gain traction, jobs growth will remain restrained, and demand for real estate will be sluggish. Even with tons of stimulus, second quarter GDP growth backtracked and Federal Reserve code words continue to signal that the financial system is only slowly recovering from its deep hemorrhaging with no quick fix in sight. Delay in raising interest rates means only one thing: we’re still in the crapper.
The good news for many on-the-edge borrowers has been that banks are still too wounded to pull the trigger on defaults and start foreclosing. But now everyone begins to realize the day of reckoning has only been delayed for many real estate owners. The crummy economy means only one thing—there’s no escape from pain. The time approaches when regulators, banks, special servicers, and borrowers will realize the losses. But given the monumental size of necessary write downs, it looks like the agonizing process may be extended over years to keep from undermining confidence in the entire financial system. A sudden recalibration would be just too much of a shock to a debt ridden government and many overleveraged taxpayers in addition to all those depleted bankers.
One group in control of its destiny already has taken its medicine and appears in a recovery mode--pension fund managers of open end core funds. Over eight quarters beginning in 2008, many of these funds registered severe losses ranging from 30% to more than 40% on diversified portfolios of office, retail, industrial, apartments and hotels. Some fund managers now think appraisers may have been too brutal especially in the wake of a recent feeding frenzy by backlogged capital looking to buy anything that’s well leased with stable cash flows. These advisors anticipate 2010 calendar-year total fund performance—from income and appreciation—can vault into the low teens with solid value upticks extending into next year. After wanting out of these core accounts, pension fund plan sponsors reverse course and begin to queue up to get back in.
Unfortunately, the core fund universe represents only a small sliver of real estate good cheer. Everybody else seems imprisoned in that uncomfortable extended state of suspended animation—knowing that until they take their losses they have no chance of getting back in the game with a chance to realize some upside again. But the system seems to have no choice, for fear of even worse consequences if it acts too abruptly.
While the banks build up reserves and take baby steps in adjusting balance sheets, financial companies step up hiring for traders and investment brokers. The king of core markets, New York, which anticipated large job losses, has been buttressed by all the federal dollars flowing into banking coffers to shore up their operations and build up reserves. The city has experienced employment gains and Manhattan office building owners sense they’re coming out of the woods. The country’s other notable core market, Washington DC, also lurches into slow recovery thanks to its sturdy mainstay employer—the federal government.
No doubt about it—at least core is back.
Want to continue reading?
Become a Free ALM Digital Reader.
Once you are an ALM Digital Member, you’ll receive:
- Breaking commercial real estate news and analysis, on-site and via our newsletters and custom alerts
- Educational webcasts, white papers, and ebooks from industry thought leaders
- Critical coverage of the property casualty insurance and financial advisory markets on our other ALM sites, PropertyCasualty360 and ThinkAdvisor
Already have an account? Sign In Now
*May exclude premium content© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Jonathan D. Miller
A marketing communication strategist who turned to real estate analysis, Jonathan D. Miller is a foremost interpreter of 21st citistate futures – cities and suburbs alike – seen through the lens of lifestyles and market realities. For more than 20 years (1992-2013), Miller authored Emerging Trends in Real Estate, the leading commercial real estate industry outlook report, published annually by PricewaterhouseCoopers and the Urban Land Institute (ULI). He has lectures frequently on trends in real estate, including the future of America's major 24-hour urban centers and sprawling suburbs. He also has been author of ULI’s annual forecasts on infrastructure and its What’s Next? series of forecasts. On a weekly basis, he writes the Trendczar blog for GlobeStreet.com, the real estate news website. Outside his published forecasting work, Miller is a prominent communications/institutional investor-marketing strategist and partner in Miller Ryan LLC, helping corporate clients develop and execute branding and communications programs. He led the re-branding of GMAC Commercial Mortgage to Capmark Financial Group Inc. and he was part of the management team that helped build Equitable Real Estate Investment Management, Inc. (subsequently Lend Lease Real Estate Investments, Inc.) into the leading real estate advisor to pension funds and other real institutional investors. He joined the Equitable Life Assurance Society of the U.S. in 1981, moving to Equitable Real Estate in 1984 as head of Corporate/Marketing Communications. In the 1980's he managed relations for several of the country's most prominent real estate developments including New York's Trump Tower and the Equitable Center. Earlier in his career, Miller was a reporter for Gannett Newspapers. He is a member of the Citistates Group and a board member of NYC Outward Bound Schools and the Center for Employment Opportunities.
