CHICAGO—DLA Piper just released its “State of the Market Survey” at its 12th Global Real Estate Summit in Chicago this week, and of the commercial real estate executives surveyed, 89% were “bullish” on the prospects for the US economy. This was slightly higher than last year, when 85% responded optimistically, and even higher than in 2007, when 77% did so. Typically, respondents stated that their good feelings came from the massive amount of capital now available for investment or simply that the economy has strong fundamentals.
Those views resonated with panelists at one of the morning sessions at the conference, titled “Risks and Rewards of Real Estate and the Public Markets.” Lauralee E. Martin, the president and chief executive officer of the California-based HCP, Inc., a $30 billion healthcare REIT, said “there is so much capital driving value.” Furthermore, “the underlying fundamentals of the US economy are getting better every day.” She does not discount the possibility of a downturn, but HCP's focus on healthcare, an asset class that retained a good deal of its health even during the recession, gives her and her colleagues even greater confidence. Their strategy is to “remain bullish on our business and bullish on the economy, but be prepared for whatever comes along.”
Confidence mixed with a bit of caution was also the outlook of Benjamin S. Butcher, the chief executive officer and chairman of STAG Industrial, a $2 billion Boston-based REIT. “We're pretty far into the recovery,” he said, and STAG is primed to take advantage of investment opportunities as they occur. However, he did raise the possibility that “maybe, a relatively mild recession” was possible in the near future. Still, just after stating that, he added that “the economy continues to improve. Maybe it's further off.”
“It doesn't feel like the fifth year of a recovery,” said David J. LaRue, the president and chief executive officer of Forest City Enterprises, “so I think it has additional legs.” In fact, foreign investment groups continue to come to Forest City and want to pour equity into the US because they see the nation as a safe bet. But LaRue is waiting for the day when the US Federal Reserve begins to shrink its massive balance sheet, and believes that could finally make an impact. “We've got a little bit of time, but not much.”
J. Michael Lynch, the president of Dividend Capital Diversified Property Fund, believes the economy, while outwardly healthy, does not have enough pillars and instead relies too heavily on burgeoning sectors like technology, energy and healthcare. “That narrow focus definitely worries me.” The office markets that have performed the best tend to be in towns or regions, like San Francisco or Silicon Valley, that rely on just a few of these pillars, but the larger, more diversified markets have not kept up that pace. National rent growth is below three percent, he points out, a fact sometimes masked by the huge gains made by the high-performers.
Some conference participants were asking one another whether the apartment market had gotten a bit too exuberant in the past few years resulting in an oversupply of units. LaRue was somewhat skeptical of that view. He believes that recent demographic studies “call for 400,000 new apartment units over the next ten years.” Some of this demand will be driven by older people who increasingly want to live either in cities or denser areas, but without the burden of another single-family home. And furthermore, millennials will also create demand due to a similar desire for dense urban areas. LaRue adds that the US homeownership rate is going back to its historic rate. “With all that demand, I don't think we're at peak.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
