Abundance of issues. What trends do CRE participants really need to pay attention to? In 2012, an obvious answer is hard to come by, as election year hysteria ramps up, and the economy attempts a fragile recovery. We have a surplus of issues demanding our attention, making it hard to prioritize.
Here are just a few examples of key issues currently impacting CRE:
- The economy is recovering very slowly – is this a new normal, or will growth quicken?
- Housing shows signs of improvement, but doldrums continue – is the worst over?
- The recovery of CRE fundamentals paused in 2H11 – will it continue or falter?
- CMBS securitizations hit the wall in 2H11 – will modest growth resume?
- Stock and bond market trends now have a real time impact on CRE capital markets
- Banks remain conservative for all but the highest quality CRE deals – will standards loosen?
- CRE debt maturities remain elevated – will “extend and pretend” delay a full recovery?
- Will REITs outperform alternatives again, or will investors begin to look elsewhere?
- New investment capital has been flowing in, but few deals have closed – more closings ahead?
- Lack of overbuilding helped prevent a more severe downturn – time to start building again?
- U.S. remains the focus for foreign CRE investors – will U.S. investors start to look overseas again?
What is your pick? In discussions with CRE owners, operators, developers, investors, and lenders, the top responses usually involve local property fundamentals, such as rent, occupancy, leasing, or the availability of equity and debt. These issues will always be central to day-to-day operations, but CRE is a derived demand, and the rate at which the industry is influenced by outside forces is accelerating. Our view is that a competitive advantage can be gained from taking a closer look at macro and micro drivers shaping CRE, and how these changes can be applied to strategy and decision making.
Our choice might surprise you. It may appear unconventional, but we’re convinced the increase in government oversight is the number one issue impacting CRE today. The U.S. economy appears to have regained its footing following the financial crisis of 2008-2009, and begun a slow path to recovery. The worst may be over, but the government remains fixated on repairing the financial system, and as the wave of regulation has risen, so has a Great Debate about how much is too much. Like it or not, the argument over the appropriate scale of government has become a central issue of the day.
Proven history of identifying critical issues. We have published annual reports on key issues affecting CRE for more than 15 years, and our selection of top issue has evolved with the market. Our early reports, published during the mid-90’s market downturn, focused on property fundamentals and debt markets, and as CRE recovered at the turn of the century, we pioneered an emphasis on macro and micro economic drivers. Today, as the linkage between CRE and outside forces has solidified, we have identified government oversight as the issue having the most significant bottom line impact.
TOP ISSUE: GOVERNMENT OVERSIGHT
Defining “Government Oversight.” Government oversight can be defined as a broad-based effort by a variety of government and non-government entities to take action intended to improve the financial and economic system. The recent wave of oversight is massive, as is the degree of backlash, with an unprecedented degree of scrutiny and attention focused on regulators. Oversight involves a variety of government entities, including the Federal Reserve, SEC, FDIC, and Financial Stability Oversight Council (part of Dodd-Frank). Oversight also comes from the state level, and from non-government sources introducing new rules regulating industries including accounting and insurance. It may seem like an abstract concept, but actions now being pursued by multiple regulators will directly impact how CRE players buy, sell, access debt, and interact with lenders.
Bottom line for CRE. Government oversight may have good intentions, but some significant concerns remain. Excessive bureaucracy, which may be the end result of Dodd-Frank and Volcker, could suppress bank lending over the long-term, and make debt more difficult to come by for all but the highest quality CRE deals.
The time has come to play close attention to government rules and regulations and how they impact your business. Government intervention will have a profound impact on banks, private equity, and hedge funds – all key sources of debt and equity for CRE. As a result, it’s important to track relevant government actions closely, and consider rethinking your debt and equity strategy.
Pivotal Year. Our next report in this series will cover how government oversight is shaping the economy and CRE in the critical election year of 2012.