The financial markets are moving fast, and the run-up in asset values reflects growing investor confidence based on positive economic sentiment. Strong corporate earnings reports and an improving employment picture have supported the advancing public equities bull market, while a nascent recovery in the commercial property markets is fueling record pricing for trophy assets in the office sector. Encouraging economic news and a wave of yield-hungry capital are pushing values ahead of fundamentals, despite the U.S. economy’s numerous major challenges and potential pitfalls.
From the Current Issue
After a deep freeze in the availability of real estate financing for more than two years, the debt markets began to thaw toward the end of 2009. As many balance sheet lenders — primarily banks and insurance companies — identified and began dealing with their problem loans or potential problem loans, they were once again ready to aggressively deploy capital. A year later, an active CMBS market joined the steady stream of returning lenders. As corporate bond yields have tightened, commercial real estate loans and new issue CMBS bonds once again offer significant spreads over Treasuries on a risk-adjusted basis. Conservative leverage for core assets (up to approximately 65 percent to 70 percent loan-to-value) is readily available for two- to three-year terms for floating-rate loans and five- to 10-year terms with fixed-rate coupons.
The overwhelming storyline in today’s institutional real estate development industry is the stark contrast between the multifamily development space and the rest of the industry. Robust capital markets, limited new supply during the past several years and a fundamental shift in the public’s view of homeownership has created an environment where shovel-ready, infill multifamily developments located in gateway cities are aggressively sought. The development story for the remaining product types is comparatively less interesting, as slowly improving market fundamentals have not rebounded to levels sufficient to warrant new supply. Below is a survey of the development landscape across all product types with a focus on multifamily development.
Significant change has swept the commercial real estate sector in recent years. Over time, larger volumes of capital from a variety of institutional sources have moved into the industry, and real estate truly emerged as an acceptable risk-managed asset class. As real estate assets under management grew, investors devised new strategies and extended their portfolios to new geographic regions, untapped sectors and new investment vehicles.
When people at a party find out I am an economist, the question I have gotten most often since early 2008 is, “When will we get out of the recession?” Like the surgeon at the patient’s bedside after the operation, I assure them that the economy will recover, but it is going to take several years before its effects are over. My answer probably scores no better than barely adequate, but those concerned with the long-term health of the economy are not asking the right question. The right question is, “How will the policies of U.S. businesses and governments have changed when we come out of the recession?”
CalPERS recently adopted a new five-year “back to basics” strategic plan. The plan redefines the role of real estate within the larger portfolio and will drastically reshape the pension plan’s real estate portfolio. Ted Eliopoulos,CalPERS’ senior investment officer, real estate, recently spoke with Institutional Real Estate, Inc.’s CEO and editor-in-chief Geoffrey Dohrmannregarding recent challenges at CalPERS and the strategic plan’s conception and implementation. This is part II of the interview; the first installment appeared in the May issue of The Institutional Real Estate Letter – North America.
The 2011 Spring Editorial Advisory Board Meeting of The Institutional Real Estate Letter -– North America convened in mid-April in San Diego, where members gathered to discuss the challenges and opportunities in today’s institutional real estate investment marketplace. “The money” at this year’s meeting — the institutional investor members of the board who collectively represent $108 billion in real estate assets — spoke candidly about their real estate portfolios, their outlook on market fundamentals and the industry best practices they’re trying to implement. Their comments, along with comments from the real estate managers and consultants on the board, painted a view of the current conditions of institutional investing in commercial real estate. The consensus: Investors, managers and consultants alike plan to be ready should another global recession strike.