Announcements of large-scale development projects in some of the nation’s cardinal markets are fueling a shared illusion: space is already running tight. Most large metros can boast at least one submarket where supply constraints are choking renewed growth, entreating developers to be munificent. In a very few cases, prices have climbed far enough that developers are responding in kind.
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New Yorkers’ restored enthusiasm is spilling out into the streets. Most of the revelers are undoubtedly celebrating our city’s Super Bowl victory. But a small minority—real estate investors among them—is also marking an inflection in the recovery.
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Even as measures of business and consumer optimism have improved in the United States, the global economy has struggled to extricate itself from a state of crisis. Fueling current headwinds, Europe’s ongoing condition of political paralysis has meant a lack of progress in addressing the Continent’s ripening sovereign debt crisis. Where progress has been made in adopting austerity plans and deleveraging bank balance sheets, these necessary steps have impinged on near-term growth. The U.S. economy is not impervious to negative developments among our major trading partners, nor is credit availability unaffected by disruptions to the global financial system. In spite of improving economic data, potential spillovers from diverging global growth trends remain ensconced as qualifiers of the domestic outlook.
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The daily buffeting of confidence in the recovery’s resilience has demanded an unusual focus on immediate threats to commercial real estate investment conditions. Even in New York City, where improvements in property values and capital inflows have clearly outpaced peer markets, the vagaries of developments in Europe as well as conditions closer to home have necessarily called for consideration in meetings of investment and credit committees.
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The potential for disruptions to global financial stability increased heading into last weekend. In Europe, both Germany and the European Central Bank rejected calls to expand the bailout to include large-scale bond purchases, insisting instead that the latter’s credibility depends upon its prioritization of price stability.
At a gathering of the Frankfurt Banking Conference, German Bundesbank president and European Central Bank Governing Council member Jens Weidmann said on Friday that “the economic costs of any form of monetary financing of public debts and deficits outweigh its benefits so clearly that it will not help to stabilize the current situation.”
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The summer our discontent behind us, the weight of inaction threatens anew. It is readily apparent from the most recent data that economic growth and labor market trends slowed markedly during July and August. Yet precious little has been accomplished over this same period to seriously assess or offset the deficiencies in the recovery.
Absent politicians in Washington calming down, or new private or public sources of stimulus, the near- and medium-term outlook for the economy remains clouded. Would that policymakers could approach the growth and employment conundrum with the same zeal—and occasional ferocity—as they approached the budget debates over the past few months, we might be in a stronger position two years after the recession reached its putative end. Read More
In the most active U.S. commercial real estate investment markets, New York City chief among them, measures of quality for newly originated mortgages declined between the first and second quarters of this year, according to a report released last week by Chandan Economics.
The deterioration in debt yield at origination, a statistically valid predictor of a commercial mortgage’s lifetime default probability, was most evident for loans secured by central business district office properties and by high-rise apartment buildings. This finding is consistent with a rapid rebound in prices for these assets, fueled by more aggressive competition between investors and among lenders seeking to make loans secured by core assets in the most liquid markets.
While apartment and office loan standards are easing, neither investors nor lenders have shown the same vigor in pursuing industrial and retail properties. Across all markets, industrial debt yield has fallen only slightly over the past six quarters, converging on retail debt yield levels in the second quarter. Apartment and office yields have fallen more precipitously, however, as lending has responded to improving property values and rising expectations of future income growth. Read More
The Federal Open Market Committee (F.O.M.C.) took the unusual step on Aug. 9 of announcing a specific time horizon for its extraordinary level of policy accommodation. Conceding evidence of a slowdown in the recovery, the committee voted 7-3 to adopt language stating that its target for the fed funds rate will likely remain at “exceptionally low levels” for the next two years. The committee also reaffirmed its intention to reinvest principal payments on its enormous holdings of Treasuries and other securities. Read More
S. & P.’s downgrade of U.S. debt offered investors no new information about the quality or the riskiness of Treasury securities. It has, however, challenged foundational assumptions about the workings of the global financial system at a difficult juncture for the fragile recovery.
The uncertainties introduced as a result coincide with other, less qualitative measures of the U.S. economy’s performance, which generally show that the recovery has slowed.
The rating adjustment’s blow to sentiment is amplifying concerns about what these metrics imply for the outlook, prompting investors to move out of risky positions and—ironically—into the safety of Treasuries. Read More
With the nation’s credibility in international bond markets propped upon the razor’s edge, reports emerged from Washington over the weekend detailing a budget compromise between the Obama administration and Republican Party leaders. At the time of the writing of this column, it now appears that a last-minute accord will be brokered and passed into law to increase the federal debt limit, ensuring that America’s creditors will be paid.
While an interim agreement on the budget and debt limit stave off the immediate crisis--in large part by postponing efforts to tackle entitlement spending--the handling of the issue raises legitimate questions about the efficacy of the legislative process and legislators’ readiness to balance dogmatism with rational compromise. That Washington has redoubled as a source of broader market uncertainty rather than a normalizing influence is deeply inauspicious at this juncture in the recovery. Read More
European leaders met last week in emergency session to hammer out a deal to stave off a disorderly default by Greece and to stabilize conditions in the continent’s sovereign debt markets. In extending more than $150 billion in contingent aid to Greece (including some hits taken by private creditors) and affording more flexibility in the use of the European Financial Stability Authority, the deal is an aggressive attempt to preempt further contagion.
That is an important consideration. From my discussions this week with colleagues in Germany and Switzerland, European central bankers and the core nations’ heads of state are acutely aware that they lack the tools to manage a wider crisis. Read More
SWITZERLAND—Europe’s intractable sovereign debt crisis engulfed Italy with surprising speed last week, forcing the adoption of $56 billion in austerity measures that are projected to bring the country’s budget into balance in 2014.
Once again, European leaders are working to contain the crisis, which has only now spilled over from the peripheral economies to one of the Continent’s largest. Read More
Last Friday’s employment report underscores that the national economic and labor market recoveries remain unusually fragile even two years after the recession’s formal end. Too many investors and lenders underestimate the drags on value if interest rates should rise ahead of cash flow. Read More
Here in Manhattan, the consensus at mid-year holds that commercial real estate investment and credit market conditions have improved markedly since last summer. There’s a lot of support for this assessment: clear evidence of rising transaction volume; an increasing diversity of lenders extending credit in support of property sales and the refinancing of maturing mortgages; and an uptick in the gross absorption of available space. Along each of these dimensions, the commercial real estate market has recorded significant progress.
The generally consistent headline investment, credit and fundamentals trends nonetheless mask a substantial and increasing divergence between several of the market’s most oft-cited pricing metrics. As The Wall Street Journal highlighted last month in a comparative report on the Green Street Advisors Commercial Property Price Index (GSA CPPI) and its counterpart from Moody’s/REAL, “… two closely watched indexes on commercial real estate continue to draw much different pictures of the market recovery.”
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Commercial real estate markets, like the broader economy, are approaching midyear on their firmest footing since before the onset of the recession, with property fundamentals improving across an increasing range of markets and property types. Similarly, the rebound in investment activity and credit availability that has been largely isolated to major markets is showing indications Read More
