A Modest Outlook for CRE Finance

CRE Finance World, Winter 2013

A Modest Outlook for Commercial Real Estate Eduardo J. Martinez Senior Economist Moody’s Analytics A improving outlook is strengthening demand for CRE and rise, they will be low in historical terms for the next several years.rising by the first half 2013 amid a deepening recovery. By the endof 2014 yields will reach only those of early 2011, which was thelast time when bond yields increased. So while borrowing costs willfter a sharp downturn during the Great Recession and aslow transition to recovery, commercial real estate canlook forward to modest improvement, at best, over thenext several years. Setting the stage for the steadily stabilizing credit availability for CRE loans. Multifamily residential CRE will provide a limited lift for construction, the labor market, and and office-related CRE have the brightest outlooks because of the broader macro economy. Construction output and employment favorable demographic trends, the lowered homeownership rate, have recently leveled off from their long declines (see Chart 2). As and expansion among technology-related services. Retail faces the the pace of CRE construction and investment accelerates, demand weakest outlook because of reduced home equity in the aftermath will rise for construction services and labor. of the housing crash and expectations of rising saving rates that will limit the outlook for retail sales. CRE’s impact on the broader Chart 2 economy will strengthen gradually in the near term and as the Little Lift for Construction Employment economy transitions belatedly into expansion. Broad CRE outlook Investment in fixed nonresidential structures as a percentage of GDP has risen modestly since bottoming in 2011 and is now roughly equal with fixed residential investment. Both will increase as a share of GDP, but nonresidential structures investment will trail as pent-up demand for housing fuels new single-family residential construction (see Chart 1). Further reflecting the brightening outlook for housing, investments in apartments will rebound faster than other major components of CRE — office, manufacturing and retail — by the end of the decade. As a share of GDP, fixed investment in multifamily housing will regain approximately a third of its decline of past years, more than double that other components of CRE. Sources: BLS, Moody’s Analytics Chart 1 Further, CRE markets in the U.S. will strengthen prior to European CRE Will Add Modestly to Recovery markets. While the European Central Bank’s bank lending survey does not include a breakout for CRE lending standards and loan demand, as is done by the Federal Reserve, the contrast between the environment for business lending in the U.S. and in the EU is stark. Whereas lending standards are easing and demand for loans is increasing in the U.S., European banks are tightening standards on net amid falling demand for business loans. CRE credit availability and quality The amount of credit available for CRE is stabilizing. After contracting by 20% from a peak at the end of 2008, commercial banks’ assets in the form of CRE loans have been steady in 2012, according to the Federal Reserve. Helping to place a floor on the amount of CRE lending has been an easing of lending standards. The net Sources: BEA, Moody’s Analytics percentage of senior loan officers reporting loosening lending Low borrowing costs today offer broad support for CRE investment. standards for CRE loans has been increasing since the beginning Since peaking in 2006 at 5%, yields for five- to 10-year Treasury of 2011 and is now at its highest level since 2006 as reported bonds, to which fixed-rate CRE loans are frequently linked, have by the Federal Reserve. The opening of the credit spigot tracks fallen below 2%. The low-cost environment, however, will soon closely with rising demand for CRE loans, which has also been begin to gradually dissipate. Treasury yields are projected to begin increasing since the start of 2011 (see Chart 3). CRE Finance World Winter 2013 54


CRE Finance World, Winter 2013
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