FTI: Economy Rebounds, CRE Continues Recovery in Q1

By Barbra Murray, Contributing Editor 

Mike Hedden, FTI Consulting

FTI Consulting Inc. has released the FTI Insights: Economic & Real Estate Report for the first quarter of 2013, and overall, it’s good news. The U.S. economy rebounded and the commercial real estate market continued along the road to recovery.

On the heels of a sluggish close to 2012, the U.S. economy revved up again in the first quarter; although, the pace of growth was not quite as speedy as economists had forecasted. During the first two months of the quarter, a total of 208,000 payroll jobs were added, and the expansion persisted in March, albeit at a lower level, with an increase of just 88,000 jobs. And while there were declines in some areas–consumer confidence, durable goods orders, construction activity, retail sales and manufacturing output–there were also notable gains. Housing market recovery marched on, consumer spending rose, the stock market maintained its strength and automobile sales were healthy. 

And then there’s commercial real estate; the first quarter of 2013 was a positive one for the market. As experts had anticipated, recovery continued.

“The market did well in central business districts and gateway cities,” Michael Hedden, Managing Director, Real Estate Solutions, with FTI Consulting, told Commercial Property Executive. “Everyone had expected that the capital–equity or debt–would be attracted to those key gateway international cities that we have here in the U.S., and that has all performed quite well.”

However, a good time was not had by all. “What hasn’t performed up to expectations are some of the outerlying suburban office parks and some of the outerlying retail or older neighborhood centers,” Hedden added. “They have not done as expected or have not really done well at all, so it’s a mixed bag of performances in the first quarter.”

There was nothing mixed about overall investment activity. FTI points to data recorded by Real Capital Analytics, which indicates that sales activity reached $69.5 billion during the first quarter, marking a 41 percent year-over-year increase in pace. And REITs will continue to have a substantial amount of money to play with going forward, having raised approximately $23 billion in capital in the first quarter.

It was a different story for lenders, who backed off just a tad. As per numbers from a Mortgage Bankers Association survey, while commercial and multi-family mortgage loan originations were 9 percent higher than the first quarter of 2012, they were 36 percent lower than the fourth quarter of 2012.  The drop, Hedden noted, has been twofold, starting with the availability of quality assets.

“There’s a lack of quality in terms of where lenders can put the money into prime assets, where the action is, so to speak,” he said. “There hasn’t been as much lending activity because of that. They can’t find the quality assets, and those assets that are out there that are trying to refinance have low value compared to the amount of debt that needs to be refinanced, so those two factors have caused commercial lending activity to decrease.” 

Regardless, the lending will continue, as will the buying, but there’s more to the story. There’s something brewing.

“The general sentiment out there this year is when interest rates rise, what then?” Hedden said. “We are in a very low interest rate environment and that is benefiting the real estate market because you can get very cheap debt, and given the ability to leverage on that your investment returns are pretty good. But when you exit this property or decide to sell after your investment horizon is reached, what happens when you sell into an interest-rate environment that is significantly higher? What happens when you have to sell at a higher cap rate going out?  I would say that’s what most consultants and most investors are now analyzing and dealing with, and making investment decisions based upon those ‘what ifs.'”