IPD Conference: Unfinished Business Hampers Cap Markets' Rebound

By Paul Rosta, Senior Editor

Real estate capital markets present a mixed bag of promise and unresolved issues left over from the Great Recession, according to the leading economists, analysts and financiers who spoke at a forum sponsored by IPD in New York City.

Bob White, president of Real Capital Analytics, projected that transaction volume could reach $300 billion this year, representing a 50 percent gain over 2011 volume. Much of that growth will take place in the second half of the year, as the market gradually returns from the slowdown during the second half of 2011.

According to Brian Valenti, a senior analyst for the Federal Reserve, “2012 will be interesting for special servicers.” Data offered by other speakers bolstered that prediction. Bill Looney, president of Debt X, predicted that distressed asset sales will reach $100 billion this year, up from $80 billion in 2011.

One concern is the volume of problem loans held by small commercial banks. Commercial real estate makes up 28 percent of their assets nationally, and many of those assets represent unresolved distress. “Five years into it, we still haven’t shed a lot of these assets,” noted Mark Eppli, professor of finance at Marquette University.  Refinancing will be a particular problem for 5-year floating rate loans issued during the peak of the market in 2007 that are maturing. The next 12 to 18 months present a window of opportunity “to get things right,” Eppli added.

In his keynote address, Moody’s Analytics chief economist Mark Zandi predicted that robust growth should return by 2014. Gross domestic product will expand by about 2.5 percent this year and hit 4 percent two years from now. Corporate balance sheets are in good shape, on the whole, and companies will eventually turn to hiring in order to grow revenues. “I think we’re coming to a point in the business cycle where confidence has improved to such a degree that we’re going to see more investment in hiring,” he said. Other positive signs are what Zandi sees as pent-up demand for new construction and new household formation, which should further boost growth.

Nevertheless, Zandi identified several major concerns that could slow economic improvement, if not derail it. “Even in my optimistic world view, it’s going to take a couple of years top fight out way all the way back,” he said. An increase in gas prices to $5 per gallon or more will be a sign that other problems are afoot in the economy and that a slowdown is in the works. Europe appears to be on track to address its debt crisis, and the European Central Bank is stabilizing the region’s financial system by making capital available. As a result, Zandi is optimistic that the European downturn will be relatively short-lived.

Also in play is the U.S. housing market. An uptick in home prices this spring and summer is likely to be followed by a 2 percent to 3 percent decline by early next year, as a new wave of foreclosures depress prices. Federal spending cuts will slow growth in 2013, but a long-term extension of the payroll tax cut and a delaying some of those cuts will reduce the drag on GDP by roughly half, to 1.5 percent, Zandi predicted.