Reis 3Q Briefing Gives Reason for Optimism

By Scott Baltic, Contributing Editor

Ryan Severino, of Reis

“All indicators are pointing toward another year of recovery” was the optimistic bottom line of Wednesday’s Q3 2013 Capital Markets Briefing from Reis Inc. Hosted by Reis senior economist Ryan Severino, the conference call promised to tackle angles such as economic growth and the capital markets, interest rates and cap rates, and the GSE pullback.

Though he cautioned that the data are still preliminary, Severino said that GDP growth at an annualized 2.8 percent in the third quarter is better than what had been expected by many and added that job creation figures look good: “We are now ahead of last year’s pace of job creation.”

He does, however, expect a slowdown in growth in the fourth quarter, in part because of lingering effects from the government shutdown.

In the office sector, Severino said, “demand continues to slightly outpace new construction.” He noted, though, that improvement in the office sector has been largely concentrated in a limited number of markets, such as metro areas with strong high-tech industries.

In the multi-family sector, “the market has hit a floor, at least temporarily,” he said, and any future cap rate compression will be “far more gradual.”

As for retail, Severino said, there’s “more evidence that retail cap rates have hit a floor.” This product type, he said, is the one “arguably with the weakest recovery,” not least because “consumer spending remains depressed.”

An examination of 12-month rolling cap rates found that, like last quarter, “we’re getting complicated results,” he said, with a few markets represented in the top 10 for one product type and the bottom 10 for another. (Detroit, for example, is in the top 10 in retail (3.7 percent) and in the bottom 10 (11.1 percent) in multi-family.)

These anomalies, Severino explained, are probably caused by a “shallow transaction environment.”

The briefing highlighted a string of positive signs for the economy and the CRE sector.

* The Mortgage Bankers Association’s Originations Index has approximately tripled since the lows of 2009, from roughly 50 to about 150 (100 = the 2001 quarterly average).

* A year-over-year decline in outstanding balances on GSE loans obviously reflects those entities’ mandate to cut their originations, but Severino also suggested that the GSEs would in any case be getting more competition in the current multi-family lending market.

* The CMBS recovery remains intact, with originations on track to total $80 billion this year, “well ahead of predictions,” according to Severino.

* A Federal Reserve survey of bank senior loan officers found a higher percentage reporting stronger loan demand than at any time in the past 13 years.

* The overall commercial mortgage delinquency rate, now at 2.7 percent, has fallen 300 basis points in three years. Or, as Severino put it, “It’s coming down about as fast as it went up” from 2008 to about 2010.

One intriguing question toward the end of the conference call was whether cheap capital is artificially inflating CRE prices. Severino answered that two quarters ago he might have said yes, but that the improved economy has allayed some of those concerns.

The economy is probably more resilient than many thought, Severino said, and though the credit market will remain “choppy in the short term,” if the capital markets behave well, “We could be on the verge of a real recovery.”