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Debt & Equity

Report finds industry insulated from slowdown

The Real Estate Roundtable’s 2019 Q1 Sentiment Index reveals confidence from commercial real estate industry executives that today’s fundamentally sound CRE markets will prove resilient when the decade-long expansion of the U.S. economy inevitably slows down.
The historically long economic expansion, stable interest rates and demand driven supply have sustained the current healthy real estate market conditions.
Unpredictability about the future longevity of the economic expansion tempers the forward looking industry outlook.
Real Estate Roundtable President and CEO Jeffrey DeBoer noted, “The unsettling year-end capital market turbulence caused a degree of early 2019 industry concern. However, as the first quarter moved forward, the equity markets strengthened and positive job creation continued to fuel steady economic growth. These conditions bolstered the already well-balanced commercial real estate markets in Q1.
“Looking ahead, our CRE executive survey reveals the timing of a natural economic cycle slowdown is concerning, but that is moderated by fundamentally sound commercial real estate markets,” DeBoer added.
The Roundtable’s Q1 2019 Sentiment Index registered at 45 — a five point drop from the previous quarter. The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.
This quarter’s Current-Conditions Index of 47 decreased six points from the previous quarter, while this quarter’s Future-Conditions Index of 42 came in at five points lower compared to Q4 2018.
The report found that CRE executives recognize that a historic decade of U.S. economic expansion has benefited today’s healthy commercial real estate markets.
Q1 survey respondents feel a cyclical slowdown for the U.S. economy could be on the horizon.
Respondents also note that a possible decrease in economic growth may not significantly adversely affect well-balanced, fundamentally-sound CRE markets.
Survey participants were quick to identify the economy’s current, strong fundamentals as a significant influence on healthy Q1 real estate market conditions.
Many respondents also suggest they have diversified their investment focus and are placing capital into less traditional real estate property types.
Respondents pointed to examples of increasing asset prices in certain markets and many suggested they view the pricing environment to be reaching, or in some cases, at peak. Multiple survey participants suggested some markets have plateaued.
Debt and equity remain plentiful for the best assets in the best markets, but is becoming challenging for secondary or tertiary market investments. Respondents also reported increased competition among lenders for business estate.
While 46 percent of survey participants reported Q1 asset values today are “about the same” compared to this time last year, 40 percent of respondents believe that one year from now, values will be “about the same.”
Many respondents noted asset values in some markets may have reached a plateau.
DeBoer noted, “Over the last decade, the commercial real estate industry has not overbuilt or over-leveraged, resulting in disciplined markets that could act as a resilient buffer to any potential slowdown in the U.S. economy.
“Our Q1 survey shows industry executives have concerns over unpredictable influences on the economy, such as the recent government shutdown and uncertain outcome of ongoing international trade talks. Policymakers need to focus on bipartisan pro-growth policies designed to encourage further investment, spur job creation and propel the economy forward for all.”

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