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June 4, 2012

Emerging Trends: CRE Profitability, Lending Look Bright for Remainder of 2012

By Nicholas Ziegler, News Editor

The Urban Land Institute and PricewaterhouseCoopers L.L.P. have released the results of the annual Emerging Trends in Real Estate survey — and the responses point to a stronger commercial real estate outlook for the remainder of 2012. The more than 195 participants believe that profitability, lending, and investor markets all show brighter signs and that markets are looking up for CRE firms.

The survey, which has been issued for 33 years, is jointly produced by PwC and the ULI, and it includes survey responses from more than 950 leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants. For the mid-year survey, 195 participants who completed the original 2012 Emerging Trends survey were interviewed.

Most importantly, the survey showed a general trend toward optimism, even when compared with the year-end 2011 results. The number of respondents rating profitability forecasts for 2012 as excellent rose by approximately 2 percent, and the number rating the category as very good rose by the same amount. In fact, the only rating that fell was the abysmal-fair bucket, which dropped by approximately 10 percent.

According to the report, foreign investors and private equity will still lead the charge as active buyers of commercial real estate, but both values have declined slightly.  The biggest jump came from private local investors and public equity REITs.  According to Real Capital Analytics through the first quarter of this year, private-capital investors have completed the most deals, followed by public-equity companies.

The sources of debt capital values displayed some positive signs in the mid-year update.  Insurance companies continue to be number one overall.  However, government-sponsored entities’ value increased over 11 percent from the original survey in November 2011.  Other strong gains were found in the CMBS market, commercial banks, and mezzanine lenders all strong signs that the availability of debt is showing improvement.  According to Commercial Mortgage Alert, U.S. CMBS deals total $10.8 billion, up over 12 percent year-over-year.  In addition, RCA states that there were increases in lending as well in completed transactions.

Sentiment at ULI’s spring conference in Charlotte, N.C., in early May reflected the same results as the survey. During one of the sessions, Glenn Grimaldi, executive vice president at HSBC, cited low interest rates as a major trend that is driving the real estate industry by allowing for low acquisition cap rates. The low interest rates will also have implications on the amount of deleveraging as loans mature in the next few years, he said. Grimaldi forecasted that banks may sell more loans at discount in the next years.

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