DLA Piper: CRE Execs Feeling Bullish in 2014

Low interest rates, abundant capital and a slowly improving economy are among the top reasons why 85 percent of commercial real estate executives interviewed for the 2013 DLA Piper State of the Market Survey said they are feeling bullish about the sector for the next year.

Jay Epstien, of DLA Piper

Low interest rates, abundant capital and a slowly improving economy are among the top reasons why 85 percent of commercial real estate executives interviewed for the 2013 DLA Piper State of the Market Survey said they are feeling bullish about the sector for the next year.

That number jumped from 30 percent in October 2011 when the last DLA Piper market survey was done. In April, DLA Piper emailed a survey to top real estate executives, including CEOs, COOs, CFOs, and other senior executives. The law firm received 189 responses. The 2013 State of the Market Survey coincides with DLA Piper’s 2013 Global Real Estate Summit held in Chicago on April 30.

The survey found that although the U.S. economy isn’t booming, 40 percent of respondents stated the continuing strength of the national economy was the primary reason for their bullish outlook. Nearly 33 percent cited the abundance of debt and equity capital available for investment and about 24 percent said it was the continuation of low interest rates.

Calling it a “very significant jump,” DLA Piper U.S. Real Estate Practice Chair Jay Epstien told Commercial Property Executive that the increased optimism among CRE executive was “attributable to low interest rates and an environment where we have abundant capital supply – the ultimate drivers of the industry.”

“You can borrow at interest rates that nobody ever imagined in commercial real estate,” he added.

While the executives know that the low interest rates are being artificially maintained, the survey showed 99 percent of those questioned believed the Fed’s pledge to keep interest rates low through the end of 2014 and felt there would be little or no change in the coming year. About 50 percent said the rates could edge up slightly, while 48.7 percent said there would be no change.

For the 15 percent of executives who are feeling bearish about the year ahead, 48.8 percent of them cited the slow U.S. job growth followed by 36.6 percent who blamed continued gridlock by legislators in Washington, D.C. Just under 10 percent cited the ongoing European debt crisis. However, the European sovereign debt crisis was the top choice when the executives were asked about external global impacts on the U.S. CRE market. That was followed by the break-up of the euro and slower growth in China.

Back at home, eliminating political gridlock was the number one answer when the respondents were asked what the U.S. must do to get its fiscal house in order. Reducing and/or rationalizing entitlement programs came in second, followed by tax reform, reducing corporate tax rates and introducing new stimulus measures. Nearly three-quarters of the respondents don’t believe Congress will vote in the coming year to eliminate the “carried interest” provision, which would impact investors in real estate partnerships, joint ventures and private equity funds.

The survey noted that 68 percent of the executives expect cap rates to remain steady for the next 12 months. But 18 percent believe cap rates are headed down.

Epstein noted that the question didn’t specify cap rates for specific asset classes or cities, but he believed, “cap rates are about as low as they’re going to go.”

Asked what types of equity investors they think will be the most active, 29 percent said private equity, 26 percent said foreign investors and 23 percent said pension funds. REITs received about 18.5 percent of the responses, similar to last year’s survey when 16 percent said REITs would be the most active investors. In 2010, nearly 30 percent of the respondents chose REITs.

Most of the respondents said they thought healthcare would present the most attractive opportunity for investors in the next twelve months, followed by multi-family, industrial, hotel, office downtown, retail and office suburban.

Even though healthcare is a specialized segment, the report noted that it was “recognized for its investment stability, superior performance and long-term opportunity following the re-election of President Obama and the implementation of the Affordable Care Act, which creates the expectation of a greater need for properties serving healthcare issues.”

Multi-family ranked as the most attractive investment in the October 2011 market survey and is still considered highly attractive, according to the respondents.

The survey asked the executives which non-gateway city did they believe would perform the strongest in the United States in the year ahead and Houston and Dallas were the strong top two finishers with Miami third, followed by Seattle, Denver, Atlanta and Minneapolis.

Epstien said he wasn’t surprised that the Texas cities came out on top.

“Dallas has what is considered to be one of the most stable economies and Houston is the energy center,” he said.

Miami being in the top three made sense to him because “it is the jumping off point for all the Latin investments and jumping in point as well,” Epstien added.

When asked what international markets or regions would be most attractive for investments in the next 12 months, not surprisingly Brazil had the most responses. For the first time, DLA Piper offered Australia as a choice and it pushed China to number three and India to number four on the list followed by Eastern Europe, Western Europe and Mexico.

Epstien said the firm was surprised at how Australia placed on the list.

“It has great fundamentals, low unemployment, high occupancy, but it’s not a very deep market,” he concluded. I thought it might have been more in the middle of the pack.”