Why Are CRE Execs a Little Worried?

Commercial real estate might be having a pretty good run now, but CRE executives are still a bit edgy.

CRE’s having a pretty good run now — certainly compared to the years after 2008 — but commercial real estate executives are still a little edgy, according to the latest Real Estate Roundtable quarterly Sentiment Index, which was released recently. The organizations “current” index for the first quarter of 2015 — which gauges how respondents feel about current conditions — was down a bit compared with the last quarter of 2014.

Participants cited a number of things that make them fret, some of which aren’t directly related to the economy (such as terrorism) and some of which are (such as interest-rate risk).

The Real Estate Roundtable Sentiment Survey is conducted by FPL Advisory Group, with the goal of gauging the sentiment of senior real estate executives, including CEOs, presidents, board members, and other executives. The industry sectors surveyed include owners and asset managers, financial services firms and operators.

“On the one hand, conditions for commercial real estate are quite good — and getting better — driven by improved job growth across the economy, improved business demand, and strong capital flows, as well as appropriate levels of construction and lending in key sectors,” Roundtable CEO Jeffrey DeBoer noted in a statement released with the report. He also cited the re-authorization of the Terrorism Risk Insurance Act  legislation as a “huge relief, averting the threat of a real estate credit crunch and resulting downstream impacts on the economy.”

At the same time, survey participants expressed concern about global instability, rising terrorist and cyber threats, falling oil prices, and potential future erosion of underwriting standards. Possibly higher interest rates are also of concern, particularly if they rise without sufficient job growth or demand, which would impact net operating income, property values, and owners’ ability to service existing debt.

At 72 points, the organization’s “current” index is up from its historical lows of 58 points in 2011 and 63 points in 2012. Still, the latest score is down two points from the fourth quarter of 2014, and is accompanied by softening in the “future” index (how the respondents feel about future conditions, as opposed to current ones). The future index, now at 64, continued its recent slide, so that there’s an eight-point spread between the current and future indices, nearly the widest since the survey was launched in 2009.