Latest DLA Piper Survey Finds Record Level of Pessimism

Bring on the bears. The brand-new 2008 State of the Market Survey from DLA Piper shows “a new record level of bearish sentiment,” 90 percent, among the survey’s 424 respondents, all C-level and other senior executives in commercial real estate. More specifically, in a last-minute supplementary survey following the Fannie-Freddie/Lehman Brothers/Merrill Lynch/AIG crisis, a majority of respondents, 60 percent, said this near meltdown of the capital markets has surpassed the 1989-to-early-1990s savings and loan debacle as the event having the greatest impact on commercial real estate in the past 20 years. Further, a strong majority of respondents don’t believe that the situation has bottomed out yet; nearly 85 percent expect to see the real estate market stabilize no sooner than 2010. == The main factor cited by the bears (71 percent) was “Continued fallout from credit crisis,” such as unfavorable financing terms and a lack of available debt. Nearly another quarter named “Sluggish economic/job growth.” In addition, nearly half (46 percent) of respondents believe that it will be 2011 at the earliest before securitized lending activity returns to prior levels. Perhaps significantly, one in six think that securitized lending transactions will never return to where they were. “We don’t really know yet how deep or broad the fallout will be,” Jay Epstien, chair of DLA Piper’s U.S. real estate practice, told CPN. “It’s too early to say with any sort of conviction that this credit crunch situation’s impact will be worse than the S&L crisis,” though he understands why survey respondents might feel that way. Epstien also commented that plenty of people in commercial real estate right now weren’t in this business 10 years ago. “There are a lot of people taking this survey who have never seen the downside” of the real estate cycle, he said. As always seems to be the case, however, some bulls remain. Of the 10 percent of respondents who professed confidence in the real estate market, exactly half cited “Investment opportunities created by market correction/credit crunch.” Handfuls of other optimists noted an expected rebound of the U.S. economy, foreign investment and an abundance of equity capital available for investment as reasons for hopefulness. Nearly 58 percent of respondents predict that interest rates will rise slightly in the next six months, while nearly 32 percent expect no change. More significantly perhaps, a similar majority (nearly 63 percent) expects cap rates to trend upward over the next six to 12 months. “The extended period of cap rate compression” appears to be over now, Epstien said, heralding a return to a more logical, more traditional situation regarding cap and interest rates.