TIAA-CREF: CRE OK for Now, Not Invulnerable

Turmoil in the financial markets and declining prospects in the general economy have so far failed to affect the U.S. commercial real estate market in a significant way, according to Martha Peyton, managing director of strategy and research for global real estate with New York City-based TIAA-CREF. But that can change. “We haven’t yet seen how many jobs will disappear in the coming weeks and month because of the interruption in credit,” Peyton (pictured) told CPN. “The sooner this is resolved the better.” Which of the proposed solutions–equity infusion or the purchase of bad subprime mortgages–will likely work faster? “The consensus that I’m hearing is that capital infusion is the faster route to resolving the problem,” she said. The administration has said that it would take five or six weeks to set up the reverse auctions, which would manage sales of the subprime paper. Capital infusions require no specially designed devices. The government simply buys stock. The capital infusion method also has a track record. “It is what Sweden did in the early 1990s, when they had a credit meltdown,” Peyton said. “So it is not unheard of. Writing in TIAA-CREF’s Oct. 13 “Market Monitor,” Peyton noted that CRE fundamentals have held up so far, with vacancy rates across the four major commerical property sectors (apartment, industrial, office and retail) remaining near their long-term averages at the end of the second quarter. At the same time, supplies of space in the four markets was growing at a modest pace–modest enough to maintain solid rental growth and to increase net operating income. For the CRE markets to continue to hold up, however, economic fundamentals must hold up too. Peyton’s analysis noted that economic fundamentals have come under pressure recently. She cited job losses in the financial sector and the general economy (760,000 jobs lost between January and September of this year) that will likely raise the unemployment rate, the restructuring underway in the financial sector that is lowering the capacity to provide leverage, the continuing deterioration of home values, high energy and food prices and plunging vehicle sales. CRE defenses are strong, continued Peyton. Cash flows produced by long-term leases are protecting investment-quality core properties. In addition, she wrote, the appraisal-based pricing methodology used for institutional CRE dampens the effects of gyrations in sentiment and confidence so damaging in publicly traded markets. Finally, the CRE market has seen few distressed sales, which has helped to maintain valuations. “In summary,” she wrote, “for the next few months, the story is the macro-economy; commercial real estate performance is well-positioned but not invulnerable.”