Business Specialties
Investment
Jul 16, 2009
By: Melissa Lin, Contributing Editor
With unemployment still rising, Prudential executives expect more pain to come for the commercial real estate market, but they also see some signs of better health, according to their assessment of the industry during yesterday’s mid-year commercial real estate outlook.
“We have gone from near death to life support. ... Now we are coming out of intensive care, yet are by no means euphoric,” declared Marc Halle, managing director of Prudential Real Estate Investors and a portfolio manager of the Dryden Global Real Estate Fund, speaking of the current state of the real estate market. And David Durning, senior managing director at Prudential Mortgage Capital Co., predicted that “people can start to feel better before three years,” despite Rep. Carolyn Maloney’s recent warning of three more years before the industry hits bottom--although he acknowledged that the economy and other uncertain factors will strongly influence his projection.
That is not to say there won’t be more pain during the next three years. The combined negative consequences of deleveraging, deflation and deterioration of market fundamentals have still to really develop, according to Allen Smith, CEO of Prudential Real Estate Investors, influenced by the series of time lags among job loss, building performance and rental rate turnaround. With unemployment expected to turn around in mid-2010, vacancies will likely be a factor until 2011, which could easily push rental rate recovery back to 2012, he speculated. And until there are improvements in building vacancies, the financial market won’t be able to recover.
Market conditions are having separate effects on different areas of the commercial real estate industry. “Lack of capital affects everybody,” observed Prudential Commercial Real Estate vice president Michael McLean, but he noted that retail owners are starting to fill space vacated by national retailers with regional or local stores, while mall owners are in some cases now paying commissions. Managers are being asked to do more with less, while brokerage firms have seen consolidation—although mergers and acquisitions are now on hold given the lack of acceptable financials. He forecast brokerage compensation and commission structures changing as well.
At the same time, some markets have not suffered as much as the economy at large and some positive steps are being taken to advance toward recovery. Included in these is the collaboration of lenders and borrowers in an effort to extend loans and avoid the bank foreclosures so prominent during the recession of the early ‘90s. In addition, the Term Asset-Backed Securities Loan Facility, or TALF, is still in its infancy for real estate, with many firms waiting on the sidelines to see how it advances. And REITs are exhibiting favorable performance, trading on the light they see at the end of the tunnel.
When a recovery comes, Halle expects that real estate with short durations, such as hotels, which perform based on one-night stays, and multi-family housing, which averages 65 percent turnover per year, should bounce back in the least amount of time, despite their current pain.
By: Melissa Lin, Contributing Editor
With unemployment still rising, Prudential executives expect more pain to come for the commercial real estate market, but they also see some signs of better health, according to their assessment of the industry during yesterday’s mid-year commercial real estate outlook.
“We have gone from near death to life support. ... Now we are coming out of intensive care, yet are by no means euphoric,” declared Marc Halle, managing director of Prudential Real Estate Investors and a portfolio manager of the Dryden Global Real Estate Fund, speaking of the current state of the real estate market. And David Durning, senior managing director at Prudential Mortgage Capital Co., predicted that “people can start to feel better before three years,” despite Rep. Carolyn Maloney’s recent warning of three more years before the industry hits bottom--although he acknowledged that the economy and other uncertain factors will strongly influence his projection.
That is not to say there won’t be more pain during the next three years. The combined negative consequences of deleveraging, deflation and deterioration of market fundamentals have still to really develop, according to Allen Smith, CEO of Prudential Real Estate Investors, influenced by the series of time lags among job loss, building performance and rental rate turnaround. With unemployment expected to turn around in mid-2010, vacancies will likely be a factor until 2011, which could easily push rental rate recovery back to 2012, he speculated. And until there are improvements in building vacancies, the financial market won’t be able to recover.
Market conditions are having separate effects on different areas of the commercial real estate industry. “Lack of capital affects everybody,” observed Prudential Commercial Real Estate vice president Michael McLean, but he noted that retail owners are starting to fill space vacated by national retailers with regional or local stores, while mall owners are in some cases now paying commissions. Managers are being asked to do more with less, while brokerage firms have seen consolidation—although mergers and acquisitions are now on hold given the lack of acceptable financials. He forecast brokerage compensation and commission structures changing as well.
At the same time, some markets have not suffered as much as the economy at large and some positive steps are being taken to advance toward recovery. Included in these is the collaboration of lenders and borrowers in an effort to extend loans and avoid the bank foreclosures so prominent during the recession of the early ‘90s. In addition, the Term Asset-Backed Securities Loan Facility, or TALF, is still in its infancy for real estate, with many firms waiting on the sidelines to see how it advances. And REITs are exhibiting favorable performance, trading on the light they see at the end of the tunnel.
When a recovery comes, Halle expects that real estate with short durations, such as hotels, which perform based on one-night stays, and multi-family housing, which averages 65 percent turnover per year, should bounce back in the least amount of time, despite their current pain.
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