Just as the robust pace of recovery at the end of last year led commercial real estate
markets to believe the recovery was well-established, along came a barrage of disappointing economic and job growth setbacks, including downward revisions to gross domestic product, fiscal turmoil in Europe, the political gridlock in Washington over the debt-ceiling limit, Standard & Poor's U.S. debt downgrade, followed by a roller-coaster ride in the investments markets, have caused analysts and economists to temper their outlooks for the remainder of the year.
Fannie Mae led the way this week in its Monthly Economics and Mortgage Markets Outlook.
"While we expect the meager recovery to continue into a third year, we have downgraded our outlook substantially for the rest of this year and next. For all of 2011, economic growth is expected to downshift to 1.4% from 3.1% in 2010-nearly a full percentage point lower than our projection in the prior forecast."
"Growth is expected to pick up in 2012, but only to about 2%, compared with 3.1% projected in the July forecast. This downgrade reflects a substantial risk of recession in coming quarters," Fannie Mae wrote. "The sluggish pace of economic growth implies that the economy is vulnerable to additional shocks, especially the renewed concerns about the European sovereign debt crisis."
Lower mortgage rates are not expected to boost housing demand, which will likely remain sluggish until we see sustained, strong employment gains, Fannie Mae wrote.
"With modest improvement in home sales in 2012 and only a gradual improvement in inventory, we expect home prices to resume their declines in the second half of 2011 before stabilizing in early 2012," Fannie Mae said. "There is some risk that the stabilization in home prices will be delayed if the labor markets deteriorate further."
Freddie Mac, wasn't nearly as downbeat as its counterpart, and said this week that the likelihood of an extended period of both relatively low short- and long-term interest rates is helpful news for the housing market's recovery.
"While the capital markets have experienced sizeable movements up and down in recent weeks, these swings are unlikely to lead to whiplash or hospitalization for individual investors," said Frank Nothaft, Freddie Mac, vice president and chief economist. "Heightened uncertainty, unfortunately, can be harmful to the overall economy. Perhaps it's best not to look up or down, but keep one's eyes on the track ahead."
While the first half of the year saw a budding commercial real estate recovery, the downbeat news this summer is also threatening to delay that progress, accounting consultancy firm Deloitte wrote in a commercial real estate outlook it published this week.
With the economy unlikely to be a short-term catalyst, strategies based on more realistic expectations of a modest and gradual return to growth are key, said Bob O'Brien, Deloitte vice chairman and real estate sector leader.
"It's important to remember that commercial real estate was the first sector to be hit hard by the downturn so it is further along in rebounding than other businesses," O'Brien said. "At the same time, the wall of debt maturity that will come due between now and 2015 still may present short- and longer-term challenges for the remainder of this year and into 2012."
Christopher Lee, president and CEO of real estate consulting firm CEL & Associates, wrote this week that the prospects for a real estate recovery could wait until 2013.
"Life isn't about waiting for the storm to pass… it is about learning to dance in the rain," Lee wrote this week in his Strategic Advantage newsletter. "We are in a perfect storm of financial and economic turmoil and chaos that continues to create challenges for the country and the real estate industry."
According to Jones Lang LaSalle's Global Capital Flows report that also came out this week, cross-border commercial real estate transactions rose 50% to comprise half of the $103.5 billion of direct investment transactions completed in the second quarter of 2011,
Given the strong start to the year, Jones Lang LaSalle said it still expects market volumes to reach its full year forecast of $440 billion, so long as current market volatility and uncertainty abates and there are no further significant economic setbacks.
In an era of instability, good quality commercial property will benefit, but deals, particularly larger ones, will take longer to complete, JLL said.
"In the first half of this year, we saw firms investing domestically and the private equity and unlisted funds investing across borders," said Arthur de Haast, head of the International Capital Group at Jones Lang LaSalle. "Funds are being more cautious with a focus on investing primarily at home and trusting experienced managers with their cross border investments. This trend should continue through the second half of the year if the economic environment remains uncertain."
"Risk aversion has risen over the past few months, meaning large deals are taking longer to close," de Haast added. "While we're seeing more transaction flow, in the second quarter there was a notable absence of big ticket, single-asset transactions."
"While a significant number of large transactions are in the pipeline for the second half, the volatility of markets could cause further delay" de Haast said.
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