May/June 2009 VOL. 2

Investment Notes

Senior real estate executives anticipate access to capital may improve slightly in the next 12 months, yet they indicate that current conditions in all sectors of commercial real estate continue to erode, according to The Real Estate Roundtable Sentiment Survey for the second quarter 2009.

“If current conditions are allowed to weaken further, the possibility of widespread commercial real estate loan defaults will transform today’s threat into an ominous reality,” says Roundtable President and CEO Jeffrey D. DeBoer. “It is clear that the nation’s frozen credit markets currently do not have the capacity to meet a looming wave of commercial real estate loan maturities. But from the depths of today’s market, our second quarter Sentiment Survey suggests a glimmer of hope.”

To help restore liquidity to credit markets, it is critical that the federal government’s Term Asset-Backed Securities Loan Facility (TALF) and Public Private Investment Program (PPIP) be properly engineered to bring desperately needed liquidity to real estate credit markets, DeBoer says.

As The Roundtable’s Q2 2009 Sentiment Survey shows, senior executives believe asset values continue to slide as access to capital remains constricted. Yet, when asked to compare today’s market conditions versus those they expect in one year, a majority of respondents say conditions will be “somewhat better.”

This view is reflected by a slight uptick in the Overall Q2 2009 Sentiment Index, which registers at 41, up from last quarter’s score of 38 and its low point of 33 six months ago. The Roundtable’s Overall Sentiment Index is measured on a scale of 1 to 100 and is calculated based on the average of Future and Current Indexes. For example, to reach an Overall Index of 100, all survey respondents would have to answer that conditions are “much better” today compared to one year ago and will also be “much better” 12 months from now.

A significant majority of the 120+ survey respondents continues to report eroding market conditions, with 83 percent saying real estate markets are worse today than one year ago. But when asked their perspective on today’s market compared to one year from now, 59 percent of respondents said they expected conditions would be better.

One executive offered a small measure of optimism for the future, saying, “I believe stock market pricing will get better, but the private market will get worse... The public markets are a leading indicator, and they seem to have found a floor.”

Respondents to the Q2 survey also report that current asset values continue to slide and expect little improvement in pricing in the next 12 months. Ninety-nine percent of executives said real estate values were lower than one year ago, while only 24 percent of respondents expect values to be somewhat higher one year from now.

Nearly all the executives surveyed said access to capital remains limited as debt and equity markets have tightened, although conditions have improved slightly. Nearly nine out of 10 respondents think debt availability has deteriorated from a year ago, yet almost seven out of 10 respondents think debt capital availability will improve in the next year. Likewise, nearly eight out of 10 respondents think equity financing has deteriorated from a year ago, yet seven out of 10 respondents think it will improve in the next year.