It’s been a slog to get here. But by all accounts, ICSC’s RECon 2012 marked the first time since the commercial real estate market peaked in 2007 that the conference felt like it did during the boom years. There was optimism. There were full halls. And, most importantly, deals were getting done.
There were slivers of optimism in recent years, but there were also looming concerns about what the next shock might be and whether that would undo the momentum that has been building since things cratered in 2008 and 2009.
This year there were murmurings about the situation in Europe and whether a Greece exit from the EuroZone might trigger a new stage of the financial crisis. But firms also say they’ve spent the last few years right-sizing portfolios, fixing their balance sheets and generally getting into better shape. As a result, many feel they could weather any macroeconomic shocks.
Taubman Centers COO William S. Taubman saysthat the key for companies is to stay focused on what they can control. “The best defense against any shocks is a conservative financial style and strong balance sheet,” Taubman says. “That gives us staying power to weather an shocks.”
Bill Rose, national director of Marcus & Millichap’s Real Estate Investment Services’ national retail group and net leased properties group, put it like this. “After trudging through 2008 and 2009, 2010 began to give us hope and 2011 built on that. But we were still waiting for the next shoe to drop. … The Greek debt crisis has caused some pause. But we’ve realized that this country—from a fiscal and monetary stance—is in alright. We’re going to be okay.”
Crucially, because the United States is seen as a safe haven for investors, a flood of interest in Treasuries has pushed yields on 10-year bonds to 1.74 percent. And with the Federal Reserve signaling that it will keep the Federal Funds rate at zero percent into 2014, a low-interest rate environment will persist for a while. “That will help us resolve the $2.3 trillion of legacy debt on the books through 2017,” Rose says.
So we’re looking at a sizable stretch where deals can continue to get done and an environment conducive to the continued recovery of the capital markets. The low-interest rate period we’re in has already created a situation where investors can aggressively bid for assets—cap rates on some recent deals are in the 4 percent to 5 percent range—but spreads to Treasuries are decent enough to make such transactions attractive.
Crowded floor
With attendance somewhere between 30,000 and 35,000, the show has grown in size the last few years. It’s not back to where it was in the boom years. But attendees said they were happy with the size and feel of the show and most reported a rise in meetings and substantive discussions taking place.
“Everything is about appointments,” says Drew Alexander, president and CEO of Weingarten Realty, “When we set an appointment and establish the agenda, we get to see the hole card. … This year, we know retailers were looking to add stores. So it’s been a productive convention.”
Brokers and landlords reported that retailers are out looking for spaces. They are no longer asking for concessions. Vacancies have flat-lined and even begun to fall in the strongest markets. That means landlords, finally, have some leverage to push for rises in rents.
This, in turn, will pave the way for discussions about development as rents approach the levels necessary to justify new projects. Some developers did have new projects on the board already. More common, however, was firms talking about building in 2013, 2014 and beyond.
In part, this stems from conservatism from developers and lenders about when to definitively pull the trigger on moving forward. Necessary pre-leasing levels need to hit 70 percent or 80 percent before a project moves forward—as opposed to 50 percent or less in the boom years. And developers need to put more equity into a deal—perhaps 40 percent of the loan-to-value ratio of the project cost—also up from the pre-2007 period.
Overall, the industry has made substantial progress in the roughly five years since the market peaked. And there’s optimism that things are on a strong enough footing that the improvement will continue.