More than 110 executives from the commercial real estate sector – encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings – participated in the latest Q3 Sentiment Survey. For the first time, the survey's current and future conditions indices merged, scoring an Overall Sentiment Index of 74 (down from 76 in the previous quarter). This score suggests a relatively positive trend and a flat trajectory.
The Overall Sentiment Index is calculated based on averages of both current and future indices – all measured on a scale of 1 to 100. To reach an Overall Index of 100, for example, all survey respondents would have to answer that market metrics are "much better" today (Current Conditions) compared to one year ago, and also will be "much better" 12 months from now (Future Conditions).
Although a total of 62% of the survey participants reported real estate market conditions today as "somewhat better" than a year ago (down from 65% in Q2), only 19% said conditions are "much better" (up from 17% last quarter).
Looking forward, 59% of respondents predicted conditions one year from now will be "somewhat better" (down from 60% in Q2), whereas only 20% expect conditions one year from now to be "much better" (down from 28% last quarter). The overall Current Conditions index of 74 for Q3 2010 stands in stark contrast to a score of 36 for the same time period last year.
One participant responded, "The only certain thing in the world at the moment is uncertainty. Until companies begin re-hiring and the consumer regains confidence, we will remain stuck in the ditch. It would help tremendously for the government to get out of the way."
For real estate asset values, respondents report some improvement in expectations, yet emphasize the gap between valuations for Class A assets and all others. According to a survey respondent, "The market remains very murky. The few quality assets that do come to market tend to attract rabid bidding, but there's still general illiquidity." Fifty-seven percent of participating executives report asset values are "somewhat higher" than a year ago (up from 35% in Q2), whereas 56% expect asset values will improve one year from now (the same expectation of 56 % was reported last quarter). Seventeen percent of survey participants stated that asset values are "much higher" than one year ago (up from 11% in Q2). Six percent said values will be "much higher" one year from now (up from 3% last quarter).
The respondents also reported that the instability of capital markets remains a significant cause of unease, although conditions have improved marginally since the previous quarter. One executive noted, "Our concern is that the pending loan maturities in the next three years continue to outpace the capacity of lenders to provide sufficient refinance capital. Assuming that the recent 'extend and pretend' practices cannot continue indefinitely, does this suggest that we are in for another round of value decreases in the commercial real estate sector?" Forty-two percent of respondents said debt capital is "somewhat better" today than one year ago (versus 38% last quarter), whereas 36% characterized debt availability as "much better" (compared to 27% in Q2). On the equity side, 54% of participants said availability is "somewhat better" than one year ago (versus 50% last quarter), whereas 24% characterized debt availability today as "much better" than one year ago (compared to 26% in Q2).
Projecting availability one year from now, 62% of participating executives said debt capital will be "somewhat better" (versus 69% last quarter), whereas 13% said debt availability will be "much better" (compared to 10% in Q2). On the equity side, 50% said availability will be "somewhat better" one year from now (versus 52% last quarter), whereas 17% said availability will be "much better" one year from now (compared to 16% in Q2).
