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Investor Sentiment in the Dumps for 2009

Even as the commercial real estate industry faces one of its worst years in recent times, industry executives are hopeful that the Obama administration’s stimulus efforts could improve the situation later in the year by putting the economy on the path of recovery, according to a January 2009 survey of industry sentiment.

The survey, conducted by the Real Estate Roundtable, a commercial real estate industry forum made up of various industry constituents, found that the commercial real estate industry is still reacting to last year’s economic crisis and could see worse ahead this year as job losses siphon off demand for commercial real estate space.

In fact, some survey respondents believe 2009 could be a year that is even more negative for the industry than last year.

“While some of our members are more ‘optimistic’ that the right combination of policy actions can begin to unlock markets and get money flowing again — possibly as early as the second half of this year — right now even sound businesses are in survival mode,” says Jeffrey DeBoer, Real Estate Roundtable president. “For many, just staying alive in 2009 will be a great accomplishment.”

Respondents to the survey were pessimistic about prices. More than half expect that a year from now commercial real estate prices will be lower than they are today, with 13% expecting them to be much lower. However, this is an improvement from October 2008, when as many as 27% of respondents expected prices to be much lower by October 2009.

Availability of capital also continues to be a major concern for survey participants. One survey respondent notes, “Right now, there’s Armageddon risk priced into everything. We need liquidity to improve to get that out of the pricing.”

On the positive side, more than half of the respondents believe that availability of debt and equity financing will be somewhat better a year from now. In fact, some of the respondents actually believe that debt markets are showing some very minor improvements from the lows touched in late 2008.

A few respondents, however, suggest that there will only be pockets of liquidity, considering that most borrowers will not be able to get loans. Property owners seeking to refinance core assets are likely to have an easier time accessing capital.

Equity financing is less likely to be available than debt financing as investors allocating capital have to rebalance their portfolios to reflect current market conditions and risk levels.

Looking at risk from the perspective of equity investors, one real estate investment trust CEO says, “It is not acceptable not to make money in 2009. People are aware of the risks and it’s better not to invest than to make a loss. Any losses will not be forgiven.”

For the first time, the Real Estate Roundtable also has launched three indices to gauge industry sentiment based on survey responses from the current period, and also incorporating responses from its three previous surveys conducted in April, July and October of last year.

A current index reflects how survey respondents see the present environment as compared with the environment in the year-ago period. For the January 2009 survey, the index reading of 18 is a very minor improvement from the reading of 17 for the October 2008 survey, which means that industry executives are just a little bit more positive about industry conditions.

Survey respondents were also a bit more optimistic about the health of the industry in the coming year. From a low of 49 in October 2008, the Real Estate Roundtable future index has risen to 58 for January 2009.

If a turnaround is in the cards, it will likely happen in the second half of the year. As one REIT chairman who responded to the survey put it, “Real estate will take most of the year to start a recovery, but I’m fairly positive about the second half of the year. There’s not as much new supply coming on board in my markets as in past downturns.”

And looking at an overall sentiment index, which incorporates respondent’s perceptions about both current and future conditions in the industry, it too shows an improvement from a low of 33 hit in October, to a reading of 38 for January.

Even then, those who are optimistic don’t have high expectations for the second half of 2009 and only expect a rebound in 2010. The survey is based on responses from more than 130 commercial real estate industry respondents.

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