Abandoning Bullish Outlook

The mood among real estate executives has shifted in a negative direction. According to a national study by DLA Piper US LLP, top executives in the industry said they are concerned about 2008, and believe it will be a year of challenges as well as some opportunities. Keat Foong, executive editor of MHN, recently spoke to Jay Epstien, chair of DLA Piper’s Real Estate Practice, in the Washington, D.C. office, for some insights. MHN: What were some of the top findings of your most recent survey of the attitudes of over 332 commercial real estate industry executives?Epstien: The DLA Piper “Credit Crunch” Real Estate Survey provided one of the first looks into how the subprime phenomenon was impacting the commercial real estate market—and it’s amazing how much has already transpired since then.We found that real estate executives had abandoned their “bullish” attitudes, quickly recognizing that this credit crunch was going to have some type of lasting effect on the commercial real estate market. Specific effects that respondents were just starting to experience included tighter loan underwriting standards, increased spreads, increased equity requirements, and delayed or cancelled transactions. MHN: What are the implications for multifamily investment properties?Epstien: In the many markets where underlying fundamentals like job growth remain strong, the multifamily sector should continue as a strong performer in the coming year. Tishman Speyer’s successful completion of the Archstone deal—the largest going-private transaction in the history of the multifamily REIT sector—at the beginning of the fourth quarter is indicative of the ongoing confidence of the investment community in multifamily assets. MHN: Since the study was released, by how much do you think the executives’ attitudes have worsened? Epstien: Since the “Credit Crunch” survey was conducted in mid-September, several real estate market sectors have ground to a halt. While many respondents to the survey predicted a nine- to 12-month period for the markets to return to some sense of normalcy, the predominant sentiment is that 2008 will be a year of challenge mixed with some opportunity. The shift in the tenor of the discussion from a recovery period of “months” to a “year” is indicative that the predominant feeling in the marketplace is one of uncertainty mixed with concern.MHN: What were your findings in terms of when the respondents think the markets will stabilize from any negative effects of the credit crunch?Epstien: The overwhelming majority of respondents (61 percent) anticipated that it would take between nine to 12 months before the real estate markets stabilize from the effects of the credit crunch. Again, given the current slowdown, the majority seems to be on the right track here as we continue to weigh the prospects for 2008. MHN: What is your outlook for the commercial real estate sector going forward?Epstien: As the Fed signals further rate cuts, even those real estate players who saw opportunity in 2008 may be forced to retreat to the sidelines. Moreover, as the foreclosure statistics continue to rise and begin to affect regional and local economies, the outlook looks more grim. But, both well-capitalized companies and the capital providers remain poised to take advantage of the opportunities that will materialize as the markets settle out and the uncertainties of the past five-plus months crystallize into the trends of the new year. We remain cautiously optimistic that the combination of outside forces, led by the Fed and perhaps the U.S. Congress, with the needed correction in the marketplace from the flurry of activity during the past several years, will result in increased activity in the second and third quarters of 2008.To comment on this interview, contact Keat Foong at kfoong@multi-housingnews.com