SPECIAL REPORT: Real Estate Companies See Businesses Strengthening Despite High Unemployment Levels, Cite ‘Unprecedented’ Availability of Capital

New York– Commercial real estate executives expressed growing optimism about their businesses although U.S. employment growth is expected to remain weak through 2011.  

Speaking at the National Association of Real Estate Investors’ (NAREIT) annual convention held this week in New York, panelists cited improving sector fundamentals, the most favorable capital conditions for REITs in memory, as well as a possibility for interest rates to rise and cap rates to fall further in the future.

Michael Glimcher, chairman and CEO of Glimcher Realty Trust, said that he is “feeling a lot better” about conditions for the retail sector. He says occupancy for properties in his company’s portfolio has increased to levels above 90 percent, retail sales have turned positive, and NOI has already been one percent-plus for two to three quarters.

Keynote speaker and moderator of the general session, which addressed the state of the economy, was Kenneth Rosen, CEO of Rosen Real Estate Securities LLC. Rosen said the U.S. economy has lost 8.4 million jobs in this recession, and has added only 1.1 million jobs so far, at the rate of about 100,000 per month which is still substantially below the 300,000 level that economists would like to see.

Rosen forecasts a GDP growth of 2.4 percent and unemployment that will remain above 9 percent for 2011. Job growth will accelerate next year, but it will remain historically low. Rosen says it will be three or four years before the lost jobs will be recovered. Consumers are still not feeling good, and unemployment is elevated and will remain elevated, he says.

Despite the high jobless numbers, Rosen says he is seeing “bounce back” even in cities, such as Phoenix and Orange County, that were hardest hit by the economic downturn. Washington D.C., Boston and New York have been relatively resilient in this downturn, and New York has “done very well” and seen a very small recession, he says. Atlanta and Houston are experiencing very slow recoveries, while Northern California is improving at a rate that is slower than expected. But Silicon Valley, driven by the social media industry, is very strong economically.

Rosen says this will be an “unequal recovery,” and the cities with the most employment growth include, in order of magnitude: Washington. D.C., Orange County, Boston, San Jose, Phoenix, New York, Miami and Seattle.  

Rosen predicts that the low low interest rate environment will not last much more than another year to year-and-a-half, and advised real estate players to lock in long-term interest rates. The apartment and retail sectors are the top performing commercial real estate sectors, and the industrial and office sectors are lagging, says Rosen.

Edward Pettinella, president and CEO of Home Properties Inc., says that occupancy for Home Properties’ apartments, at 95.5 percent, is healthy, although the national employment level is weak. Petinnella says homeownership is dropping “precipitously” ‑ every one percent fall in the homeownership rate means 1 million additional household customers for rentals‑ and that is helping drive the residents to the apartment sector.   

Petinnella says his customers, most of whom are blue-collar, are “sitting tight” and not buying homes because they cannot meet the 35 percent downpayment requirement, the U.S. banking system is not lending money, or they are uncertain about economic conditions. “Homeowners are pouring back to the apartment sector,” says Petinnella, and it will be a couple of years before there will be movement back to the homeownership sector, he predicts.

Spencer Kirk, chairman and CEO of Extra Storage Inc, who says that storage space serves people with life changes, says the sector is “rebounding very nicely,” although it may take further economic growth to see additional growth.

Steven Rogers, president and CEO of Parkway Properties Inc., says the office sector is bouncing along the bottom at an average 17-18 percent occupancy, although his company is showing higher than average occupancy levels. Rogers noted that usually, 250,000 jobs per month would be created by this stage in the recovery—versus 159,000 created last month. He predicts that the Sunbelt will be the location to recover in the office sector as it historically has.

Panelists also noted the extraordinarily favorable capital environment, at least for REITs. Extra Storage Space’s Kirk says he cannot remember capital markets being so favorable, and that a 4.2 percent interest rate on 10 year financing is “unprecedented” in his career. Rogers noted that the public space is a very good place to be today. And Rosen cited the “unlimited access to capital” for REITs, whether it is the public markets, debt capital, joint ventures, private pensions or opportunity funds.

Pettinella says his company is aggressively acquiring properties, and sees current cap rates of 5.7 to 5.8 percent, which are about 50 basis points higher than the rates achieved during the market peak in 2007. Petinella says he thinks there will be further drops in the cap rate because of the “unprecedented” availability of equity and debt capital.