BarCap: Commercial Real Estate Demand to Start Back This Summer
Demand for commercial real estate should rebound by the summer of 2010 as the labor market improves, according to analysts from Barclays Capital (BCS), although “it depends on how delinquencies and defaults will ramp-up next year,” Barclays' Aaron Bryson told HousingWire. But, according to Barclay’s report on the 2010 outlook for commercial mortgage-backed securities (CMBS), the labor market is showing encouraging signs in recent months, which is the best indication of growing demand in commercial space. Barclay’s analysts forecast “sustained positive job growth” beginning in Q110 and an addition of 2.3m jobs by the end of the year. This translates to a 9.1% unemployment rate at the end of 2010, which is not yet healthy but a sign of recovery. Since the middle of 2008, demand for commercial real estate has slipped into a freefall but should turn positive by the end of 2010. Supply, however, will maintain its current levels as new completions will stay “extremely low,” according to the report. As far as when vacancies will disappear, during the last two recessions, the lag time between job growth and rent growth usually lasts 2-to-3 years. Analysts do not expect national office net operating income to reach positive levels until 2013 or early 2014. On the pricing side, Barclay’s analysts expect commercial real estate prices to reach a bottom in 2010 as transaction activity picks up and cash returns to the market. According to Moody’s CPPI Index, which measures pricing, values sit 43% below the market’s peak in October 2007. All of the talk of “recovery” in the commercial space hinges on collateral performance and recent vintage loans. “Our biggest concern heading into 2010 is not the well-publicized loan maturities and funding gap, but instead the income gap – that is, the growing pressure on legacy loans to cover mortgage payments and avoid default,” according to the report. Through December, 30-plus day delinquencies jumped 6.5% across fixed-rate loans. Another 3% are in special servicing and need modifications. According to the analysts, most delinquencies in 2009 came from aggressive underwriting not a lack of cash flow. This is not the case of hotels, which continues to suffer from a lack of business. Recent data shows an increase in the pace of delinquencies as 30-plus day delinquencies jumped 69bp in December for 2005-plus vintage loans, compared to an increase of 41bp in the previous three months. For this reason, analysts expect defaults to rise sharply. For the 2005-plus vintages, defaults, including modified loans, will double to almost 13% by the end of 2010. These expectations, if they come to pass, could overshadow the fragile growth in the job market. Write to Jon Prior. The author held no relevant investments.