KPMG CRE Outlook Survey Results

KPMG LLP, the audit, tax and advisory firm, completed the 2012 KPMG Commercial Real Estate Outlook Survey with reflections and responses of nearly 80 senior executives in the commercial real estate industry. The survey found that CRE executives remain focused on efficiency and cost cutting as the commercial real estate market continues to rebound in a lackluster economy.

"Commercial real estate executives are seeing their margins and profits being squeezed, so increasing operational efficiency and reducing costs is a key focus," said Greg Williams, national leader of KPMG LLP's Building, Construction and Real Estate practice. "At the same time, there is tempered optimism as industry fundamentals continue to slowly improve and bright spots emerge... Commercial real estate execs are finding it challenging to source sufficient product that will produce the necessary yields to meet investor expectations. The gap between ask and bid price can still be significant in certain markets," said Williams. "It's also taking a lot longer to raise capital needed to grow their portfolios, while increased regulatory reporting requirements are driving up costs."

58% of the respondents expect the U.S. economy to improve next year, but they remain guarded about an economic recovery. In fact, 63% do not expect the economy to recover as a whole until 2014 or later - as opposed to 77% who, in the 2011 KPMG survey, predicted the recovery would be complete by the end of 2013.

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Global Effects on US Recovery

Preliminary reports suggest Europe may be slipping back into recession. 
That's one major danger to the US recovery. 

China suffered a rare trade deficit earlier in the year caused by weak external and internal demand after 5 months of decreased purchasing activity, and now manufacturing sector declines.  
Europe's double dip which looms stronger, will be affected further if China, a major market for European exports, continues to stagnate and shrink.  

That combined with credit shortages in Europe, means the easing of the sovereign debt crisis earlier this year, following the European Central Bank's(ECB) massive aid package, may all be for naught if global recession puts more pressure on a banking system already teetering on crisis.  Defaults and shrinking credit will reintroduce huge sovereign risk to a Euro Zone out of options other than full restructuring with dramatic write off's.  
And with a further domino effect on country risk through out the continent. 

The effect on the US in the banking/financial  sectors and credit availability and exports sectors certainly will echo with bad news.  

That scenario is one that could de-rail a nascent and fragile real estate recovery in the US (below).  Always a precursor to more serious troubles.  

One North American zone (in a hazardous world economy Canada and the US continue to build closer ties and interconnections across industry, energy and resources) advantage is a better positioned corporate sector and more stabally perceived fundamentals and political systems.  
In a volatile risk and surprise filled world that's a major capital attractor. 

Next week's release by the ECB may shed some light on money supply and recent bank lending - but doesn't presage the future.  

More important to the North American zone outlook, are the upcoming corporate earnings reports. 

Banks are set to contract loan portfolios by $1 trillion. This de-leveraging, though needed, will put further strain on the refinancing markets. Bond yields in Italy and Spain edge up. The German offer of a financial boost to the Euro zone financial rescue Fund, the European Financial Stability Fund, may ease concerns temporarily.

But we expect continued problems in Europe, absent some good news on fundamentals soon.

Is the CMBS Recovery Faltering?

The Wall Street Journal thinks so. A new article from Al Yoon at the Journal observed that the recovery in the commercial mortage-backed securities market has stalled out even though before the summer all indicators showed a favorable return on the horizon post-recession. An excerpt from the article:

Investment banks have sold four issues of the bonds, valued at about $6 billion, since the market hit the brakes this past summer because of investor skittishness about the souring economy and an 11th-hour decision by rating firm Standard & Poor's to pull its rating from a deal.

But to sell these issues banks had to structure them differently, providing buyers of the safest bonds more protection than usual. Now, weak investor demand is hampering the sale of the riskier parts of the new issues.

For example, J.P. Morgan Chase & Co. has been trying to sell a quarter of its $1 billion issue for two weeks as investors have been balking at yields on lower-rated classes, according to two investors familiar with the deal. Sales have been slow even as J.P. Morgan raised the risk premiums—or the amount of yield above their interest-rate benchmark—at least twice for these riskier bonds, the investors said.

Meantime, the bank easily sold the senior, safest bonds within days of the deal's announcement. A spokesman for the bank declined to comment. Investors say J.P. Morgan has sold most of the high-risk bonds but took much longer than usual.

The difficulty means that banks may have to go even further to make commercial mortgage securities attractive to investors. "Everyone wants to be in a safe haven, but once you go down in the capital structure, it's not looking so good," said Julia Tcherkassova, a strategist at Barclays Capital in New York.

For more news and information visit Blumberg Capital Partners.