Deloitte: Amid Downtrodden Economy, Commercial Real Estate Triumphs

(August 19, 2011) — Research by Deloitte shows that commercial real estate deal flow and liquidity are going strong despite a sluggish economy.

The firm’s “Commercial Real Estate Outlook: Top Five Issues in 2011” report reveals that capital availability, price discovery, and improved fundamentals — driven by alternative financing sources and loan restructuring — are fueling commercial real estate (CRE) recovery.

“This is a positive year for commercial real estate so far. The uncertainty impacting the overall economy and other industries has had less of an effect on the real estate industry,” said Bob O’Brien, vice chairman and real estate sector leader at Deloitte. “It’s important to remember that commercial real estate was the first sector to be hit hard by the downturn so it is further along in rebounding than other businesses. At the same time, the wall of debt maturity that will come due between now and 2015 still may present short and longer term challenges for the remainder of this year and into 2012.”

The study found that the impact of financial regulations on commercial real estate is uncertain. The report stated: “Commercial real estate players are evaluating the potential impact of proposed legislation, regulation and accounting rules on the market while wrestling with uncertainty about how legislation such as the Dodd-Frank Act will be implemented. Other key issues include the Volker Rule, risk retention, lease accounting standards and covered bonds.”

Furthermore, the study noted that global commercial real estate is likely to fuel investments, despite natural disasters in Japan and political turmoil in the Middle East.

In signs of a rebound of commercial real estate, the head of one of Canada’s most active global investors revealed earlier this year that it is eyeing US commercial property. David Denison, chief executive of the Canada Pension Plan Investment Board (CPPIB), which oversees about $140 billion in assets for Canada’s national pension plan, told the Wall Street Journal that he has witnessed a spike in the availability of commercial real estate in the US, and that he expected that trend to continue.

Largely due to a number of major recent purchases, the fund reported in February that its infrastructure holdings had ballooned over the previous nine months to become 6.8% of the fund’s total assets with a total value of $9.5 billion, up from 4.6% of assets worth $5.8 billion as of last March 31. Meanwhile, real estate assets had grown to $9.2-billion in value representing 6.6% of the fund’s holdings, an increase from $7 billion or 5.5% of total assets last year.