Keep an Eye on Confidence
03/08/2012 | by Allen Kenney
While analysts and investors focus on job growth as the key indicator of expansion in the commercial real estate market, they should also pay attention to consumer confidence and housing, according to Robert Lehman, REIT practice leader with Ernst & Young LLP.

In an interview with at NAREIT's Washington Leadership Forum, Lehman touched on a variety of pressing issues in the industry. He described employment as "just a small indicator of confidence." He singled out the residential housing market as one of the biggest factors influencing the economic recovery.

"Businesses will add jobs if they're confident," Lehman said. "I wouldn't be just looking to jobs as a sole measure."

Lehman also discussed the prospects for growth in commercial development. Relatively high vacancy rates at the moment, particularly in secondary and tertiary markets, aren't conducive to expansion, Lehman noted. Until more empty space is filled, new construction won't start.

"In many of the property classes, what we have right now is a larger than historic vacancy level," Lehman said. "What we need to see is those areas lower their vacancy levels and increase rents. When that happens, businesses will be forced to get a better economic deal to move to some of our tertiary markets to, therefore, lower their vacancy rates. "I think before we have true expansion, we're first going to have to address this issue of vacancies in the secondary markets."

Looking globally, Lehman encouraged the bodies responsible for setting financial reporting standards—namely the Financial Accounting Standards Board (FASB) in the United States and the International Accounting Standards Board (IASB)—to take their time with their convergence projects.

"The process itself is slow, and it needs to go slow," he said.

Lehman identified mark-to-market accounting as one of the key issues for REITs and the real estate industry in the convergence discussion.