Tenuous Recovery in Commercial Real Estate

Although the commercial real estate market continues to show signs of improvement, Ron Donohue, president and chairman of Hoyt Advisory Services, says it's still early in the recovery.

In a video interview at REITWise 2012®: NAREIT's Law, Accounting & Finance Conference in Hollywood, Fla., Donohue offered his investment outlook for REITs and commercial real estate. Donohue said tepid job growth threatens to undo some of the strides made in the industry in recent months.

"The reality is that the jobs have been coming, but they're not really coming at the pace that we've historically seen," Donohue commented. "If it's not sustained, I think we're going to see a little bit of retrenchment."

While leasing activity and demand are continuing to grow, Donohue said the recession likely taught some companies that they could make do with less space.

"The reality is that there were probably a fair number of companies that were operating in more space than they needed, so they can bring on some level of employment without needing more space," he said.

Looking ahead, Donohue said investors should keep an eye trained on job growth for signs of where the market is headed.

"If nobody hires anybody, they don't rent space and nobody writes a rent check," he said. "It doesn't matter how wonderful our structures are. It doesn't matter how good the managers are.
At the end of the day, the income growth is what drives that property."

Donohue also pointed out that conditions in the capital markets could help drive industry growth.

"The situation in the financing markets is very favorable," he said. "There's a lot of money available, but it's not favorable for everybody. It's favorable for well-capitalized, well-known organizations that can present a clean balance sheet."

Conversely, borrowers will find it difficult to obtain financing for lower-quality properties or those with problems maintaining their occupancy rates, according to Donohue.

"If you have a complex ownership structure without single-asset entitites and so forth, your opportunities for financing are pretty few and far between," he said. "The CMBS market has been very selective in what it takes in.