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Thursday, November 4, 2010

Shhh, don't wake up REIT buyers but Wells Fargo VP says commercial real estate is relying on Corporate America to "Pull us out of the ditch"

"The recovery of the commercial real estate market
is going to depend nearly exclusively on corporate America,
and that sector is currently not spending."
Bryan Ellis Real Estate Letter
Williamsburg, VA – Carlos Evans, executive vice president and group head of the Eastern division of Wells Fargo National Commercial Banking described an oddly bleak yet optimistic scenario this morning during his speech at the “Reinventing Real Estate” conference at the College of William and Mary. Evans, who bemusedly described the ordeal that Wells Fargo and the other big banks have undergone since 2008 by saying, “today, people think banks are like a piƱata; if you just keep whacking at them good stuff comes out,” believes that “there is no hiding that the banks were part of the problem” of the “perfect storm” that hit the lending and real estate markets in 2008. However, he firmly believes that the one remaining “leg” of commercial real estate that is intact will pull the entire industry “out of the ditch” it is currently in.
Evans believes the commercial real estate market recovery will happen when 3 “legs” of support are in place: construction, public (city/local government) funding and corporate America.
Evans described his outlook on the remainder of 2010 saying simply: “Things are getting better.” However, he elaborated, construction spending, which is usually the primary source for recovery in the commercial market, is “not going to be there” in 2010 or 2011 – and possibly not for longer than that. Additionally, he added, public spending is also likely to be greatly reduced due to local governments’ own set of budget problems. As a result, he said, the recovery of the commercial real estate market is going to depend nearly exclusively on corporate America, and that sector is currently not spending.
There are some bright spots indicating that the spending could start soon, though. Not only is credit availability improving, but activity in capital markets is also on the rise. However, until businesses start borrowing and spending some of the capital that they are earning, Evans pointed out, the recovery will be a “slow, long pull.” While companies used to tap, on average, about 50 percent of their potential, now they are down to tapping about 30 percent, he said – and that number has been on the decline for the past 30 months.
However, “it is totally against the grain for American businesses to sit on the sidelines and pile up cash,” he reminded the audience, saying that all that is needed is a catalyst to “trigger” borrowing and spending. Evans speculated that the trigger could possibly be Tuesday’s elections, but believes that “Corporate America needs to see conviction in the government that something will be done about the level of debt in this country and the expense of programs in this country” in order to resume “business as usual” and return the commercial industry – and quite likely the job market along with it – to the “new normal.”
The Bryan Ellis Real Estate Letter has a reporter on site at the Reinventing Real Estate conference at the College of William & Mary in Williamsburg, Virginia. This article is based on information garnered from that conference. Link to Bryan Ellis Real Estate Letter

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