Signs of Recovery?

Real estate is showing some early signs of a revival as an attractive investment destination compared to other opportunities like corporate debt, but the equity and debt markets have to open their wallets with more confidence to resume a normal flow of deals. Real estate looks like a better value deal relative to other alternatives than it did six months ago although while debt capital is available, equity investors are still holding back. That phenomenon is not helping the process of deleveraging, or reducing the share of debt in portfolios, that banks and other lenders must undergo before a more normal deal flow can resume-The difference is very few people are writing equity checks to buy property.

The bond markets for investment-grade debt from REITs have also opened up, with issuances totaling $8 billion so far this year. All that has given more confidence to the market participants and propels new opportunities.

Those confidence levels will move to a higher plane only with deleveraging of investment portfolios- banks hold about half the $3.4 trillion in private debt. Another 20% is in the commercial mortgage-backed securities (CMBS) market and the remainder is split between insurance companies and agencies of Fannie Mae, Freddie Mac and the Federal Housing Administration. There is money for new loans; we have more money to invest than we can find the loans for, but the problem is deleveraging as a process is going to take time.

Still, while some glimmers of confidence are returning to some sectors, the positive signs are distributed unevenly. Activity is at "historic lows" among the roughly 600 private market funds that invest in real estate-Few, if any, funds are closing [deals], and managers who have capital are not executing deals-Aggravating that situation: Institutional investors were seeing "dramatic losses" at the end of the second quarter, with the prospect of that continuing.

Insurance companies wrote $40 billion in loans in their peak years -The market needs capital flows from banks and agencies such as Fannie Mae and Freddie Mac, as well as a revival of the CMBS market!

Expect job growth to resume around April 2010, creating nine million jobs over the following three years.The key driver: basic confidence in the economic outlook, just as it has been in earlier recoveries. You're going to get that again because panics are as much psychological as anything else. Housing starts are expected to regain strength to meet the needs of a population increasing by three million people annually.

Interest rates are down and we have normalization of spreads -- which are good things. The housing crisis has in some sense bottomed out, and construction volumes and inventory levels are down, although shadow, or hidden, inventory exists. But it's totally dependent on the federal government.

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