As 2011 draws to a close, it becomes clear that the year has been a mixed one for real estate investors. And looking ahead to 2012, there continues to be considerable uncertainty for investors in commercial real estate.
During the past two months, Institutional Real Estate, Inc. has held editorial advisory board meetings in Asia, Europe and the United States. These meetings have been heavily tilted toward investors, with more investors than investment managers attending each event. In addition, I’ve attended EPRA and IMN conferences in London, as well as PREA’s annual conference in Chicago
The commercial real estate transaction market experienced a little more liquidity in 2011; however, new real estate commitments by plan sponsors remained restrained, partly due to the wall of previously committed capital yet to be invested and also due to the lack of distributions from existing investments. Through mid-November, Institutional Real Estate, Inc. (IREI) tracked approximately $6.9 billion of publicly announced capital commitments, an 8 percent increase from the 2010 total, and up 28 percent from the $5.4 billion recorded in 2009. By comparison, IREI tracked $17.6 billion of commitments to real estate during the market peak in 2007 and $15.5 billion in 2008.
While current economic conditions don’t help the fund-raising environment, the capital commitment overhang from previous years also has placed some investors in a holding pattern. And the large number of funds competing for limited capital makes for a long and bumpy road littered with fund-raising extensions and numerous failed efforts. However, despite a gloomy outlook for fund-raising in the months ahead, investment managers continue to roll out new products. Through the first nine months of the year, sponsors have rolled out more than 150 pooled investment vehicles. Collectively, these 2011 vintage funds were seeking to raise approximately $81 billion of equity capital.
From the beginning of the recession during the fourth quarter of 2007 until the fourth quarter of 2009, U.S. gross domestic product (GDP) contracted at an average annual rate of 3.5 percent. Before the recession, GDP had been growing at an average annual rate of 2.6 percent. With the costs of two wars adding to federal expenditures, the taxes collected from this level of economic activity were too small to balance the pre-recession budget.
With 10-year Treasury yields falling below 2 percent, ample slack in the employment market, what appears to be weak aggregate economic demand in the United States, China raising interest rates to slow its economy, and the European Union struggling mightily with sovereign debt concerns, why worry about inflation now?