Retail W Minnesota

When it comes to commercial real estate, optimism still rules

When it comes to CRE, optimism still rules,ph01

There was more optimism. That was what surprised Paul Shadle and John Sullivan, partners with law firm DLA Piper, the most during the company’s Global Real Estate Summit held Sept. 26 in Chicago.

The event attracted the biggest names in commercial real estate across the globe. And these big names were, largely, still optimistic about the immediate future of the commercial real estate industry. This optimism was strong even with the amount of turmoil happening in the United States and around the globe.

“There was a much greater sense of hope and optimism than I expected there to be,” said Sullivan, chair of the U.S. real estate practice with DLA Piper. “We are seven or eight years or more into the current cycle and there is a fair amount of political uncertainty out there. I expected that this would have caused more angst. The prevailing sentiment throughout the day, though, was positive. There are challenges. But people are still looking at a strong equity market.”

Sullivan’s thoughts are echoed in the most recent market survey released by DLA Piper on the morning of its big summit. That survey showed that a majority – 60 percent – of CRE executives expect the commercial real estate market to remain a strong one during the next 12 months.

Why aren’t CRE execs more worried about commercial real estate, especially here in the United States? Sullivan pointed to a host of factors. First, it’s true that interest rates are rising. But Sullivan said that the Federal Reserve is doing a good job of telegraphing jumps. This gives everyone a chance to prepare for the gradual rising of rates.

Secondly, there’s still a view across the globe that the United States is still a safe haven for capital. That remains a positive for real estate in the country.

Finally, there’s even more optimism surrounding the U.S. retail real estate sector than either Sullivan or Shadle expected. That’s because even though this sector certainly faces challenges, retailers are learning how to adapt to the changing desires of U.S. consumers.

“There is more confidence out there about retail bricks-and-mortar locations than you’d expect given the pessimistic conventional wisdom about this sector,” said Shadle, a partner in DLA Piper’s development, land use and government affairs practice group. “Creative real estate concepts can be compelling in the retail sector. Some of our panelists at the summit said that creative placemaking can make a real difference for retail. Conventional wisdom says that traditional retailers will fail. But the panelists said that isn’t necessarily the case.”

But what of the long cycle of increasing CRE activity that the country has been in? Isn’t it inevitable that the pace of deals and new construction will have to slow? Doesn’t that worry CRE executives?

Not necessarily ... at least not for the next 12 months.

“Of course, everybody knows that all cycles come to an end,” Sullivan said. “But one point that a panelist made is that we started from a very low low. And the growth, particularly in the early years as we were coming out of the recession, was quite slow. The past is not always prologue. Could we have a cycle that is longer than some have been historically? There was a general prevailing sentiment that we might.”

One panel at the DLA Piper conference focused on investing in and operating real estate during a time of uncertainty. Shadle said that the panelists agreed that there has been more rigor during the current cycle in terms of underwriting. This should hopefully prevent the kind of crash that led in part to the recession.

“If there is a slowdown, it will be more of a slowdown instead of a crash,” Shadle said.

Both Sullivan and Shadle agreed that the United States remains a prime spot for investors seeking real estate, even with the current turmoil that seems to be hitting the country.

“We here are in the middle of this political turmoil, angst and uncertainty. It looks bad to us,” Sullivan said. “People outside the United States look at it and say, it’s true, there are changes. But compared to almost every other place, the United States remains the most transparent, stable market. The longest we can have anyone in the presidency here is eight years. We are living in the middle of some political uncertainty. But it might seem more dramatic to us than it is to some of these global investors.”

In good news for the Midwest, both Shadle and Sullivan agreed that investors are more frequently targeting tertiary and secondary markets for commercial real estate investment. Shadle pointed to Midwest cities such as Minneapolis, St. Paul and Nashville as secondary markets that are in demand by investors.

“They have stable political environments, growing populations and job growth,” Shadle said. “Cities like that provide a rich environment for investment.”