“Market fundamentals” are often cited when evaluating the real estate industry. Indices measuring home values, cap rates valuing commercial properties, office vacancy “absorption rates,” REO inventory, are great examples of accepted standards used by the industry to measure success. What’s missing from this list is the influence consumers and small business have on core fundamentals, and they could arguably be the most critical component in driving the real estate recovery.
Let’s start by looking at the distressed homeowner segment as one example of how consumers are contributing to the recovery. Armed with more information and options than ever before, borrowers are confronting and no longer running from delinquencies. Their proactive efforts to modify loans, refinance underwater mortgages to lower rates, and accept a short sale as a foreclosure alternative are having a positive effect on containing non-performing assets held by lenders. At the other end of the spectrum, consumers with less debt and on more stable financial footing are feeling more confident in their ability to handle the obligations of a mortgage. Realtors, builders, and loan originators alike should soon see their numbers improve as more buyers are enticed into the market by low rates, more affordable homes and evidence of an improving economy.
Fundamentals in multi-family real estate are also improving thanks to the rise of the latest “renter nation,” a new generation of younger and more transient households not interested in the overhead of a mortgage. As a result of this new demand, developers and investors with positions in multi-family projects are seeing a much needed jump-start in apartment construction.
And finally, as more consumers get back to work, small business expands in pace with current economic growth, and construction of new office product is at a standstill, office vacancy rates will continue to contract and generate more healthy returns for owners / investors in the office and retail sectors.
The real question at this point is, as consumers and small business are in the drivers’ seat of the recovery, what can the industry and government policies do to ensure the recovery moves forward?
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Let’s start with government policy. Efforts should continue for crafting workouts for borrowers who could afford to keep their homes under loan-modified circumstances, and toward removing barriers for short sale or other foreclosure alternatives for homeowners who cannot afford to keep their homes.
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Realtors should better adapt to service a market heavily-influenced by distressed properties. Short sales and REO sales are projected to dominate the market through 2012. Major stumbling blocks in 2011 were protracted short sale negotiations and pervasive litigation. As expertise is required, realtors should partner with specialists familiar with the unique lender-buyer-seller process to facilitate more efficient, litigation-free sales.
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Investors and developers have an opportunity to step up to meet the growing demand for affordable rentals through new multi-family projects, and by participating with GSEs in bulk REO purchases and converting them to rentals to meet the demand for affordable housing and limiting the “for sale” inventory.
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Lenders need to step up the most. Without the flow of credit, the system simply stops working. Lenders must not only be a reliable source of capital for the investor class, they need to loosen restrictions for consumers as well. Easing restrictions and making loans more accessible and financially-viable to today’s new class of buyers and business owners who understand the responsibilities required of long-term credit commitments, is the glue that will make this recovery stick and move forward.
So goes the consumer and small business, so goes a recovery in real estate. This “fundamental” concept cannot be ignored.
Gil Priel is Managing Director and Principal of the Peak entities. Priel has worked in all phases of the real estate industry including land development, management, financing (portfolio lending for commercial and residential properties plus non-performing debt acquisition and broken development cycles) and disposition of all product types.