Middle market commercial real estate executives are expressing cautious optimism toward the market and are looking to take advantage of long-term investment opportunities. However, the majority are finding that the current tax and regulatory climate is placing a strain on the performance of their companies. These are some of the findings from a recent survey by CIT Group Inc. (NYSE: CIT) cit.com, a leading provider of financing and advisory services to small businesses and middle market companies, and Forbes Insights.
“Commercial real estate has been known to be a bellwether for the overall U.S. economy,” said Matt Galligan, president of CIT Real Estate Finance. “As we enter 2014, we are seeing mixed views among middle market commercial real estate executives. The good news is we are definitely seeing renewed optimism and expectations for a more complete recovery down the road.”
Commercial real estate is in the midst of a cautious recovery: Over half of industry executives (57 percent) believe that the U.S. commercial real estate market is in recovery, while 1 in 10 says the recovery is very strong. Nonetheless, just under a third warns that certain segments of the industry are poised for significant decline.
Markets are showing mixed signals, but many executives are being opportunistic when it comes to long-term investments: Commercial real estate executives view the markets as either mixed (51 percent), flat (7 percent), or weak (5 percent). However, 3 out of 10 describe the markets where they are active as strong. Overall, nearly two thirds (60 percent) say their go-forward orientation is opportunistic and that they face a mix of challenges and opportunities. In fact, some real estate executives (12 percent) describe their market orientation for the coming year as aggressive, saying that existing conditions make for great long-term investments.
Interest rates and unemployment top concerns for executives: The survey asked commercial real estate executives to rank the top five factors that influence their investment decisions. Interestingly, while interest rates and ongoing unemployment top the list, overall consumer confidence is at the bottom. The top five investment influences include:
• Interest rates
• Unemployment rates
• The Affordable Care Act
• Consumer confidence
Taxes, regulations and some costs are impeding growth potential: Three out of five executives say the current tax and regulatory climate places a strain on their performance. Just under 60 percent are concerned by the Affordable Care Act, and nearly half (46 percent) claim that its implementation will depress the economy. Four out of 10 list the impact of Dodd-Frank on investing and lending as a concern. And nearly 1 in 4 (22 percent) are concerned by trends in the availability and cost of terrorism insurance. In fact, 23 percent say the high cost of terrorism insurance will likely stall certain segments.
Despite government budget cuts, investors have an appetite for tax credits and incentives: Four out of 10 executives say they are negotiating harder with state and local governments to obtain tax credits, cash grants, and related business incentives, even though only 22 percent believe such packages are growing larger. Nearly one third (28 percent) say the availability of tax credits and cash grants for green energy are a significant influence on their design, renovation, and related commercial real estate investments. Finally, 22 percent say the availability of tax-exempt financing has played a significant role in past investments and 27 percent say it will likely play a significant role in the future.
Financing ranges from overabundant to questionable: Three out of five (61 percent) say they have adequate capital for their operations, and 12 percent of these indicate that capital is overabundant for the opportunities available. However, a third (33 percent) report that capital availability is spotty. Only 6 percent say their access to capital is questionable or has completely dried up. Overall, about half (51 percent) are likely to pursue bank financing in the next 12 months, while 18 percent of executives say they are very likely to do so.
For more information, visit www.cit.com.
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