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MACROECONOMICS AND COMMERCIAL REAL ESTATE – THE IMPORTANCE OF HAVING A HOUSE VIEW ON BOTH MARKETS

One of the biggest reasons for bank failures during the recession was failure in Commercial Real Estate portfolios. Loan standards spiralled out of control and banks were unprepared for the crash that followed. The U.S. CRE market is sluggishly growing and multi-family has been steadily improving; however, there is scepticism about its sustainability. The U.S. CMBS market is slowly improving as well but faces a significant amount of loans from 2007 that are maturing. As the U.S. CRE market slowly continues to make progress, banks are worried about managing their portfolios appropriately to avoid loss and are seeking out the best ways to deal with the issues that arose from the downturn.

Hubert Roslund, Managing Director, Head of Strategic Portfolio Management at the Royal Bank of Scotland Non Core Real Estate, and speaker at the marcus evans 6th Annual Risk Management for CRE Conference answered a series of questions provided by marcus evans. The responses to these questions strictly reflect the views and beliefs of Hubert Roslund and not necessarily those of the Royal Bank of Scotland.

ME: Why is it important to have a view on both the macroeconomic and real estate markets?

HR: The real estate market does not operate in a vacuum. It is essential to have a view on how macroeconomic events affect the relevant real estate markets, both directly through trade and growth and indirectly through the financial markets. Don’t trust others to do this for you. The analysis of a great number of analysts has been incorrect over the past few years. Over optimistic macroeconomic forecasts and a lack of understanding of negative feedback loops in the financial industry have certainly played their part in this.

ME: Is it important to have a view on events in Europe and Asia, even if you are a U.S. domestic player?

HR: Macroeconomic events in other regions, especially of the magnitude seen over the past few years, will impact commercial real estate markets in the United States as well. De-coupling is rare and it is important to have a view on events in other key economic regions. Remember that all transactions are not equally affected by any given scenario. It is important to assess how your deals and portfolios would be affected by expected events.

ME: What is the importance of understanding where the CRE portfolio fits into the organization’s overall strategic plan?

HR: All companies are different. It is important to take your own company’s targets and restrictions into account, e.g. capital, funding, return requirements, remaining life of fund or institution, permission to use derivatives, regulation, and legislation. Inaction is never the answer – there are relevant conclusions for all types of institutions, but the relative importance of issues such as macroeconomics, politics, and liquidity will vary greatly. For instance, an institution looking to divest most of its portfolio in the short term should focus more on the short term risk and liquidity indicators, while an institution with a long term hold objective and restrictions on using derivatives should have a stronger emphasis on long term risks and opportunities such as energy efficiency and long term changes in the competitiveness of specific regions and tenant types.