Principal Real Estate Investors optimistic for economic recovery in 2011

Principal Real Estate Investors expects the Republican gains in Congress, stabilizing commercial real estate values, stronger corporate earnings, higher personal savings rates and the dynamics related to quantitative easing by the Federal Reserve will fuel economic growth in 2011. The institutional real estate manager said these factors should gradually reduce the unemployment rate that’s flirted with 10% all year and help stave off a double-dip recession. “Despite policy uncertainty, a soft patch in the U.S. economy, and continued peril in the broader investment environment, we feel there are several reasons for optimism in 2011 and beyond,” Principal told investors in its outlook for next year. The firm said the political rebalancing of November should reduce risk of “unwelcome legislative initiatives” and lower “corporate perceptions of anti-business political climate.” Principal expects policy decisions by the Fed to prop up asset values over the near-to-intermediate term and “help the wealth effect.” More stable commercial real estate values “should help unclog bank balance sheets through improved resolution of problem loans, freeing up lending capacity and improved credit formation for small business.” The company anticipates the cumulative impact of these and other factors to help real estate and capital markets next year and in 2012. “The outlying years of 2013 and beyond do face the risk that a reversal of ultra-accommodative monetary policy and removal of quantitative easing could produce a material upward movement in Treasury rates, which would be generally unfavorable for cap rates, discount rates and borrowing rates,” according to Principal. The company said the market for commercial mortgage-backed securities is bouncing back, but the regulatory reform upcoming with the formation of the Consumer Financial Protection Bureau “could still take the wind out of the sails of the burgeoning CMBS recovery.” Of particular interest is the uncertainty surrounding the final risk-retention rules, especially for banks that issue CMBS. Write to Jason Philyaw.