Few Bright Spots in Capital Markets According to Expert Panel at BoyarMiller’s Breakfast Forum
U.S. Economy Not Out of the Woods Yet
HOUSTON, Texas (September 15, 2011) — As the President put the finishing touches on his “jobs speech” on Thursday, September 8, panelists at BoyarMiller’s 5th Annual “Current State of the Capital Markets” Breakfast Forum provided more than 200 guests with their forecasts on the economic recovery in the U.S., showing optimism as well as concern in their relative industries.
Held at The Houstonian Hotel in Houston, the program featured Andrew D. Kanaly, Chairman & CEO of Kanaly Trust; David W. Sargent, Managing Director of Duff & Phelps Securities; Thomas O. Fish, Executive Managing Director and Co-Head Real Estate Investment Banking of Jones Lang LaSalle; and Jim D’Agostino, Chairman of the Board of Encore Bank.
Three main themes permeated discussion of the panel including concerns over the European debt situation, fragility of the U.S. economy, and optimism for economic conditions in Houston and Texas.
“Thank goodness we live and work in Texas,” said Fish as he detailed commercial real estate standings and forecasts for the upcoming months. “In fact, the state is one of the true bright spots in commercial real estate and we are seeing global investors who want to do business here in Houston.”
He added, U.S. commercial real estate (CRE) sales are up — increasing to $97 billion year-to-date through July, compared to $49 billion for the same period in 2010, an increase of 98%. In terms of lending in the CRE sector, banks have arranged over $21 billion in commercial loans this year, led by retail and office properties, compared with $11 billion in all of 2011. Fish noted, “While this is promising, we won’t make the $35-40 billion forecast for the year.”
Like Fish, D’Agostino also relayed positive thoughts about Houston stating, “Houston is the best banking market in the U.S. with over 100 different banks servicing 1,500 locations.” In addition, he explained how bank capital ratios are at an all-time high and problem loans are declining — down 6.5 percent last quarter. Other positive news in the banking industry includes the decline of problem banks, but with the amount of significant government compliance being instituted, bank revenues continue to decline, making it challenging for banks to do business.
Other good news for Houston was shared by Sargent, who showed panelists that the energy sector has shown a significant uptick in activity, almost doubling in the number of transactions from 2009 through June 2011. In fact, deal value in energy-related transactions represented more than 20 percent of total Mergers & Acquisitions deal value in 2010, making energy the most active industry sector, he said.
Unlike Houston, the global markets are continually being rattled by debt troubles in the European union. The panel shared concern with Sargent describing how the European sovereign debt and bank crises could get worse. Fish described how the S&P 500 plunged 18 percent from a three-year high on April 29 through August 8 in large part over concern that Europe will fail to contain its debt crisis. “The two-year swap spread – considered a gauge of fear in the debt markets — rose to a one-year high on August 23. Risk aversion has sent investors back to the Treasuries, driving down yields,” explained Fish.
Kanaly reiterated concerns over the European economies but, more importantly, discussed how the U.S. employment recovery is not doing well, stating that new jobless claims need to move below 400,000. He explained that household balance sheets in America have improved as people continue to pay off their personal debt, including credit cards. However, the lack of credit prevents the U.S. from a robust recovery. “Credit is the lifeblood of economic growth and the largest banks have reduced lending by over 25 percent,” he explained.
Likewise, Sargent discussed how the recovery in the financing markets resulted in a general upturn in M&A activity in 2010, following two years of decline. He cited that deal value year-to-date is up 21.5 percent driven primarily by an increase in larger-sized transactions, offsetting a 17.9 percent decline in the total number of transactions. However, he noted “the tone in recent months has been more cautious owing to an uncertain economic recovery.”
The commercial banking sector is also taking a cautious approach until stability returns. Fish explained that there is $900 billion of debt maturing through 2013, $682 billion of which is bank debt and many of the loans have no option other than foreclosure or restructuring/modification. But, there is good news as relatively inexpensive debt/equity is still available with loan to value ratios up to 75 percent. In addition, Fish stated portfolio lenders continue to grow their books and insurance companies have raised their production goals for 2011 and are able to tackle larger loans that securitized lenders are wary of warehousing.
In all, the message of “wait and see” rang clear to attendees at BoyarMiller’s 5th Annual “Current State of the Capital Markets” Breakfast Forum. The key is to be prepared for anything.