Guest Blog Post feature is a new idea we are trying to give all of our members an opportunity to share an article on theBrokerList blog. Since our project is open to the public via online search, writing a blog article about an area of expertise is a great way to brand yourself and your firm. Thanks to Michael Bull for providing this post.
Commercial real estate performance in the next year will likely continue along a slow grinding path to recovery. While most segments will improve, each property sector, asset class and market area will perform differently.
Core markets, or gateway cities, are the preferred markets for institutional investors. The stable core assets in these markets will continue to experience cap rate compression and improved values. Investors in search of more reasonable yields will cause stable institutional-quality assets in secondary markets to see more activity and improved values.
The single-tenant net lease market will continue to strengthen, causing further cap rate compression for properties with long-term leases and credit tenants. The relative safety of these assets offers a good risk-adjusted return for investors compared to the lower returns of treasury bills and other safe investment options.
Medical office properties will continue to be a favored asset class. While medical office building owners did learn that the sector is not recession proof, the increasing baby boomer demand for healthcare services and the typically longer leases and stable tenants enjoyed by these properties will keep the sector popular.
Apartments will be a sought-after asset class as occupancy and revenues continue to improve this year. With the rose off the bloom of home ownership and the lack of new apartment construction, the multi-family industry is expected to perform well.
In all property sectors we will continue to see a bifurcated market between stable assets and value-add properties. As the recovery drags along, properties with vacancy issues will be underwritten with lower rents to aid lease-up and include ample reserves for build out, lease-up periods and lease-up costs.
Lackluster progress in economic fundamentals and the resulting slow improvements in commercial real estate fundamentals are expected to continue this year. Inadequate job growth is the biggest issue, caused in part from lack of investment and corporate expansion. Business leaders and investors will expand in 2012, but will be cautious based on concerns about the European Union and U.S. debt issues, as well as political gridlock and election-year uncertainty in the U.S.
There are reasons to be optimistic, as all sectors experienced positive absorption in 2011 and 2012 should continue similar growth, albeit slower than we would like. The lack of new construction in nearly every asset class is a major factor benefiting the market.
The various property sectors will perform somewhat differently, with apartments in the lead and industrial, office and retail showing some improved performance in that order.
Apartments will be a strong asset class this year. Axiometrics research reported increases for U.S. occupancy to 93.5% and rent growth of 4.1% in 2011. They predict occupancy to climb to 95% in 2012, and rental rates are expected to grow by 5.5%.
It’s important to note that while class A and well-located class B stable apartment properties will continue to show improved occupancy and value, some B and many C properties in markets with slow job growth will see only modest improvements. This is in part due to the uneven job market. The unemployment rate for blue collar and less-educated workers is higher than that for college grads, causing occupancy issues for some B and C apartment communities.
The industrial market will see improved fundamentals caused by some corporations bringing manufacturing back to the U.S., and from the widening of the Panama Canal causing some corporations to gear up production for the coming recovery. The national market has experienced seven consecutive quarters of positive net absorption.
U.S. vacancy declined from 10% down to 9.5% in 2011 according to the CoStar Group. The lack of new construction is in part the driver of improved performance in the industrial market. Another good sign: we are beginning to see more demand from both large and small tenants.
The office market has been hit hard by the huge loss of jobs and slow job growth. Corporate downsizing and lower lease rates have diminished values in most markets. Some core markets like Boston, New York, Chicago and Washington, DC, have rebounded well, while markets hit hard by the housing bust have had much slower growth.
In 2011 the national office vacancy rate declined by about 30 basis points when compared to 2010, as reported by Reis. Asking rents rose by 1.6 percent and effective rents by 1.9 percent, the first increases in those statistics on an annual basis since 2008.
Suburban markets are experiencing slower growth this year than CBD or infill locations. Unlike past downturns, the CBD markets are rebounding better than suburban markets. In past recoveries, housing and small businesses have led job growth, benefitting suburban markets. Small businesses, like businesses related to the housing market, have not seen significant growth in this recovery.
The demand by office users to buy office properties is picking up steam. We are closing a much larger percentage of owner-occupied properties as businesses and lenders begin to feel more comfortable about the recovery.
The retail market was hit hard by the recession, but is on the road to recovery.Chain-store retail spending grew by 4.7 percent in 2011 when compared to the year before, according to Michael Niemira, chief economist for the International Council of Shopping Centers. This growth was the largest since 1999.
Investment sales of retail properties grew substantially in 2011. Transactions totaled about $47 billion last year – almost double 2010’s figure of $24 billion, according to Kevin Imboden, senior market analyst for Real Capital Analytics.
Strong locations will see improved performance this year, while centers built in outlying suburban areas that were projecting home ownership growth that did not occur will see only tepid growth in 2012
It’s important to note that average U.S. numbers and even numbers for a particular city or submarket may not accurately reflect your particular asset, especially in this market. Be sure to get an updated market analysis and recommendations for your submarket and for each particular asset from a specialist in the property type. For an accurate market analysis for a particular asset or portfolio, give us a call.
This year will be a better time to sell than we have seen in three and half years. As the fundamentals continue to improve, there will be more sales volume and more tenants in the market.
If liquidating an asset, adjust supply and demand in your favor as much as possible by utilizing the best marketing strategies. To see a complimentary video on powerful marketing strategies working well for lenders across the country, you’re invited to call us at 800-408-2855 ext 2001.