Emerging Trends Update: Positive Outlook?
Every fall, the respected Emerging Trends in Real Estate survey from PricewaterhouseCoopers and the Urban Land Institute marks the bellwether for commercial real estate forecasting for the year ahead. Now the duo has released a new mid-year update, which found shifts to a stronger commercial real estate outlook for the remainder of 2012.
Over 195 participants out of the 950 who completed the original 2012 Emerging Trends survey believe that profitability, lending, and investor markets all show brighter signs for the remainder of the year.
Here are the ups and downs, according to the survey update.
As broader corporate profits continue to increase, commercial real estate companies likewise look to benefit. Participants forecasting good-to-excellent profits for the rest of 2012 increased over 7.5% from the original survey.
Foreign investors and private equity will still lead the charge as active buyers of commercial real estate, but both values have declined slightly. The biggest jump came from private local investors and public equity REITs. According to Real Capital Analytics (RCA) through 1Q2012, private capital investors have completed the most deals, followed by public equity companies.
Asset class investment prospects displayed increases, except in the investment grade bond arena. The largest jump of interest was found in the publicly listed homebuilders, as new home sales show slight signs of improvement in a market that continues to control supply. The second largest increase was found in the commercial mortgage backed securities.
The sources of debt capital values displayed some positive signs in the mid-year update. Insurance companies continue to be number one overall. However, government-sponsored entities’ value increased over 11% from the original ET survey in November 2011. Other strong gains were found in the CMBS market, commercial banks, and mezzanine lenders – all strong signs that the availability of debt is showing improvement. According to Commercial Mortgage Alert, U.S. CMBS deals total $10.8B, up over 12% year-over-year. In addition, RCA states that there were increases in lending as well in completed transactions.
All five major property sectors covered in the ET report had higher values in the mid-year update results. The apartment sector is still number one, followed by industrial/distribution. However, industrial/distribution had a significant increase in value. Leasing demand for industrial real estate continues to grow, as U.S. based manufacturing continues to show positive signs. Of particular interest to buyers are industrial properties located in hot-bed energy and high-tech markets, such as Austin and San Jose-Silicon Valley, where job gains, leasing demand, and rental growth are expected to lead the country. Hotels had the biggest gain overall but still placed third as corporate and individual travel show signs of improvement.
In the “Markets to Watch” section, we asked participants to rate only selected markets instead of the 51 we cover in the full edition of Emerging Trends. The mid-year focused on the top 10, and then on hand-selected markets covering prime, secondary and tertiary locations.
The largest increase was Boston, followed by Houston. Both markets have displayed job growth stronger than the national average, but Houston hands down leads the pack. Through January 2012, year-over-year change in employment was 3.7% compared to the national average of 1.5%. As stated in the original ET, markets with jobs in the IT, energy, and healthcare areas seem to score better overall. Three other markets that support the trend of showing large increases in the mid-year update include San Jose, Austin and San Francisco.
Other signs show some interest in larger markets that have been damaged in the recession. For example, Detroit’s value increased 16% compared to the original report, as well as Phoenix, which was up 1.3%.
Denver, Seattle and New York showed increases, though not as strong as some of the others. Markets that are continuing to struggle include Atlanta, Jacksonville, Las Vegas, and San Diego.
Washington, D.C. showed the biggest decline in market investment prospects, according to survey participants. Possibly too much real estate at very high prices, combined with the possibility of the Federal Government’s cuts has left a bad feeling in investor’s minds.
Participants showed dismal expectations when asked on how they feel about changes in inflation, 1-yr treasuries, 10-yr Treasuries, and commercial mortgage rates now and over the next five years. No changes for the remainder of 2012 were seen, as expected. However, 5-year outlooks all increased, as participants understand that rates and inflation at this point can’t go anywhere but up.