Recovery for commercial real estate will remain slow, report says
- October 26, 2011
In 2012, commercial real estate can expect a “slowing, grind-it-out economic recovery,” according to a report released Wednesday. In its 33rd annual survey on Emerging Trends in Real Estate, PwC U.S. and the Urban Land Institute (ULI) say the slowdown will follow mostly sporadic growth confined to a few real estate markets in 24-hour, gateway cities.
The consensus of more than 950 real estate experts — including developers, investors and brokers — is that continuing economic struggles and the absence of jobs are weighing down real estate. “Job creation is clearly the critical ingredient for a sustained recovery in commercial real estate, and the market participants we surveyed uniformly struggled to identify new employment engines,” Mitch Roschelle, partner, and U.S. real estate advisory practice leader for PwC, said in a statement.
In 2012, he says part of the “new normal” is that investors will come to grips with the fact that “they may not be selling for more than they paid.”
Survey participants predict that 2012 will see an increased supply of properties for sale; however, due to economic uncertainty, interest among buyers may diminish. One bright spot: Well-leased core real estate in leading markets will continue to produce solid, single-digit, income-oriented returns.
“The return landscape for 2012 presents a mixed bag, and all depends on where and when investors bought, the amount of leverage employed, and asset quality,” said ULI senior resident fellow for real estate finance, Stephen Blank.
The report cited these “best investor” bets for 2012:
• Caution still rules — Investors should concentrate on the few markets showing hiring and leasing gains.
• Blue-chip gateways — Over time, assets in 24-hour markets dependably outperform because they lie on important global commercial routes and attract money from all over the world.
• Job centers — Head to the few cities where employment growth actually occurs, including those that rely on energy, high-tech and health care-related industries, as well as universities and government offices.
• Value-add plays – Look for class B properties in good infill markets that have been neglected over the past five years.
Survey respondents also identified the top 5 markets:
Washington, D.C. It may cool down if the government shrinks. However, no market performs better during a recession The area’s jobs base has diversified well beyond government and lobbying into technology, communications, and biomedical industries.
Austin. State government provides an economic buffer, while the giant University of Texas campus attracts both energetic young brainpower and top professional talent. The academic environment helps incubate and support burgeoning tech companies and other higher-paying industries.
San Francisco. It rates as the survey’s best buy for offices and apartments. Also, the report notes that institutional investor ardor never wanes for the expensive warehouse market serving one of the country’s largest ports.
New York City. Manhattan, which features a diverse employment base, sees its resurgence facing headwinds from downsizing at investment banks and other financial institutions. Vacancies actually drop to among the lowest levels in the country, and rents increase ahead of other markets, helped by a lack of new supply.
Boston. Despite relatively high office vacancy rates, Boston retains believers who value an exceptionally well-educated workforce drawn from local colleges and universities.
A copy of the full report is available at http://www.uli.org/emergingtrends or www.pwc.com/us/realestate.