Executive Summary
The ongoing low-gear real estate recovery
should advance further in 2013: Emerging
Trends surveys suggest that modest gains
in leasing, rents, and pricing will extend across
U.S. markets from coast to coast and improve prospects for all property sectors, including housing, which finally begins to recover. Most developers and investors who seek quick wins will remain frustrated as return expectations continue to ratchet down to more realistic but relatively attractive levels providing income plus some appreciation. In fact, real estate assets will almost certainly continue to outperform fixed-income investments in the ultra-low-interest-rate environment induced by the Federal Reserve, as well as offer a familiar refuge from ever-seesawing stock markets.
Most areas can sustain little if any new commercial construction, given relatively lackluster tenant demand and the generally weak employment outlook. Only the multifamily housing sector continues to offer solid development opportunities, although interviewees grow more concerned about potential overbuilding in markets with low barriers to entry—probably occurring by 2014 or 2015.
Real estate capital markets maintain a turtle’s pace when it comes to resolving legacy-loan problems as the wave of maturing commercial mortgages gains momentum over the next three years. Low interest rates have bailed out lenders and underwater borrowers, but interviewees warn against complacency and recommend preparation for eventual rate increases. Under the circumstances, low rates and high core real estate prices lead investors to find the best risk-adjusted returns in the middle of the capital stack—mezzanine debt and preferred equity. Equity pipelines will have ample capital from well-positioned, cash-rich real estate investment trusts (REITs); yield-hungry pension funds; and foreign players parking money in safe North American havens. These investors will need to remain disciplined and sidestep risk outside of major markets, probably partnering with local operators who have an edge in ferreting out the best deals.
The industry must continue to grapple with unprecedented changes in tenant demand driven by technology and a relentless pursuit to temper costs in a less vibrant economy. Office users squeeze more people into less square footage, preferring green buildings with operating efficiencies, while retailers reduce store size in favor of various integrated e-commerce strategies. The large “generation Y” demographic cohort is oriented away from the suburbs and toward more urban lifestyles, and these young adults willingly rent shoebox-sized apartment units as long as neighborhoods have enticing amenities with access to mass transit. And more intergenerational sharing of housing occurs so that resources can be pooled among children (seeking employment), their parents (with reduced wages and benefits), and their grandparents (with limited pensions and savings).
In general, the economy should generate enough momentum to push greater leasing activity and increase occupancies. Emerging Trends respondents continue to favor apartments over all other sectors, although pricing has probably peaked and rent growth will subside in markets with an uptick in multifamily development activity. Industrial properties and hotels will show the biggest improvement in 2013, and downtown office space in gateway markets also registers solid prospects, but power centers and suburban office space score the lowest marks for investment and development among survey respondents. Homebuilders will need to keep activity in check, but should gain confidence from stabilizing housing markets. Any uptick in single-family construction by 2014 and 2015 should buoy the overall economy and help other property sectors.
