Commercial – Investment real estate – 3 Trends for 2015

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“Let us live so that when we come to die even the undertaker will be sorry.” Mark Twain

Market Data Market Trends January / February 2015

Raymond Torto, Harvard University lecturer and recently retired CBRE global chief economist, and Douglas Poutasse, executive vice president and head of strategy and research at Bentall Kennedy, cited three positive real estate trends in their remarks at the Counselors of Real Estate annual convention in Boston last fall.

  • Foreign investors continue to look favorably at the U.S. “They are taking a longer view, more than the traditional five-to-seven year outlook,” said Torto.
  • Workforce housing is both a need and a driver in many markets, according to Poutasse. Both he and Torto cited examples of affordable housing built near medical centers such as the Cleveland Clinic in Cleveland, Ohio, and near the tech industry in Austin, Texas, as key to driving real estate growth in those markets. In particular, today’s workers look for housing that eliminates or reduces commute time — opening up new potential locations for new condo and multifamily development.
  • Secondary cities with direct flights to major cities are prime candidates for growth, according to Torto. “International airports bring in capital,” he said, explaining that foreign investors are more likely to invest in cities they can easily reach by air.

3 Trends for 2015

2015 Property Snapshots

With the capital markets back at 2006 levels and a growing economy, Cassidy Turley’s U.S. property market forecast portends healthy times ahead for the major property sectors. Multifamily: While vacancy rose in 3Q14 for the first time in this cycle, demand remains strong from 85 million echo boomers in the market. However, the delivery of 443,000 new apartment units in the next couple of years will push up vacancy to “5.3 percent by the end of 2016, and rent growth will soften to 2 percent during this period.” Industrial: “Ecommerce fulfillment centers have accounted for 45 percent of the industrial market’s net absorption since 2011. … In terms of demand, the industrial sector will flirt with record-setting territory in 2015 and vacancy will drop below 7.5 percent by year-end. Industrial rents will soar next year.” Office: “Strengthening job trends indicate that pent-up demand is rising beneath the surface. … Most firms have outgrown their current space. This, in combination with the stronger job numbers, leads us to believe that net absorption will go from modest to robust in 2015.” Retail: “To characterize the retail sector as weak would be inaccurate; it is simply all over the map. Retail will remain a tale of multiple stories with one general theme: the closer to the core of the city, the better the retailer will perform.”

3 Trends for 2015 1



3 Trends for 2015 2


Briefly Noted

Hotel — New York, Houston, Washington, D.C., Los Angeles, and Miami top the lodging pipeline as of 3Q14, according to Lodging Econometrics, with Houston showing the largest YOY increase in rooms at 41 percent, followed by Miami at 38 percent. The pipeline includes projects in the early planning stages, scheduled in the next 12 months, and those already under construction. Projects under construction have increased the most in the past year, up 50 percent YOY, as developers take advantage of near-perfect conditions for new supply.

Industrial — Warehouse remains the top investment and development property choice of Emerging Trends in Real Estate 2015 survey respondents, according to the report. Favored cities include Nashville, Tenn., St. Louis, Charlotte, N.C., and Louisville, Ky., because “you can build industrial in these markets and get good returns.”

Multifamily — Vacancy rates are expected to reach 4.3 percent by 4Q15 up from 4.0 in 2014, according to Laurence Yun, National Association of Realtors’ chief economist. Areas with the lowest multifamily vacancy rates currently are Orange County, Calif., and Sacramento, Calif., at 2.2 percent; Providence, R.I., and New Haven, Conn., at 2.3 percent; and Hartford, Conn., at 2.5 percent. Still considered a landlord’s market, apartment rents should rise 4.0 percent in 2014 and 4.1 percent in 2015.

Office — Eight msf of medical office space was brought on line in 2014, up from approximately 6 msf in 2013, according to Marcus & Millichap. While newer properties capture new tenant demand, older buildings remain popular, particularly those built in the 1990s, which average 8.7 percent vacancy, compared with a national average of 9.9 percent. Pre-1990s properties’ vacancy is “more likely to soften further in years to come amid ongoing healthcare industry consolidation and accelerating physician retirements.”

Retail — Retailers are converting bricks-and-mortar stores to concept stores, blending physical inventory, online access, and experiential retailing, according to the Deloitte’s 2015 Commercial Real Estate Outlook. This translates into increased technology demands from retail tenants, as they redesign to meet the technology needs of today’s customer.

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