Slow, Steady Recovery Expected for Commercial Real Estate: Report

Posted on October 22, 2012

The commercial real estate sector is improving, but investors need to be patient and not expect “quick wins,” according to findings from Emerging Trends in Real Estate 2013, which was jointly released by PwC and the Urban Land Institute (ULI).

The report included surveys and interviews with over 900 individuals.

According to report findings, “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.”

Among the major commercial property types, survey participants in the report favored apartments. However, the report noted prices may have reached their peak and growth in the rental market may slow due to a surge in multifamily development activity.

While prospects for development in the multifamily sector may be solid now, the report said interviewees were “concerned about potential overbuilding in markets with low barriers to entry-probably occurring by 2014 or 2015.”

Prospects into 2013 for industrial/warehouse properties and hotels showed the biggest improvement, according to report findings. Prospects also seem favorable for downtown office space in gateway markets, but not for office space in suburban markets.

Overall, the report said recent job creation should bring down vacancy rates in the office, industrial, and retail sectors, and demand for apartments should remain.

But, the report cautioned that, “[m]ost areas can sustain little if any new commercial construction, given relatively lackluster tenant demand and the generally weak employment outlook.”

“With the outlook for commercial real estate continuing to improve in 2013, investors are expected to allocate substantial sums of capital to the real estate asset class, according to our survey respondents,” said Mitch Roschelle, partner at PwC. “As yield in bonds and other financial instruments tighten in a still volatile market, commercial real estate’s income producing and total return attributes offer investors potentially attractive risk-adjusted returns.”

Stephen Blank, ULI’s senior resident fellow for real estate finance, added, “What these findings suggest is that, in general, the industry is moving forward bit by bit. Nothing indicates a quick turnaround for commercial real estate, but it is improving. Those who are patient and willing to rethink their expectations and adapt to market realities are expected to come out ahead this year.”

Among the top markets for investors to watch, San Francisco came out ahead at number one. The market was described as being “driven by growth and a strong jobs outlook, led by technology and a structural change away from suburban and toward downtown.” New York City was ranked second, followed by San Jose, Austin, and Houston.

Esther Cho, DS News.