Economy Experts Talk Rough January and Outlook for CRE

Economy Experts Talk Rough January and Outlook for CRE

February 2016

If you pay any attention to the global economy, you know January wasn’t a ton of fun.

But still, it was just one month. Can it really say anything about the future of the commercial real estate market in the United States? Bisnow.com got the opinions of six top economists, and as you might expect, those opinions vary.

Economy

Stockbrokers struggled through the worst January since 2009 this year.

Some cautioned against paying too much attention to the market (and the resulting bluster from politicians and cable news). Others predicted pain in the short-term but economic success in the long-term. The general feeling seemed to be: “Be patient, we’ve seen this before.”

Here are the highlights:

  • Robert Bach, director of research – Americas for Newmark Grubb Knight Frank: Bach confessed some angst, but told Bisnow, “If the economy muddles through, so will commercial real estate.”
  • Ray Torto, Harvard lecturer and former global chief economist at CBRE: Torto predicts a positive long-term outlook for CRE and pins the blame for short-term struggles on factors like low oil prices and China’s drooping stock market. “Hope is not a tactic to pursue right now,” he told Bisnow. “Implement careful planning and executions.”
  • George Ratiu, director of quantitative and commercial research for the National Association of Realtors: Have no fear; the CRE market has seen this before (and recently, too). “Looking at the post-recession recovery, we’ve had other periods of volatility … which had minimal impact on CRE performance,” Ratiu told Bisnow.
  • Jack G. Kern, director – research and publications for Yardi: Kern says CRE is naturally affected by global stock markets, but doesn’t see an issue as long as proper precautions are taken. “Properties bought based on solid underwriting and reasonable fundamentals will continue to do fine,” he told Bisnow. “Those acquired without recognizing the risks properly will be back on the market soon enough.”
  • Victor Calanog, chief economist at Reis: Calanog isn’t expecting 2016 to mimic last year. “Property fundamentals rocked 2015, but we expect 2016 to be a bit rockier,” he told Bisnow.

With January (thankfully) in the rearview mirror, this CRE topic will be worth monitoring as we wait to see if the global economy improves.

Multifamily Market Draws Optimism From Freddie Mac

Multifamily Market Draws Optimism From Freddie Mac

February 2016

The year 2015 is one that multifamily investors will remember fondly.Multifamily

Higher-than-expected demand helped absorb most of the rental supply, keeping vacancy rates low. Meanwhile, rent continued to rise in many markets. Experts are split as to what investors should expect from multifamily in 2016. But Freddie Mac struck a cautiously optimistic tone in its newest Multifamily Outlook 2016 report.

Freddie Mac based its outlook on continued economic growth and the following key drivers:

  • Strength in the job market
  • Reduced affordability of owning a home

So, more people have jobs, and fewer people can afford to own homes. That makes renting an attractive option, especially in metropolitan markets.

Multifamily

Freddie Mac is cautiously optimistic about the multifamily market.

Freddie Mac does expect growth rates to moderate in 2016, but not as much as the more dire projections indicate. Relatively low vacancy rates in most markets will contribute to rent growth in the year ahead.

You might ask why Freddie Mac is being cautious. Well, it admits that turmoil in the financial markets is a cause for some concern. Still, it’s not nearly enough for Freddie Mac to be scared of the multifamily market anytime soon.

Read more about Freddie Mac’s multifamily outlook from Multi-Housing News.

Emerging Trends Report Highlights 18-Hour Cities, Suburbs

Emerging Trends Report Highlights 18-Hour Cities, Suburbs

February 2016

Emerging trends

San Diego is an 18-hour city that is gaining popularity.

The Urban Land Institute has released its annual Emerging Trends in Real Estate report, painting a picture of a real estate market that might not be down but is certainly changing.

GlobeSt.com has the full report, but here’s a quick snapshot of some of the emerging trends highlighted by ULI:

  • 18-hour cities: The rise in interest among markets like Austin, Denver, and San Diego was detected in last year’s report, and ULI sees that movement outside of 24-hour gateway cities continuing. 
  • Moving to the suburbs: Within gateway markets, rising prices are leading investors to consider suburban opportunities. Millenials may favor downtown areas and urban environments now, but it’s only a matter of time until marriage and family push them to the suburbs. Suburbs that also offer the benefits of an urban setting should do well.Private equity
  • Office strength: Look no further than the office sector for signs of continued economic recovery. Office jobs have accounted for more than one third of the employment gain, bringing vacancy down and pushing rents up. That’s a trend that should hold in 2016.
  • Moving forward: Home ownership rates dropped drastically during the global financial crises, settling in at 63.4 percent in the second quarter of 2015. ULI expects the future housing to be shaped by a necessity to improve housing options for everyone.

Keep an eye out for more on ULI’s findings in the weeks ahead.

Multifamily Markets Expected to Shine in 2016

Multifamily Markets Expected to Shine in 2016

Multifamily markets

The multifamily market of Washington, D.C., is poised to do well in 2016. (Photo by Ad Meskens/Wikimedia Commons)

January 2016

Experts from around the country hinted at their expectations for the year ahead in a recent wide-ranging GlobeSt.com feature on multifamily markets.

Much of the conversation centered on which multifamily markets will do well in terms of transactional activity in 2016. Multifamily performance has been strong in most markets during the economic recovery. But there are a few places to watch as investors continue to seek out rent growth and low vacancy rates.

Multifamily investment sales

Multifamily investment sales set records in 2015.

Multifamily investment sales set records in 2015.

Start with the old standbys New York, Washington, D.C., Miami and San Francisco. Bryan Sullivan, VP of acquisitions and investment at the Habitat Co., said those primary markets are still pulling in institutional and foreign capital. That’s especially good to see in the case of Washington, D.C., which underperformed in the first half of 2015 before seeing a drop in vacancy rates and some mild rent increases. Its multifamily market is on the mend.

Investors will also look to changing markets like Denver, Chicago, Atlanta, Charlotte and Nashville. What makes them changing markets? An influx of young professionals and companies that has legitimized some overlooked neighborhoods. Sullivan cited the example of Chicago’s West Loop, which has seen its growth start to accelerate.

As per usual, Millennials will be a factor. Gary Goodman, SVP of Acquisitions at Passco Cos., made a point to highlight Southeastern markets like Atlanta, Nashville and Tampa as especially appealing to that demographic. As a result, they are expected to be strong multifamily markets. These are trends we’ll keep an eye on!

Can multifamily investment sales continue record-setting ways?

Can multifamily investment sales continue record-setting ways?

Multifamily investment sales

Multifamily investment sales set records in 2015.

January 2016

After a record-setting 2015 for multifamily investment sales, there is some uncertainty regarding the market’s future performance.

A fourth-quarter surge resulted in investors pouring a record $150.6 billion into apartment properties in 2015. That figure was up 16 percent from 2014, according to data from CoStar. The $47.3 billion in apartment sales for the fourth-quarter of 2015 also broke a record, crushing a $38.4-billion quarter from 2014.

But despite the giant leap forward from 2014-15, early projections for multifamily investment sales in 2016 are strong, yet modest. That may be due to a variety of factors, including:

  • The high price of multifamily properties in many markets
  • A slowdown in the leasing of new properties
  • The downturn of apartment rents late in 2015

Hopes for a robust 2016 can be pinned to an influx of foreign buyers, according to research from JLL. That same research suggested a growth pace of between 5 and 10 percent for multifamily investment sales in the year ahead.

In an interview with CoStar, JLL international director David Williams said, “While institutional investors made up the majority of buyers in 2015, we expect foreign dollars to be the wild card in the year ahead.” The apartment sector should see more cross-border investment in 2016, giving multifamily sales a boost.

Maybe the record books are safe, but there’s still reason to believe multifamily investment sales will be strong in the year ahead.

What Industrial Real Estate Can Learn from California

What Industrial Real Estate Can Learn from California

January 2016

Industrial real estate

Port activity has driven interest in California cities like Los Angeles.

When it comes to the industrial real estate market in California, it doesn’t seem to matter whether you look to the north or south.

Southern California has about double the amount of industrial space as Northern California, but both markets appear to be strong. That’s according to Westcore Properties president and CEO Don Ankeny, who talked about industrial real estate in a recent interview with GlobeSt.com.

So why is California’s industrial sector in such high demand? Increased manufacturing and employment has helped, and California benefits from the diversity of its markets. Port activity has driven interest in cities like Los Angeles in Long Beach. Meanwhile, tech and e-commerce firms are creating strong rent growth in San Francisco and San Jose. California has also benefitted from new industrial space as well as the renovation of existing space.

But California is not alone! The demand for industrial product is high nationwide, and a few characteristics of the California market can be used to spot other opportunities. Markets close to major transportation corridors and sea or air ports will do well. Other positive factors include low unemployment, low vacancy rates and a limited supply of new product.

Private Equity Growth Expected to Continue in 2016

Private Equity Growth Expected to Continue in 2016

Private equity

Jan. 2016

Private equity should continue to be a big player in the investment arena in 2016. The rate at which private buyers are gobbling up real estate has grown faster than any other capital source (save for cross-border investing) in the past 14 years. The 2016 ULI Emerging Trends Report indicates there is no reason to expect the growth of private equity to drop off over the next 12 months.

 

According to the report, here’s the breakdown on investment from June 2014 to June 2015:

  • Private investors purchased $216 billion in U.S. property, 43.5 percent of total gross investment
  • Institutional investors had 20.1 percent of the total
  • REITS had 14.1 percent
  • International investors had an 11.7 percent share

Emerging Trends based its positive outlook for private equity in 2016 on three main points:

  • Private equity capital can move quickly without the need for investment committee processes
  • Private equity can probe deeper into the U.S. market because it doesn’t have to consider a portfolio or abide by the minimum-deal-size parameters of some larger investors
  • Private equity is free to pursue opportunistic investments, which can result in higher yields

Private equity has benefited from a lowering of expectation on return in recent years. Few investors are chasing 20 percent returns (or higher), focusing instead on more realistic projections. They are moving into smaller markets such as Austin, Charlotte, Charleston, Dallas and Denver (among many others), and leaving New York City; Boston; Washington, D.C.; and the Bay Area behind.

Look for private equity investors to be active throughout 2016, using the ever-growing pool of available information to move quickly into secondary markets.

Why Office Leasing and Rent Growth is Lagging

Why Office Leasing and Rent Growth is Lagging

January 2016

Office leasing and rent growth

Office employment growth is outpacing leasing and rental growth.

Office employment has grown as the U.S. economy continues its recovery from the latest recession. But that hasn’t resulted in rugged office leasing and rent growth in the office sector.

There are many potential explanations for why the growth rate is lagging. Here are a few of the chief possibilities:

  • The Millennial factor: Younger workers tend to prefer open-plan office spaces that are ideal for collaboration (and, as it turns out, cutting costs). As a result, companies can fit more workers into less office space. They simply don’t need to rent as much space as they did in the past.
  • The traditional powers are slumping: When the U.S. economy was recovering from 2003-07, securities and banking and “traditional” professional services (legal, accounting, advertising, engineering, architecture and consulting) accounted for the majority of the employment growth. Those industries haven’t been growing as quickly this time around, according to figures from the U.S. Bureau of Labor Statistics. That lack of growth could be keeping net absorption figures down.
  • The tech bump: Cities with high rates of technology-related employment growth — places like San Francisco, San Jose and Seattle — are seeing healthy net absorption figures. That’s because tech companies are still leasing spaces with room for amenities. Cities without that major tech presence aren’t getting the same boost.

There’s reason to believe the office leasing and rental market will heat up. The Federal Reserve raising interest rates indicates the economy is strong and growing. Over time, that should lead to demand for banking, accounting and legal services. Maybe those industries won’t return to occupying the space they did years ago, but they will grow nonetheless.

Read more about office leasing and rent growth at NREIonline.com.

CRE Investment: What’s Big for 2016?

CRE Investment: What’s Big for 2016?

January 2016

As 2016 kicks into gear, here are a few trends we’re seeing on the investment side:

Foreign investment is still hot

Last year was big for foreign acquisitions, and there’s no indication that will change in 2016. According to Real Capital Analytics, the U.S. market saw $62 billion in foreign acquisitions over the past 12 months. Compare that to 2007, when foreign acquisitions were around $52 million. It’s not just Asia that’s investing in the United States, either. Real Capital Analytics says the top five players are:

  • Canada
  • Norway
  • Singapore
  • China
  • Germany
CRE Investment

European money is flowing into the U.S. market.

Canada was especially aggressive, spending around $20 billion while upping its investment in New York City from $1.97 billion in 2014 to a record $3.85 billion through September of 2015, according to the New York Post. China and Singapore make sense, but the inclusion of Norway and Germany is interesting as the capital flowing in from Europe hits all-time highs.

Foreign buyers have been drawn to the U.S. because of the strength of the economy, the low-interest-rate environment and the liquidity, transparency and stability the U.S. market offers. Most of the cross-border capital has been tied to deals in major markets like Chicago, Los Angeles and New York, but the capital is spreading to new markets. And speaking of new markets…

Don’t sleep on secondary markets

CRE Investing

Nashville is a secondary market on the rise.

This is a theme that comes up again and again when forecasting for 2016. Secondary markets — Atlanta, Austin, Portland, Nashville, Charlotte, etc. — will offer opportunities unmatched by their gateway counterparts. We’ve covered the rise of 18-hour cities before, and these markets are poised to continue growing. Why? Because they benefit from factors like lower cost of living and the perception of coolness, making them attractive to millennials.

So how will activity play out in secondary markets for 2016? Consider these examples:

In Atlanta, multifamily investors are capitalizing on the fact that higher income tenants — even those in secondary markets — are choosing to rent instead of own. As GlobeSt.com reported, investors are more aware of which products are quality, as well as their proximity to attractions like restaurants and shopping areas. That makes these properties more appealing.

Nashville’s commercial real estate market turned heads in 2015, setting a record for investment sales at $3.5 billion. The multifamily sector was especially strong, with investors buying $1.27 billion worth of apartment units. Last year was the second year in a row that multifamily cracked $1 billion in sales in Nashville.

Atlanta and Nashville prove that investors are aware of the growing opportunities in secondary markets.

Capital continues to enter U.S. real estate market

Capital continues to enter U.S. real estate market

new-capital

New capital is entering the real estate market. Where will it end up?

Dec. 2015

Money is flowing into the U.S. real estate market, and that trend is expected to continue in 2016. The big question: Where will all that new capital go?

Total acquisition volume for the 12 months ending June 30, 2015, was $497.4 billion (up 24 percent year-over-year), according to the 2016 ULI Emerging Trends Report. That type of growth isn’t likely to be sustainable, but the fact remains that investors will have capital to spend in 2016.

As we try to figure out where that new money could flow, here are a few options:

  • Secondary markets: We’ve written about the rise of 18-hour cities before, and this seems to be a likely place for investors to spend capital. Markets like Austin, Denver, San Diego, and San Antonio are “cool,” “hip” and starting to grow.
  • Outside the box: Investors may rethink their definition of real estate, or at least expand it. ULI highlighted the expansion of Real Estate Investment Trusts (REITS) to include cell towers and outdoor advertising. The market could grow by offering investors more opportunities to invest in infrastructure.
  • Comeback story: Old properties are becoming new again thanks to the popularity of renovation and redevelopment. Consider the number of companies that are re-thinking the design of their office spaces. In some cases, the current demands of millennial workers can make rehabbed industrial space even more desirable than new Class A options.
  • Going alternative: Properties that have traditionally been of interest to a small number of investors (medical offices, senior housing, data centers, labs) may find themselves in demand on a larger scale.

Clearly, CRE investors will be looking at their full range of investment options in 2016. The U.S. market offers plenty of choices, and now investors have the capital to match.

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