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.

JLL Ranks Top Cities for Innovation

JLL Ranks Top Cities for Innovation

January 2016

Three fast-rising cities have broken into the top five of the annual City Momentum Index published by brokerage firm JLL and reported by GlobeSt.

The City Momentum Index highlights the top cities in the world for creating environments that attract business, technology and foreign investment. Innovation-rich cities dominated the top 10, illustrating the importance of building an economy through technology and creating new businesses.

Boston_Financial_District_skylineBoston ranked second nationally — behind Silicon Valley, CA  and fifth globally. Now, thanks to record rent growth, its lowest vacancy rate in eight years and strong global investment, Boston has given the United States two cities in JLL’s top five.

“This year was further recognition that Boston is one of the most important ‘innovation hubs’ in the world,” JLL New England research manager Lisa Strope told GlobeSt.com.

The City Momentum Index is published annually. To arrive at its rankings, JLL studied 120 global cities and used 37 social and economic indicators.

The full list of the global top 10 is:

  1. London
  2. Silicon Valley
  3. Dublin
  4. Bangalore, India
  5. Boston
  6. Shanghai
  7. New York City
  8. Sydney
  9. Beijing
  10. San Francisco
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.

Interest in Medical Retail on the Rise

Interest in Medical Retail on the Rise

Jan. 8, 2016

medical retail

Interest in medical facilities is on the rise.

As the rising senior population leads to demographic changes in the United States, the investment market for medical retail properties is heating up.

U.S. Census Bureau figures indicate that seniors over the age of 65 will continue to make up a higher percentage of the population over the next 35 years. With those seniors averaging more than six doctor visits per year (according to the U.S. Center for Disease Control) and the Affordable Care Act increasing the number of Americans with access to health insurance, medical retail facilities are becoming an attractive option for investors.

This trend was evident in a recent deal made by the Boulder Group of suburban Chicago. GlobeSt.com detailed the investment brokerage firm’s completed sale of a single tenant Aurora Health Care medical property in Milwaukee. Randy Blankstein, the president of Boulder, said the property — a doctor’s office with a focus on internal medicine — sold at a cap rate of 5.70. That compares favorably to other properties near the Midtown Center retail property that houses the Aurora facility.

With the future of well-located medical retail facilities looking bright, it’s likely we’ll see similar sales in the next few years.

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.

Vacancy rates for commercial properties poised to drop

Vacancy rates for commercial properties poised to drop

Dec. 2015

The improving economy should bring a decline in vacancy rates among the major commercial property sectors aside from multifamily in 2016. But according to the National Association of Realtors, that decline will be accompanied by a dip in prices.

Lawrence Yun, the NAR’s chief economist, attributed slowed growth in the third quarter to the following factors:

  • Temporary turbulence in financial markets
  • A stronger U.S. dollar that hurt exports
  • Economic weakness overseas
Lawrence Yun sees vacancy rates dropping in 2016.

Lawrence Yun

Those factors are expected to be less of an issue going forward. That has led to optimism related to vacancy rates commercial spaces.

Yun is not as optimistic for the future of multifamily housing. He recently told GlobeSt.com that: the best days for multifamily could be winding down….new construction has already surpassed historical averages. States in the South and West could see the largest rise in multifamily housing vacancy rates.

Prices to fall with vacancy rates?

The NAR predicts prices to drop in 2016 as the Federal Reserve begins to raise interest rates to match the improving economy.

Yun said that in recent years, rising sales and optimism among investors has pushed prices higher than usual in many large commercial markets. As a result, investors looking to gain an advantage turn a profit could begin to seek out smaller markets or lower-end properties.

At the same time, Moody’s Analytics has reported long-term findings that indicate while pricing on the East and West coasts will cool by 2020, markets in the heartland and Southeast are poised to see price increases. That includes undervalued markets like Atlanta, Jacksonville, Chicago and areas of Ohio.

It will be interesting to see whether one (or both) of these trends changes at all in the coming year.

2016 Outlook: Hotel Market Nears Peak

2016 Outlook: Hotel Market Nears Peak

What’s Ahead for Hotel Construction?

The new Four Seasons hotel in Fort Lauderdale is slated for completion in 2018

The new Four Seasons hotel in Fort Lauderdale is slated for completion in 2018

Hotel occupancy, construction and sales are approaching peak levels and 2016 could be the last strong year for this expansion cycle. Recent analysis from Marcus & Millichap and JLL provides these details:

  • Room occupancy rates are near an all time high, reaching 65.6 percent by December 2015, says a recent Marcus & Millichap report.
  • Room rents are on the rise, increasing 5.2% to $120.99 on average. With more tourists and business travelers occupying rooms, owners and investors are enjoying an average revenue per available room of $80. So, of course, an increase in interest is sparking near-record levels of new construction.
  • Hotel sector capital markets also remained strong, with global hotel deal volume rising by 10 percent to nearly $60 billion in 2014, says JLL. Both Wall Street and Main Street are currently lending on hotels and transaction volumes could reach $68 million in 2015. See JLL’s Hotel Investment Outlook Report for more.

Caution for investors

Analysts are also warning investors to think ahead when building new hotels: assets that takes three years to build could open after the demand for hotels starts to drop again. As a result, developers are focusing on select service hotels that are less expensive and faster to build than full-service hotels:

  • Courtyard by Marriott
  • Holiday Inn
  • Hampton Inn

These service hotels are making up a good portion of the 4,038 projects currently under construction, which will bring 507,221 new hotel rooms on the market in 2016. That may seem like a lot, but it’s a far cry from the 5,883 new hotels that came online in 2008. Also, cross-border transactions should account for one-third of deals in 2015, with the U.S., China, Singapore and the Middle East as the biggest capital exporters.

Foreign Investment Boosts Industrial Market

Foreign Investment Boosts Industrial Market

GLP buys chi_indcor-properties

Foreign investment in industrial surged in 2015, led by investors such as GLP, which bought the IndCor portfolio.

Nov. 12, 2015

Ready for a surprise (or three)? JLL and capital markets research lead Sean Coghlan provided a few with the recently published report Commercial Real Estate Investment: 2015 and Beyond.

A few of the main points:

  • The industrial market is back in a big way: YTD sales volume hit $43.2 billion by the end of Q3, a mark that is 53.9% higher than it was at the same time last year. This will be the sixth year of consecutive growth. “We did not anticipate that the industrial sector’s recovery would be as strong or as quick as it was,” Coghlan said.
  • Foreign capital is big on industrial, a sector that could outperform its office counterpart: The industrial market has received $11.5 billion in foreign capital so far, and Coghlan said there’s a good chance another $7.5 billion in deals will be closed by year end. In recent years, office has reigned, but that trend looks poised to reverse.
  • The multifamily sector remains strong: Factors such as millennials delaying home buying and moving to urban environments have caused the multifamily sector to outperform expectations. “There is a strong pipeline for new development, but we have also seen a pervasive rent growth that has outperformed the other sectors,” Coghlan said. YTD sales volume is nearly $96 billion.

Read the full article on GlobeSt.com.

Industrial investors careful with Houston market

Industrial investors careful with Houston market

Nov. 8, 2015

The commercial real estate market remains healthy across the U.S, but there are signs of a slowdown in one major industrial market: HoustonHouston.

Citing the persistence of lower oil and gas prices, CoStar says CRE investors are being cautious in this major Texas market. This is particularly true of the industrial market, as EastGroup Properties announced plans to reduce its holdings in Houston.

That news comes even though the Houston market has continued to improve. CoStar cites overall industrial vacancy rates as decreasing to a record low of 4.7 percent as of Sept. 30.

This CoStar story says that EastGroup is expected to sell a 232,000-square-foot business park in November, and will start to sell other Houston assets in early 2016.

How is big oil affecting CRE?

  • The oil price plunge from a year ago has hurt the performance of industrial, multifamily and hotel properties more than office and retail segments.
  • Publicly held REITs in each property sector are debating whether to pare their exposure to the market or shift strategies to ride out the latest cycle.

Chicago isn’t as dependent on oil and gas prices as Houston, but this development is being watched closely. Will other markets be affected? Stay tuned.

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