For 2012, U.S. real estate players must resign themselves to a slowing, grind-it-out recovery following a period of mostly sporadic growth, confined largely to “wealth island” real estate markets—the primary 24-hour gateways located along global pathways. A handful of cities also should continue to benefit from expansion in locally based technology- and energy-related industries. Otherwise, most commercial markets have stabilized, but will find marked improve- ment in occupancies and rents relatively elusive. Despite some stepped-up bargain hunting, capital generally will continue to avoid commodity real estate in most secondary and tertiary cities. Among the property sectors, only apartments will score especially well: demographic trends and the aftermath of the housing bloodbath combine to increase and sustain demand for multifamily units.
Enduring economic doldrums and the absence of dynamic jobs generators hamstring overall demand, weighing on real estate markets. While the nation’s lackluster employment outlook delays filling office space, the related drag in consumer spending compromises growth in retail and industrial occupancies and rents. Interviewees uniformly struggle to identify new employment engines: competition from overseas markets, technology gains, government and personal debt loads, an aging population, and global financial breakdowns all combine to stanch wage growth and hiring. As a result, businesses that are focused on squeezing profitability out
of productivity gains and families forced into belt-tightening use less square footage. “The Era of Less” forecast in last year’s Emerging Trends takes firm hold. Housing markets continue to founder in widespread borrower distress. Many cash-strapped, prospective buyers can meet neither stricter credit requirements nor higher equity hurdles. Casting a further pall on respondent outlooks, U.S. government disarray breeds uncertainty about policy affecting business and investment decision making.
Return expectations continue to ebb, although well-leased core real estate in leading markets will continue to produce solid single-digit income- oriented returns. Opportunistic investors ratchet down forecasts; even projections of returns in the midteens look like a stretch as risk increases from squirrely supply/demand fundamentals. Buying sentiment declines as selling interest increases. Investors who bought at or near market bottom in 2009 and 2010 consider cashing in some gains. Many players back off from bidding on trophy properties in better markets, fearing that pricing is outpacing the potential for recovery in net operat- ing incomes. Cap rate compression has ended; a leveling off is expected, with possible upticks for some property sectors in certain markets.
Most developers and homebuilders will twiddle their thumbs in ongoing extended hiatus; without evident demand drivers, construction lend- ers hold back funding on most projects, except for multifamily development. Expect a ramp-up in apartment development across many markets justified by plunging vacancies and continuing rent increases. When the odd new office building goes forward, developers likely will employ green technologies and concepts; tenants begin to insist on cost-saving, energy-efficient systems.
Shaken by stock market declines and anemic bond yields, investors gravitate toward equity real estate, but grow somewhat unsettled in the face of limited property investment opportunities. “Face it: real estate doesn’t offer enough growth poten- tial to satisfy” the demand, says an interviewee. Although debt capital remains undersupplied, lenders and government regulators work hard to avoid a refinancing crisis with hundreds of billions in commercial mortgages maturing over the next three to four years. Well-capitalized borrowers and solid, revenue-generating properties have no trouble obtaining financing, while lenders and special servicers will continue to extend and pretend as long as borrowers on less-stable assets can pay something out of cash flows. Foreclosures will increase, but at a relatively restrained rate given the number of still-troubled properties.
The top investment markets remain the usual suspects, led by the 24-hour global gateways— Washington, D.C., San Francisco, New York City, Boston, and Seattle. Austin, the moderately sized Texas capital, sneaks into the number-two spot on the survey, benefiting from dynamics created by its large university, the local tech industry, government jobs, and regional energy-based economy. Houston and Dallas also solidify rankings off their oil and gas businesses and relatively strong jobs advances. Other tech- and/or energy- related markets scoring well include San Jose, Denver, and Raleigh-Durham.
Among property sectors, everybody wants apartments. Living smaller, closer to work, and preferably near mass transit holds increasingly appeal as more people look to manage expenses wisely. Interest cools on offices, especially sub- urban office parks: more companies concentrate in urban districts where sought-after generation-Y talent wants to locate in 24-hour environments. Investors continue to place bets on high-ceiling warehouses in the gateway ports and around international hub airports. And East Coast and Gulf Coast ports vie to attract the most new ship- ping traffic coming through a widened Panama Canal in 2014. Winning cities could transform into major distribution sites. Shopping center owners continue to face incursions from internet retailing: fortress malls and infill grocery-anchored centers consolidate business at the same time that older regional malls and fringe strip centers appear to lose ground. The hotel recovery begins to flag: good news concentrates in the prime business traveler/tourist gateways and in middle-market brands without food and beverage.
The two largest Latin American real estate markets head in different directions. Brazil matures into more of a core play, especially in Rio de Janeiro and São Paulo, where vacancies in top properties barely register and condo prices com- pete with New York City’s best residential districts. Investors shy away from Mexico as drug violence takes an unfortunate toll.
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