CBRE Sees Domestic Energy Production Boom Enhancing Office Investment opportunities #CRE

CBRE‘s “13 Trends for 2013” Report Also Sees Aging Population Driving Multi-Housing Investment and Growing E-Commerce Transforming Supply Chains

Los Angeles, February 20, 2013 – The increase in domestic energy exploration and production will spur office investment opportunities in U.S. markets like Dallas, Pittsburgh and Oklahoma City; the transformation of the supply chain by e-commerce will accelerate changes in distribution facilities and locations; and an aging population will significantly drive apartment rental demand during this decade. Those are among the key real estate trends that CBRE has identified in a new report, “13 Trends for 2013.”

The CBRE report notes that most of the top energy markets in the U.S. are seeing employment growth, particularly in office-using sectors. These markets, including Dallas, Oklahoma City and Pittsburgh, offer opportunities for investors willing to venture outside of traditional gateway markets, with office valuations well below the national average.

2013 will also be a year during which companies will move goods from their store shelves back to warehouses at an increasing rate. As this trend expands, the nation’s supply chain will be transformed, significantly affecting industrial and retail real estate. Distribution markets where the share of distribution-specific stock is greater than the national average, such as Dallas and Riverside, are at the center of the nation’s supply chain because they have the right mix of infrastructure to justify the construction of large intermodal distribution facilities.

Wider availability of affordable, longer-term rental opportunities for senior citizens could help unlock more demand for multi-housing properties and lead to higher rents. Multi-housing investors and developers should not underestimate the potential contribution of an aging population to future growth in rental demand. Growth in the population aged 65 and above is so strong that even with a traditionally high homeownership rate, the group is likely to contribute more to net growth in rental demand during this decade than households under the age of 35.

“While the slow but steady economic recovery portends positive trends for the U.S. commercial real estate market, owners, occupiers and investors still need sharp insight to make the right decisions and ‘13 trends for 2013’ offers a practical, sector by sector, analysis,” said Jon Southard, Director of Forecasting, CBRE Econometric Advisors.

According to CBRE other key trends for 2013 are:

  • Cap rates will remain relatively unchanged in 2013, as a result of loose Fed monetary policy, the continuing recovery in both debt availability and real estate fundamentals, and stability in risk premiums.
  • The outlook for manufacturing remains healthy as the U.S. economy continues to gain traction, with industrial production forecast to reach its pre-recession high by the end of 2013. Continued improvement in business and consumer demand will see more need for industrial space throughout the entire supply chain. Higher levels of production will drive manufacturing businesses to expand their access to warehouse space.
  • The property pricing gap between suburban office assets and downtown properties will narrow. There are early signs that spreads are narrowing, first through near-term stabilization of cap rates in the suburbs, and then in later years through compression. During 2013 and 2014, investors will gradually increase their risk appetite and venture beyond cities’ central urban core.

Note to editors/journalists: For a full copy of the report email


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Commercial Real Estate Forecast Update: 2013-2014 #CRE

Commercial real estate continues to improve at a moderate pace, much in line with our previous forecast update from six months ago.

The office market enjoyed “11 consecutive quarters of occupancy growth and eight straight quarters of rent increases,” according to the Jones Lang LaSalle firm. The length of the expansion is more noticeable than the strength of the expansion. REIS Inc. reported national figures for office vacancy that are only slightly lower than a year ago. Jones Lang LaSalle also reported that most of the improvement is in Class A space, which confirms the anecdotes I’ve been hearing as I travel around the country: the only challenge for tenants is finding large contiguous Class A spaces in downtown areas. DeLoitte’s annual commercial real estate survey notes low construction levels in office space, which should bode well for landlords’ future occupancy and rent rates.

Before we get too overjoyed, note the limiting factors on the office rebound. First, the pace of economic growth is subdued, with a risk of recession large enough to demand concern. Second, high tech is a growing element of office occupancy. The software industry’s preference for putting many programmers in one large room cuts the square footage per worker. It may not be justified on productivity grounds, but the open workspace concept is so established in the software industry that it’s not going away any time soon.

Industrial space is starting to expand, with more new deliveries than in recent years. Industrial typically has the shortest development and construction periods and thus is the first sector to complete new projects when the market improves. This trait means that vacancy rates will not fall too far, nor will rents rise too fast. Still, increased volume of rented space will help the large landlords improve their efficiency, though it does little for owners of one or two properties who must compete in a market with growing supply.

Retail space is seeing more absorption than construction, but there’s plenty to worry about. Retail spending has only increased 4.4 percent in the past 12 months; a year ago we saw a 6.2 percent gain, and a year before that a 7.8 percent increase. Our recent figure is certainly an increase, but not terribly fast, especially in light of two percent inflation. Looking forward, the end of the temporary payroll tax cut will pinch a number of wallets.

On the positive side for property owners is the extremely low interest rate for commercial mortgages. Those owners who qualify pay so little interest that it’s almost free. Others, however, still have some difficulty obtaining cheap financing.

Investor interest has been strong, but the recent stock market surge may shift some money away from real estate into stocks. It’s certainly foolish to invest for the future based on recent gains or losses, but that is what many investors seem to do. In the coming year it’s unlikely that prices of commercial properties who show a strong upward trend. Light to moderate gains are likely, but price risk is greater on the downside than the upside.

For contractors itching to erect some buildings, the best opportunities last year were in multi-family residential. This year single family residential and industrial offer the best gains. Next year and in 2014, look for retail then office construction at the top of the leaderboard.

The greatest economic risk for commercial property owners is recession.The Wall Street Journal’s most recent survey of economic forecasters shows a 17 percent risk of recession. I am at 20 percent, but what’s a few percentage points among friends? The most likely trigger for a recession this year would be a worsening of Europe’s financial crisis. The Continent had been in a mild recession, then last quarter it turned decidedly ugly. If bond defaults or bank failures begin, the Europe’s economy would turn down, with ripple effects triggering an American recession. Most likely that will not happen, but nobody can be sure.

Given this risk, it may be better to sign a long-term lease at a low rental rate than to hold out for a premium rent in a year or two. Holding out for a better rent will probably work out—but probably is not the same as certainly.

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Investors Giving Private Equity Real Estate Funds a Second Look – #CRE

Investors Giving Private Equity Real Estate Funds a Second Look – CoStar Group.

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#Housing as an #Investment? Yes, That Idea Is Back #multifamily #cre


Should you look at housing as a (good) investment?


For the love of five years of foreclosures, bank failures, and congressional testimonies, have we learned nothing? Bobcats and coyotes, after all, were taking over condemned houses with antifreeze-green pools. That’s pretty Mad Max where I come from.

Don’t look now, but with the sector resurgent—prices for single-family homes climbed in 88 percent of U.S. cities in the fourth quarter—the idea of “house as nest egg” is making a comeback. The most recent national median price for an existing single-family home is about $179,000, a 10 percent rise from a year earlier, which was the biggest gain since 2005, according to the National Association of Realtors.

Still, Yale professor and home-price tracker Robert Shiller says housing remains a pretty crummy investment over the long run. He calculated (PDF) that real (after-inflation) home-price appreciation from 1890 to 1990 was approximately zero percent. “Housing,” he told Bloomberg TV, “takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing. So new ones are better.”

He continued: “So why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000s. And I don’t expect it to come back. Not with the same force.” The professor then compared the idea of investing in housing to investing in cars: “Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won’t want our cars. It’s the same with our houses. So they’re not really an investment vehicle.”

Those in the industry don’t buy that analysis. “The key to evaluating housing from an investment standpoint is to understand what gives real estate its value,” saysAndrew Jeffery, a director of acquisitions for Cirios, a San Francisco residential property investment shop. “Shiller misses the point by comparing investing in houses to investing in cars. Houses, and all real estate, have the potential to generate cash flow. Cars do not. The value of a property is derived from what multiple the market assigns this cash flow, which is based on a variety of factors, from location to property type and tenant profile.”

He says many homeowners—present and prospective—simply view homes as assets whose price appreciates and depreciates with market conditions, ignoring their key potential to throw off cash. Also, Jeffery says it’s critical for investors to grasp how leverage works in housing. Think about it: You put down $110,000 on a $540,000 house. If the value jumps to $650,000 when you’re ready to sell, you’ve effectively used debt to double your initial investment. Of course, interest payments and upkeep eat into that profit, and too many people know the pain of owing more on their mortgages than their homes are worth. But the tax deductibility of mortgages mitigates the risks.

Jeffery says that thanks to leverage, a person who buys a house and rents it out will come out ahead of someone who invests the same amount of money in the stock market—especially at the point when the incoming rent covers maintenance outlays and helps pay off the mortgage. Going by historical data, by the time the owner retires, the house should be worth more than what equities would have returned. Plus, he says, “You’d already own your cash-flowing fixed income assets to retire on.”

There is, of course, that holistic way of looking at housing: as an investment that at least holds its value as inflation rises, and whose dividends—a home office, kids playing in the backyard, school bus around the corner—pay out big, however nonfinancially.

Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter@robenfarzad
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When Online House Hunting Heats Up


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Top Cities for Job #Growth and #Rental Revenue in 2013

The latest report from Dallas-based Axiometrics spells out some positive data for 2013 job growth and rental revenue increases. But not all metros have such a bright outlook this year.

Last year, the West was the best. The only cities to break the 3 percent increase mark were San Francisco and San Jose, Calif., as well as Austin, Fort Worth and Houston, Texas. The lone surprise on the East Coast was Charlotte, which ended 2012 with a 3.1 percent increase in annual relative job growth from the previous year. When revenue growth is factored in, Silicon Valley and Texas lead the way.

Unfortunately for Mid-Atlantic cities, 2013 will lag in terms of growth potential, with major rental hubs like Washington, D.C., Philadelphia, Pa., and Baltimore, Md. trending toward the lower end of the combined spectrum.

Yet, 2013 has good things in store for Seattle, Salt Lake City, Raleigh-Durham, and Savannah, which are all expected to see 3 percent or more job growth this year.

For a full list of how Axiometrics expects major metros to perform in 2013, see the table below:

2013 Job Growth and Rental Revenue Forecast_tcm23-1804201

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stack-blocks-300As expected, investment sales volume in the retail sector in 2012 took a leap upwards from 2011.

Real Capital Analytics (RCA), a New York City-based research firm, reports that retail investment sales totaled $52.8 billion in 2012—a 20 percent increase from the year prior. The number of closed transactions involving significant retail properties also went up by 20 percent, to roughly 4,400.

Similarly, in its December “Capital Markets” report, brokerage firm Marcus & Millichap Real Estate Investment Services notes that sales volume for multi-tenant retail properties rose 17 percent year-over-year, while sales of single-tenant properties increased 8 percent.

The rise in acquisition activity was especially pronounced in the regional mall sector, where 117 properties were traded for $24.2 billion, according to RCA. The figure includes outright acquisitions, as well as acquisitions of majority and minority interests, and represents a 172 percent increase in deal volume from 2011.

For mall transactions, the average price per sq. ft. in 2012 was $237, while the average cap rate stood at 7 percent. For transactions involving strip centers, the average price was $145 per sq. ft., while the average cap rate was 7.7 percent.

Marcus & Millichap researchers estimate that overall, prices for multi-tenant retail centers currently average $141 per sq. ft. That’s still 13 percent below previous peak levels.


Emerging markets


New York City, Chicago and Los Angeles saw the greatest volume of retail transactions over the past 12 months, but there are indications that other markets are picking up steam.

For example, retail investment sales in San Jose, Calif. rose 224 percent year-over-year, to $809 million. Investment sales in Orange County, Calif. were up 138 percent, to more than $1 billion. Investment sales in Cleveland, Ohio, increased 112 percent, to $587 million.

Simon Property Group, the Canada Pension Plan Investment Board and DDR were among the most active retail buyers by dollar volume, while Cole Real Estate Investments, Inland Real Estate Group and Realty Income Corp. led by the number of transactions. The Blackstone Group took the number four spot in both categories.

On the flip side, Fallaron Capital Partners, the Westfield Group and Macquarie disposed of significant retail holdings last year, along with Family Dollar, Inland and KBS Realty Advisors.


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