CHICAGO, Dec. 12, 2011 —
Economic indicators suggest improvement – albeit minor – in the real estate market for the forthcoming year, with no foreseeable double dip, according to Jones Lang LaSalle’s 2012 National Commercial Real Estate Outlook. Key findings from Jones Lang LaSalle
’s outlook were presented by top experts from the firm’s Research group
in its annual media webcast event.
“Given concerns in Europe and in some emerging markets, we anticipate the United States recovery to be comparably stable in 2012, though the overall growth trajectory will remain modest,” said Ben Breslau, Jones Lang LaSalle’s Americas Research Managing Director. Despite the slow improvement in underlying demand for most segments of the commercial real estate market, total investment volume will continue trending upward. “Debt financing will remain available for core real estate, and we expect the current slowdown in commercial mortgage-backed securities will be relatively short-lived, though the recovery in CMBS volumes will be choppy and will take time.”
2012 Commercial Real Estate Outlook Highlights
- Total investment transaction volume to increase by 15 to 20 percent to $190 billion in 2012 – a slower increase than the last two years.
- Businesses will take real estate into greater consideration in 2012, focusing investments on efficiency and productivity. Additionally, businesses will consider corporate real estate as a greater contributor to corporate social responsibility initiatives in 2012, shifting investments from new construction toward retrofitting existing assets.
- Global uncertainty, slow employment growth, and changes in space use will cause office space demand to slow. Commodity- and technology-rich markets, such as Texas, Denver and Northern California will lead demand growth.
- Hotel demand is expected to continue to rise in 2012, but likely on a more cautious trajectory than in 2011, with private equity groups at the forefront of asset bidding.
- Distribution hubs and ports will lead the industrial recovery in 2012.
2012 Real Estate Sector Forecasts
The level of liquidity and U.S. investment transaction volumes have improved dramatically over the last two years, but annual growth rates are slowing. Total transaction volume, which includes office, industrial, retail and multifamily, will continue trending upward throughout 2012, but at a slower rate than the last two years.
“Total investment transaction volume in office, industrial, retail and multifamily will increase by a projected 15-20 percent over the 2011 forecast total of more than $160 billion, which in itself will represent an approximately 44 percent increase over total volumes in 2010,” added Breslau.
Breslau believes that investor sentiment will continue driving markets in 2012, given the uncertainty and caution that remains in the system. The market could see short-run fluctuations as investors alternate between seeking out more risk at times and briefly pulling back at other times.
“Although on a less-steep trajectory than in 2010 and in 2011, investors will apply some downward pressure on core cap rates because of a deficiency in attractive yield alternatives and widened spreads on over U.S. government bonds,” Breslau predicted. “Furthermore, debt financing will remain very strong in the core space from life companies and domestic banks and we expect the CMBS market to mount a slow comeback starting in 2012.” Corporate Occupier Markets
As the economic environment prolongs the tenant-favorable conditions in markets across the U.S., corporate occupiers extend their window of time to evaluate and take advantage of the real estate market. As the economy continues to recover, companies will consider commercial real estate investments as an integral part of business and efficiency in 2012.
While businesses focus on growth, efficiency and productivity in 2012, commercial real estate teams will be challenged to develop workplace solutions that enable the corporate culture to stay intact and keep employees engaged, despite a largely mobile workforce. “The commercial real estate industry should be prepared to focus on decisions driven by corporate social responsibility. As a result, they will work closely with human resources and information technology teams to find solutions that will offer employees a sustainable environment that fosters productivity and engagement – while meeting business objectives,” said Lauren Picariello, Jones Lang LaSalle Director of Occupier Research.
In the same vein as improving productivity, market dynamics indicate that in 2012, companies will move away from investing in new construction and toward retrofitting existing assets. Updating offices based on sustainability has become critical – both from a business perspective as well as from a regulatory standpoint. Location will likely drive retrofit investment dollars and buildings in central, transit-oriented areas presenting the greatest opportunities.
Outlook for Property Sectors in 2012
: Although the office recovery continued to gain traction through the course of 2011, the pace of recovery in the first half of 2012 will likely slow due to increased global uncertainties and slowing office-employment growth levels and in turn, leasing velocity. Market tightening will continue, largely driven by commodity-rich and technology-rich markets such as Texas, Denver and Northern California, as examples. “Most other market segments will likely remain at or near the bottom of the market cycle in a stagnant position for the majority of 2012, handing tenants in most market niches prolonged leverage with respect to options, pricing and concessions,” says John Sikaitis, Director of Office Research for Jones Lang LaSalle.
Multifamily: The U.S. apartment market continued its strong performance throughout 2011, and at the outset of 2012 the sector is poised to outperform other property types. The strength of the market is fueled by low levels of new deliveries, a continued shift from home ownership to renting, positive demographic trends, and slow but steady employment growth. As home prices in much of the country remain uncertain, foreclosures and altered consumer psychology have pushed the national homeownership rate down by roughly 300 basis points since its peak mid-last decade.
Following a near-100 basis point decline of national apartment vacancy rate through the third quarter 2011, the near-record low levels of completions will likely continue over the next few months. As a result, vacancy rates could fall below 5 percent by mid-2012. Consistent demand will be accompanied by rent growth in 2012, with potentially modest growth acceleration in the first half of the year. As new supply deliveries noticeably increase by mid-2012, they will have a direct impact on market fundamentals; demand will keep pace with the market, particularly if employment increases.
"Multifamily is highly likely to retain its position as the ‘most preferred’ sector among property investors in 2012", Breslau maintained. “Prized for its perceived stability, liquidity, ease of debt financing, and semi-secular trends underway in the overall residential industry, yields in most quality segments of the market will remain low and could even continue to drift downward during the next year. Multifamily may attract the most investment of any major sector.”
- Hotels: Economic volatility is leading to more delicate hotel investor sentiment, but operating fundamentals are still strong and the transactions market is showing few signs of cooling down.
U.S. hotel investment volume swelled to a four-year high in 2011 as investors unleashed pent-up demand. “Total trade volume for the year is on track to reach $14.5 billion. This marks a nearly 30% increase on 2010 volumes,” said Lauro Ferroni, Research Associate for Jones Lang LaSalle Hotels.
“Real estate investment trusts (REITs) drove acquisition volume during the first half of 2011, accounting for 43% of purchases. Amid lower stock valuations, REITs accounted for a decreased 18% of hotel buys in the second half, whereas private equity buyers picked up steam.”
Ferroni expects the positive momentum to continue despite the overhang of volatility. “The investment environment in 2012 will likely mirror the second half of 2011, with private equity groups at the forefront of asset bidding.” Hotel demand is expected to continue to rise in 2012, even if on a more cautious trajectory than in 2011.
- Industrial: The industrial market will continue a slow and steady recovery in 2012, though at a shallower trajectory. The “big box” distribution and bulk warehousing sector that propelled leasing activity through the recovery cycle and large-block demand show no signs of slowing. Following the decrease of available Class A warehouse and distribution products, competition has increased for the remaining space on the market, leading to the onset of speculative construction in many space-constrained markets.
“Though tightening in the industrial ‘big box’ sector will continue to improve leasing and investment fundamentals in 2012, more leasing demand from smaller and mid-sized businesses will be required for broad growth across all classes and geographies,” stated Aaron Ahlburn, Director of Industrial Research for Jones Lang LaSalle.
In the U.S., the Inland Empire in Southern California and the Philadelphia and Central Pennsylvania markets have already experienced robust activity leading to speculative construction. As a result of strong opportunities in the pipeline, markets like Chicago and Northern California are adjusting to higher aggregate demand as they foresee strong growth in the pipeline. Other markets, such as Indianapolis, Houston, Seattle and Phoenix, are also beginning to tighten and experience rent growth. Yet, global and domestic economic headwinds will continue contributing to industrial property and supply chain uncertainty. Rising oil prices have caused concern about future transportation costs, manufacturing is only slightly expanding, and GDP forecasts are muted relative to longer-term historical averages. Unstable international financial and political environments will continue driving decisions about how and where to produce goods and materials.
- Retail: The retail sector remains polarized at the start of 2012: luxury retailers continue impressive growth, as high-income consumers remain isolated from the negative changes in the economy; concurrently, consumers aiming to stretch their dollars are driving wholesalers to experience outstanding performance in recent months. This positive performance on opposite ends of the retailer spectrum will continue to place pressure on middle-market retailers.
In response to a narrowing of the middle market for sales growth, retailers will adopt one of two strategies: enhance “shopping experience” by increasing organic selections, or focus on bargain-opportunities for shoppers.
“Since retailers need to appeal to a broad array of consumers, they’ll focus on functionality in 2012,” explains Ahlburn. “As retailers redesign and evaluate their footprints to become more nimble, with concepts like store-within-store formats, they will also try to make shopping more convenient with additional services like increased wireless capabilities, electronic displays and kiosks, drive-thru lanes and pick-up areas for online merchandise. We’ll also see many retailers expanding outlet store development and offerings.”
to see Jones Lang LaSalle’s Outlook presentation.
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