Commercial real estate sector poised for big rebound

Posted on April 11, 2013

As consumer confidence grows alongside the housing market’s steady rebound, there is an equal sentiment now emerging nationwide among economists and analysts about the potential of the commercial real estate market.

Economists and analysts are now notably more optimistic about the commercial market than they were six months ago, increasing their previous predictions for transaction volume and lending activity over the next three years, according to a survey released Wednesday by the Urban Land Institute and Ernst & Young. The survey polled 38 of the nation’s top real estate economists and analysts between March 4 and 25 in an effort to measure their sentiment about the market.

Survey respondents now expect transaction volume this year to increase by 7 percent from last year to a total of $310 billion. By 2015, volume could be around $360 billion.

Respondents were even more optimistic about the issuance of commercial mortgage-backed securities, or CMBS, which are a prime source of financing for real estate professionals. The experts believe CMBS issuance will jump by 50 percent this year alone to $70 billion. Next year, CMBS issuance is predicted to reach $80 billion and then $100 billion by 2015.

These projections were largely based on favorable outlooks for the overall economy, specifically employment and economic growth. For instance, the nation should expect to see a 7.5 percent unemployment rate by year-end and then drop to 6.5 percent by 2015. Real gross domestic product (GDP) is expected to rise by 2 percent this year and then 3 percent in both 2014 and 2015.

“The survey suggests that despite some tapering off of price increases and returns, the commercial real estate industry will, in general, be on solid footing for the next three years,” Dean Schwanke, ULI senior vice president and executive director of the ULI Center for Capital Markets and Real Estate, said in the report. “After a prolonged period of uncertainty, we’re seeing a revival of investor confidence as the economy continues to recover.”

When breaking down the commercial market by subtype, however, confidence and outlook is somewhat mixed. In fact, survey respondents believe all sectors — office, industrial, retail and multifamily — will actually decline slightly by 2015.

Here’s a quick recap of predictions for each submarket:

• Apartments: This has undoubtedly been the hottest commercial submarket and is expected to lead the nation in terms of return on investments this year at 10 percent. However, experts believe multifamily will see a cooling down as supply meets up with demand. Vacancy rates are anticipated to hold steady at 5 percent this year, then bump minimally to 5.2 percent next year where it should stay through 2015.

• Office: Returns for this sector are expected to close out the year at 9 percent, tying with retail in third place behind industrial and multifamily. Vacancy rates are expected to decline to 14.8 percent this year, although at the same time see a 3.5 percent drop in rental rates. By 2015, vacancies should be around 13.6 percent with a 4 percent uptick in rental rates.

• Retail: Returns on investment for retail, as mentioned above, should be around 9 percent this year. Vacancies and rental rates will show modest improvements over the next few years as economic conditions and consumer spending rises. This year, retail vacancies should decline to 12.5 percent with a modest 1 percent increase in rental rates. By 2015, the sector should see vacancies around 11.9 percent and rental rates rise by 2 percent.

• Industrial/warehouse: Returns for this sector are expected to be right behind multifamily this year at 9.9 percent. Vacancy rates should fall to 12.2 percent this year and further decline to 11.4 percent by 2015. Rental rate growth should be even stronger, increasing by 2 percent this year and then 3 percent in both 2014 and 2015.

Kristena Hansen, Phoenix Business Journal.