Emerging Trends: Optimism Clouded by Uncertainty
The snap audience poll matched the outlook for Emerging Trends in Real Estate 2013 at the report’s release during the Urban Land Institute Fall Meeting in Denver this past week. Before presenting the findings of this year’s forecast, I asked the 700 plus in attendance to answer whether they thought the real estate markets next year would be better, the same or worse than in 2012. Overwhelmingly they signaled better, maybe 20% or so “the same” and only a few thought 2013 would be worse.
Real estate players by nature are optimists—they almost have to be to make some of the deals they do. But if you look at the data, vacancies are headed down across all property sectors, hotels have rebounded especially well, and multifamily has been on its well-documented roll.
That said demand for office and retail space has been sluggish at best, and gains in occupancies have been helped considerably by a dearth of new construction. Industrial looks like a vigorous comeback story especially in the leading gateway markets where big space users have trouble finding adequate facilities. In these markets we could even see a modest ramp up in development next year. But in places left off the new e-commerce oriented distribution chains—typically smaller, local markets—warehouse vacancies will remain high waiting for a recovery in the housing markets. In short, the fundamentals present a mixed bag of good and concerning.
And speaking of housing, Emerging Trends respondents register confidence that single family will sustain recent gains, leading to increased starts and higher prices—albeit at reasonably restrained levels. Infill and affordable housing especially show signs of improvement and only leisure and golf course communities lag in the sick zone.
No surprise—San Francisco and New York lead as the top Emerging Trends’ markets, followed by Houston (an energy boost), Boston, Seattle, and Washington (down from number one the last four years). One thing you can be sure of--the nation’s prime 24-hour cities will maintain their perennial market standing with some shifts year to year for the foreseeable future. D.C.’s drop may be a good sign for overall market self-control. Investors backed off in the face off significant cap rate compression and some softening in the suburbs with concerns about possible federal government cutbacks. Without increased tenant demand to prop up fundamentals other top tier 24-hour markets may experience a leveling off of pricing too over the next 12 to 18 months. But D.C. will be back on top as soon as the economy backs up again—it’s almost guaranteed, and investors would be silly not to want to have stakes in such a solid market.
According to ET, yield chasers will head into secondary and tertiary cities—as discussed in previous blogs. But they need to be careful—buy income producing properties only well below replacement cost. In most of these markets, you cannot count on significant demand spikes and any new development can be a threat to existing properties.
Clouding all the relative good news is concern over the worrisome world economic backdrop and the fiscal cliff. In the post-election U.S., the politicos in Washington will either start the necessary process of paying down the debt by some combination of raising taxes and cutting spending or continue to put off the day of reckoning. If they take the former track, the economy is sure to lag—the government will be funding fewer jobs and people will have less in their pockets to spend or save. If the latter, we’re all just fooling ourselves—raising the stakes that interest rates will increase and inflation will get out of control.
So should we be so optimistic?