The latter part of 2011 brought a steady stream of relatively positive readings for the U.S. economy and commercial real estate. The data points failed to shatter any recovery records but they reaffirmed that the economy and the CRE sector are still headed in a positive direction. As recently as the third quarter of 2011, prospects for the continuation of the recovery were being questioned by a number of economists and market participants, and mounting evidence that a retraction is far from occurring is encouraging, especially when it comes to consumer and business sentiment.
The underlying data on jobs, core retail sales and corporate profits beat expectations by a healthy enough margin to substantially reduce recession fears. Private sector hiring in the fourth quarter totaled 466,000, up from 438,000 in 4Q 2010, boosting it to 1.8 million for the year. Government job losses appear to be easing and the prior months’ overall job readings have consistently been revised upward for several months. Core retail sales continue to show year-over-year growth in the 5% to 6% range and holiday sales grew by 3.8% over 2010. Consumers are still under tremendous pressure but have shown significant resilience amid the financial-market turmoil and recession talk of the past five months.
Holding with our theme of “good but not great,” the labor market is on a gradual recovery trend which is a consistent theme for commercial property occupancies with the exception of apartments. Preliminary data show that occupancies across all sectors improved moderately once again in the fourth quarter, falling short of an exciting turn around but certainly moving in the right direction. Apartments continued to widen the gap with the other sectors thanks to the unique set of drivers that are charging renter demand. On the macro front, various initiatives to stem the worsening of the eurozone debt crisis have had mixed results and the U.S. political log jam is alive and well. Geopolitical tensions and higher oil prices are recapturing headlines. In other words, not much has changed to elevate the ever-present risk of additional macro-induced volatility in the New Year but the economic foundation appears stronger.
The guarded optimism for a better year for the economy and CRE fundamentals should give way to more cheer when it comes to investing. Sales volume in the four major property sectors rose by an estimated 35% in 2011 to $240 billion as incredibly low interest rates, availability of more financing sources and relief that recession fears seemed overblown brought more capital to market. It also appears that private investors have become more active and more capital is flowing to Class B assets and secondary markets in light of rapid tightening of yields in the upper tier of the market. The current prospects of investing in a hard asset that is set to improve along with an expanding economy, even at a moderate pace, with generation-low cost of debt locked in for five to seven years and very competitive cash flow yields point to a unique CRE investment window. The combination of these factors is setting the stage for an increase of 15% to 20% in property sales volume this year as well as a broadening of equity capital sources, asset quality and markets.
Hessam Nadji is senior vice president and managing director of Marcus & Millichap Real Estate Investment Services. He is also the interim managing director of Institutional Property Advisors, Marcus & Millichap’s special division designed to serve the unique needs of institutional and major private multifamily investors. Contact him at email@example.com.