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LOS ANGELES—Love him or hate him, Barack Obama hit on some important CRE issues during his State of the Union address, and we discussed the coincidence this morning. Now here are 13 main trends to watch for in 2013, as delineated by Jon Southard, director of forecasting for CBRE Econometric Advisors and his team.
(This is a highly abbreviated report on a much lengthier report. For the full White Paper, please click here.)
Trend 1) Housing Will Finally Provide a Boost for the Economy. Given the sector’s tough recent years, it is understandable that folks might hold out little hope, say the researchers. “Indeed, many headwinds remain,” they point out, “in particular, shadow supply. Yet, the majority of housing markets are recovering, and although previous hints of recovery wound up being false starts, national statistics are now lining up in a way that makes the gains look more permanent.”
Trend 2) Cap Rates Will Remain Steady. Expect rates to stay flat, say the folks of CBRE, who point to what they call the Fed’s “loose monetary policy and the resultant low interest-rate environment.” Fundamentals on a local level are expected to continue their slow and steady march to recovery, but in the meantime, you’ll see their current levels reflected in cap rates. Also, debt availability will follow the same trajectory, “which will further assist in holding cap rates relatively unchanged.”
Trend 3) Immigration Comes off the Back Burner. The analysts believe this could “be the year the nation makes some headway in the area of immigration policy. With the US economy in a prolonged slump, it is hard to believe that a labor shortage exists, or that the economy would benefit from increasing the number of work-related visas. But that is precisely the case.”
Trend 4) Aging Consumers Impact Retail Strategies. Baby boomers are approaching retirement and taking their spending money with them. Seniors, 65 to 74 years old, spend 23% less than younger groups. (They don’t say what happens when you hit 75.) That “will mean a significant downward adjustment in overall spending by the end of the current decade.” And that shift, CBRE points out, is already taking place.
Trend 5) The Elderly Will Rent More. “Growth in the population aged 65 and above is so strong that even with its traditionally high homeownership rate, during this decade the group is likely to contribute more to net growth in rental demand than households under the age of 35,” they predict.
Trend 6) High (-Tech) Stakes for Office. Or, technology is breaking up that old office of mine. Miniaturization and mobilization have freed tenants from the bonds of the office. Corporate users are taking that freed-up space out on owners, and, according to CBRE, when development starts up again in earnest they will need to reflect users’ drive toward technology.
Trend 7) The Comeback of Manufacturing. Increases in productivity might not result in more jobs right away as manufacturing picks up. But, according to CBRE, you will see a boost in the industrial and housing sectors. In the industrial front, more output means more warehousing and manufacturing facilities. In housing, the uptick in consumer confidence will bring about more spending, which means an increased flow of goods.
Trend 8) Shifts in Financial Services Jobs. “With the exception of just a few markets,” the report said, “the financial services sector does not look like the major engine of economic growth it once was. It certainly seems possible that this era is coming to an end. New York City presents a great example of how changing industry patterns affect office demand at the submarket level: demand in Midtown South, dominated by technology firm activity, is outpacing the neighboring Midtown submarket, where demand for office space is more tied to financial and professional services firms.”
Trend 9) Shifts from Investor Interest in the Urban Core. The researchers question the theory of a downtown resurgence. While they point to the fact that central urban cores are growing, “the areas outside CUCs and primary central cities are growing faster.
“More important, we found that cap rate differences between CUCs and their markets could not be explained by their respective differences in employment, population or even revenue growth. . . . Investors seem to be paying a premium for CUC assets largely on the expectation that the cap-rate gap with the metros will widen.
Trend 10) The ‘Burbs will Close the Investment Gap. The analysts question if the so-called urban bias of investors is due to superior asset performance or other factors. “Transaction data from 2012 show that sales volume in suburban areas is picking up, and there is evidence that the total-market-to-CUC cap rate spread will narrow.” As a result, CBRE expects the interest in suburban assets to increase through 2013 and well into next year.
Trend 11) The IT Revolution Will Continue to Impact the Supply Chain. E-commerce grew 14% this past holiday season. Expect it to continue, and as it does, “the nation’s supply chain will be transformed, bearing on industrial and retail real estate in a major way.” As just an example, distribution centers are now increasingly serving the end-user rather than the store.
Trend 12) Beware Theme Investing. “Investors brag about their ability to post superior investment performance in a given geographical market,” the report states. This is called theme investing and it can hurt. The suggestion is to look at national trends for property cycles, since these can impact market and submarket performance. Pay close attention to market level rental performance. Finally, look for true opportunities to outperform by identifying unique submarket dynamics. In short, leave theme investing behind.
Trend 13) Energy Markets Will Attract Investors. There’s really no surprise here, but as the researchers of CBRE point out, “The emergence of the energy industry as a growth driver for the US economy holds great potential for economic recovery over the next year and for office markets where ties to the industry are strongest.” Think Oakland, Oklahoma City, Houston and Denver, the experts suggest.