Grubb Forecasts Leasing, Investment Recovery

SANTA ANA, CA-Grubb & Ellis Co. foresees a slow recovery in leasing for all property sectors in the US in 2011, plus an expansion of the renewed investment activity that marked 2010. The Santa Ana-based publicly held company, in a series of forecasts for both the nation and local markets around the country, says that the multifamily market will recover the fastest, the office market will continue to lag without faster job growth, and "Activity in the investment market, which began its recovery earlier than anticipated in 2010, will expand beyond assets at the top and bottom of the quality scale to include properties with slightly more risk."

Robert Bach, Grubb & Ellis SVP and chief economist, outlined the company's overall outlook, saying: “We have challenges to overcome, and we don’t expect fundamentals to return to their pre-recessionary peaks for several more years, but we’re slowly and cautiously building the foundation necessary to do just that.” Bach said that 2011 follows a 2010 that "was actually better than most anticipated it would be." Some of the surprises included positive net absorption and an uptick in investment sales during the second half of the year, Bach said.

Bach described the best and worst assets as "trophies and trainwrecks," pointing out that investors in 2010 tended to favor one or the other of those two extremes, but he expects that to change this year. “With all of the capital that lenders and investors have been sitting on, they are more likely to consider transactions farther off the ‘fairway’ than we saw last year now that the capital markets are thawing,” he said. “Look for investors to broaden their horizon beyond trophies and trainwrecks, which should result in a 75 % increase in transaction dollar volume from 2010 levels.”

In the office market, jobs remain the driving factor, as Bach and other economists have been pointing out for some time. As a result, the office market recovery in 2011 will be "half-speed," according to the Grubb & Ellis forecast, which cites slow job growth and the substantial inventory of shadow space as the two major reasons for the slow comeback. The company's researchers expect the vacancy rate in 2011 and 2012 to drop to 17% and 15.9%, respectively. This is approximately half of the 200-basis-point annual decline typical for a healthy recovery cycle. The company expects positive net absorption of 35 million square feet in 2011 and 47 million in 2012. Asking rental rates bottomed out in 2010 but will rise only slightly in the next two years, "with tenants retaining the bargaining leverage," the forecast says.

In the industrial sector, the forecast expects the weak dollar to boost exports and stronger consumer spending to spur imports, increasing demand for space. The national industrial vacancy rate, which peaked in the first quarter of 2010 at 10.9% and ended the year at 10.5%, is expected to decline gradually to 10.1% by year-end 2011 and 9.3% by year-end 2012. Despite improved fundamentals, the recovery will be slow and landlords "will not have much pricing power over the next two years with the notable exception of supply-constrained markets near major port and transportation facilities," the forecast states.

In the multifamily market, Grubb & Ellis expects a faster recovery than in other sectors despite foreclosures that continue to add shadow supply to the availability of rentals. "Modest job growth and lack of home buyers is causing the number of renter households to outpace that shadow supply," the forecast explains. Although home prices remain soft and interest rates low, mortgages "are difficult to obtain with more conservative underwriting standards in the wake of the mortgage lending crisis," the forecast points out.

In the retail sector, the forecast cites a “new normal” in which retailers are repositioning stores to create leaner, more effective organizations and securing high-profile locations that are now available at lower rates. "Despite these changes in the landscape, retail leasing activity has revived more quickly than originally expected," the forecast states. "Luxury retailers in particular are on their way to recovery as the financial pressure on the demographic they serve has eased, though the relatively high level of unemployment at the working class level will result in a slower recovery for big-box discount retailers and other merchants."

In the hotel sector as in other investment classes, "investment capital chased higher-end investment grade product and avoided non-institutional grade assets" in 2010, according to the forecast. The monthly volume of closed sales remained above the $9-billion mark from June through October 2010, it points out, reflecting an increase of more than 50% over 2009 during the same period. This unexpectedly good 2010 in core hotel industry fundamentals, which should continue in 2011, "will help alleviate some distress in the sector and provide an opportunity for some hoteliers to increase rates," the forecast states.

Along with its forecast, Grubb & Ellis Grubb & Ellis develops an Investment Opportunity Monitor each year that is geared to identify the metropolitan markets with the strongest investment prospects for each major property type over the coming five years. Those rankings, and the local forecasts for geographic markets throughout the country, are are available on the Grubb & Ellis Co. web site: www.grubb-ellis.com.