What's the Most Active Sector in CRE?

MIAMI—It's hard to get everyone at a commercial real estate conference to agree on everything. But there's one thing upon which speakers at the Akerman Summit did agree: suburban areas and secondary markets are still far from recovery. Indeed, competition is fierce in gateway cities such as New York, Miami, Houston, and San Francisco that guarantee the most yield.

Len O'Donnell, president and COO of USAA Real Estate, explained that the reason for declining acquisitions in urban areas is not because of balance sheets or the financial position of companies, but due to competition and the volatility of the overall market. As the peak years of debt maturity approach, investors are focused on recapitalizing existing ventures; bridging debt rather than acquisition opportunities.

Meanwhile, 20% of executives see hospitality as the most active sector in commercial development. Only 14% believe retail is seeing the most activity.

According to Stephen Owens, president of Swire Properties, high-end retail is essential to urban development projects. Owens explained that there are only 12 true luxury retail markets in the world, including London, Paris, Shanghai, New York, and Miami. When it comes to the future of urban development and the retail market, Shanghai stands as a growth model for cities like New York and Miami. Owens also expressed that public transit is fundamental to the stability of urban development projects.

Vincent Signorello, president and CEO of Florida East Coast Industries, said it is difficult to compete in cities not directly linked to a port, a main entry point for goods, or mass transit. The state of the nation's infrastructure is either overwhelmed or devastated and local governments are eager to partner with the private sector. As he sees it, working together to revitalize urban infrastructure is essential to attracting major anchor brands like Target, Ross, and Macy's.

Hotel development also feeds into these luxury demand centers. According to Lee Pillsbury, co-chairman and CEO of Thayer Lodging Group, price tags are better in secondary and tertiary markets, but the return on investment is better in top force markets. However, Millard explains that boutique hotels that struggle to compete against large chain hotels in major cities are thriving in smaller markets.

Regardless of size, the hospitality industry is growing at a rate three times that of the consumer price index (CPI). When factoring principal operation costs, labor wages, and capital with current interest rates, Pillsbury said, the industry is entering into a long period of profitable expansion.