2012 Forecast: Partly Cloudy With a Chance of Improvement

CPE offers a snapshot of forecasts for the new year, portraying the likely trends that will shape commercial real estate in 2012.

January 3, 2012
By Paul Rosta, Senior Editor

With the new year comes a flurry of predictions about the next 12 months. CPE has synthesized a variety of forecasts from around the industry to create a snapshot of the trends that will shape commercial real estate in 2012. Prospects for the industrial, multi-family and office sectors appear to be modestly upbeat; for retail and the real estate capital markets, the outlook is more guarded.

CAPITAL MARKETS/ECONOMY:  For CMBS, the good news includes fewer delinquencies and a stable outlook, according to Fitch Ratings. However, the capital markets and the economy face any number of widely discussed challenges, ranging from the European debt crisis and cautious consumer spending to worries about an economic slowdown in China.

Markets to watch: “Larger metropolitan areas will continue to outperform smaller cities, tertiary markets, manufacturing hubs, and markets with heavy exposure to the housing industry downturn,” Fitch predicts. “This continues to make the Washington, D.C./Northern Virginia, New York metro, San Francisco, and Boston markets well positioned to take advantage of the economic recovery. Conversely, Phoenix, Detroit, Atlanta, Las Vegas, most Florida cities, and certain California markets will remain weak.”

OFFICE: For the U.S. office market, slow improvement should be the story in 2012. CBRE Econometric Advisors projects that the national vacancy rate will decline from 16.2 percent in the third quarter last year to 15.7 percent by the end of this year.  “Healthy corporate balance sheets, record profitability and sustained consumer demand suggest that the economic recovery will strengthen by mid-2012 and, as a result, office market fundamentals will continue to improve slowly throughout the year,” said Arthur Jones, senior managing economist for CBRE-EA.

Markets to watch: Best bets for rent growth in 2012-13 include such as gateway cities as New York City, Boston and San Francisco, as well as high-tech centers like Austin, Dallas, Pittsburgh and Salt Lake City, says CBRE EA. Vacancy rates will drop at least 80 basis points in Atlanta, Chicago, Houston, Dallas, Houston and Seattle, according to Cushman & Wakefield; In New York City, Philadelphia and San Francisco, vacancy will improve by at least 60 basis points.

MULTI-FAMILY: CBRE EA projects that multi-family vacancy will stay steady at 5.5 percent this year, a wash with 2011. Further dips are unlikely until the job market improves. An estimated 200,000 new units will come on line during the year.

In a survey conducted by Jones Lang LaSalle Inc. in conjunction with a recent RealShare conference, 39 percent of respondents said that multi-family cap rates in the most competitive markets will stay stable. Twenty-one percent expect a decline of 50 basis points or less, and 15 percent believe that cap rates will decrease more than 50 basis points. Another 15 percent predict that rates will rise, but by less than 50 basis points.

Markets to watch: San Francisco, San Jose, Austin, Denver, Seattle and Phoenix will show the strongest rent growth over the next two years, according to CBRE EA. The Jones Lang LaSalle/RealShare survey identified the most attractive locations for multi-family investment are Los Angeles, San Francisco, Dallas, San Diego and Phoenix. Survey respondents said they are most likely to sell assets in Las Vegas, Los Angeles, Washington, D.C., Atlanta, Houston and Phoenix.

RETAIL: Despite some encouraging signs, the retail sector’s long-awaited rebound will not begin before the third quarter this year at a minimum. “Until we have some market certainty in the U.S. and overseas plus sustained high levels of consumer confidence driven by higher paychecks, a stronger stock market and an improved housing market, a robust recovery will elude the retail sector,” explained Greg Maloney, president & CEO of Jones Lang LaSalle’ retail business unit.  Of the 18 markets surveyed by the firm, only Houston promises to favor owners during the first six months of the year.  Store closings may rise to 5,000 nationwide this year, more than double the 2,200 tallied in 2011.

On the plus side, availability will continue to decline from 13.3 percent at the end of the third quarter to 12.4 percent by the end of the year and 11.7 percent next year, according to CBRE EA. Those figures still remain higher than the previous all-time high of 11.3 percent, set in the second quarter of 2002.

Markets to watch: Austin, Columbus, Denver, Nashville and New York City will all post rent growth, CBRE EA predicts.

INDUSTRIAL: Growing demand for U.S. exports is fueling expansion by end users, and bargain rental prices are prompting some tenants to look for newer, higher-quality space. Availability could drop to 12.5 percent in 2012, a decline of 120 basis points from the third quarter last year and 210 basis points since the second quarter of 2010, according to CBRE EA. Rents should increase 2.4 percent nationwide, followed by a 5.8 percent hike in 2013.

Markets to watch: Oakland, Chicago and Philadelphia should all register declining availability. Meanwhile, Riverside, Calif., Los Angeles and Chicago will post the strongest rent growth this year, CBRE EA projects.