Looking Forward: A Flat Economy Means a Rising CRE Marketplace

Commercial real estate markets will continue to improve in 2012 because of the relative yield they offer. With a flat economy comes a rising CRE marketplace.

The economy’s recovery has been disappointing by many standards of measurement. We’ve seen declines in median household income. As of November 2011, employment was up just 0.9 percent from its lowest level in the recent recession – which pales in comparison to a post-World War II historical average of a 6.8 percent decrease in unemployment 30 months after the end of recessions. And, amid all the European crises, Commercial Property Executive reported today that the biggest problem isn’t Greek debt; it’s the possibility of default in Italy.

But there has been somewhat of a brightening: The 2 percent third-quarter growth in U.S. GDP hit just before a record holiday season, and a year-beginning prediction from services firm Jones Lang LaSalle said that total transaction volume in U.S. capital markets in 2012 could hit $160 billion.

While that’s not the same volume of growth as 2010 to 2011 – when transactions grew by 44 percent – it’s still a significant improvement in the 15 to 20 percent range. “There is uncertainty out there, but give me a flat economy and I’ll show you a rising CRE marketplace,” Tom Fish, executive managing director and co-head of Jones Lang LaSalle’s real estate investment banking unit told Commercial Property Executive. “Commercial real estate markets will continue to improve because of the relative yield they offer.”

Ian Goltra, a portfolio manager with Forward Management L.L.C., agrees.

“Even with weak U.S. job growth, the supply/demand picture appears favorable on the commercial side, especially in the apartment and lodging sectors, while housing is still in the weeds,” he said. “Meanwhile, commercial properties are relatively inexpensive by historical standards.” Goltra went on to note that, in 2011, private equity fundraising for direct-property purchases hit a new peak of more than $150 billion.

A recent report by Maximus Advisors, a research and consulting firm, pointed out what many in the industry already know: That multi-family is going to continue to be the darling asset class for investors. With home ownership down 0.6 percent from one year ago – a shift of 700,000 owners into renters – “the transition from stage one of the recovery to stage two” may be in the cards, the report noted. “The net result leaves the overall outlook for [the multi-family sector] in place: continued improvement in vacancies and healthy rent gains.”

But it won’t only be the cultural shift from buying to renting; new apartment developments will fuel the trend as well. “We will start to see development capital pour into markets that can substantiate it,” Fish said. “Even capital that was focused on urban infill core will creep out to suburban areas because [investors] see potential.”

But the investment trend doesn’t stop with multi-family – investors with a willingness to invest are flocking to core product in all sectors. For offices, investors will continue to be most interested in the top-tier markets this year. In fact, market share for the office volume as a percentage of all investment in core gateway markets increased to 60 percent as of the third quarter, versus a longer-term average of 51 percent.