Emerging Trends Ranks Washington Top Market for 2011, Multi-Family Best Investment Bet

Better days lie ahead, but with more rational expectations, according to the Urban Land Institute and PriceWaterhouseCoopers' annual Emerging Trends report.

October 13, 2010
By Allison Landa, News Editor

Courtesy Flickr Creative Commons user morrissey

Better days lie ahead, but with more rational expectations. That’s according to the Urban Land Institute and PriceWaterhouseCoopers’ annual Emerging Trends report, which takes as its base 275 face-to-face interviews with and 600 surveys of those in the commercial real estate industry.

“After a period of more,” Emerging Trends author Jonathan Miller said during a webcast announcing the report’s findings, “we’re entering what we call the era of less.”

That, the presenters asserted, will make itself clear in restrained yet palpable economic growth. They contend that the economy hit the bottom this year and will start a slow recovery in 2011. Properties and investors with stronger cash flow have more prospects, with a sharp divide obvious between the haves and have-nots.

Perhaps some of the most encouraging news is that the report predicts that the debt markets will continue to thaw in 2011 and 2012, providing a more accessible flow of capital. Nearly half of respondents – 46.1 percent – claimed that capital coffers are substantially undersupplied, while 32.8 percent said they were moderately undersupplied and 13.7 percent contended they were in balance. The remaining interviewees contended that there is an oversupply of capital.

“Investors with capital have got a lot of options, but buyers will remain selective, highly concerned about overpaying,” ULI senior resident fellow Stephen Blank said.

As with last year, Washington, DC was ranked the top market to watch given its continued strong performance during recessionary times. New York City inched up from fourth place in 2009 to second this year, followed by San Francisco, Boston and Seattle.

“Global pathway markets are the ones that are doing best,” Miller said. “They’re on the coast, they’re a familiar port, seaport, international airport destination, they’re our more vibrant cities. … All paths lead to a relative handful of markets.”

The report ranked the multi-family sector as strongest, dubbing it the “king of core real estate.” Multi-family is bolstered by echo boomers, Miller and Blank said, as well as housing-bust refugees who can no longer afford homes. In addition, government-sponsored entities Fannie Mae and Freddie Mac are still financing the sector, unlike others.

Multi-family was followed by the industrial sector, which is seeing vacancy rates come down, and hotels, which are seeing a recovery. Then comes office and at the bottom, retail, a sector in which Miller said “Darwin rules.”

According to the report, the best investment bets are to buy and hold multi-family, buy and hold industrial, buy and hold select retail, buy and hold 24-hour gateway office properties, buy select hotels and buy condos and single-family housing.

“For speculators, this is not the time for speculation,” Miller warned.

They also emphasized that the real estate market is only one piece of the economic puzzle and others will have to fall into place before true recovery can happen.

“Simply put,” Blank said, “our problems have become much bigger than real estate and solutions are well beyond the scope of our industry.”