Commercial Real Estate Assets in 2014
January 14th, 2014 by Alisa Sava
Being one of the top international real estate markets, the US provides favorable conditions for those who are eager to invest in property. This year, the industrial sector has risen to the number one category for investment and development, leaving behind hotel, multifamily, office, retail and health-care real estate.
The majority of experts share optimistic forecasts for the future of the real estate market in the US. The overall economic situation, interest rate conditions and rapid tech development will all continue to stimulate business activity in 2014. It is also expected that the market will have returned to its pre-bubble levels by the end of the year.
Moreover, this year investors are no longer confined to the top six markets. Their focus will switch to the secondary markets demonstrating a solid growth and high level of confidence. Among the most prospective alternative markets, the experts consider Salt Lake City, Charlotte, Orlando, Phoenix and Sacramento to be great emerging markets.
Below we suggest a short forecast of the largest property markets in decreasing order regarding their investment and development attractiveness:
Flourishing E-commerce and Manufacturing Increases Demand for Industrial Buildings
Economic observers single out several reasons for the industrial market’s boost. First, manufacturing returning to the US as well as shortening supply chains creates a demand for warehousing:
“Manufacturing is coming back to the US. Now, we are seeing dozens of companies moving back to the US because the economics is shifting.”
This trend is caused by the sudden rise of labor costs in China, which makes no sense for US manufacturers to outsource their production abroad.
Another thing influencing the industrial real estate is the expected Panama Canal expansion in 2015, which means the new demand for warehouses and ports along the East and West Gulf coast:
“By 2014 it is expected to see some impact on warehouse and factory location, and more so once the canal reopens in 2015”
Thus, warehousing is expected to be the strongest sector for both development and investment this year. Due to the rapid development of e-commerce and online retail, there has also been an additional demand for new storage centers close to the major cities:
“Electronic retailing is impacting the whole distribution program. Facilities are being built to enable same-day delivery — huge buildings, fulfillment centers in areas where we’ve never seen warehouses before,” says one logistics executive.
Data/research centers and self-storage will become another attractive field for investors and developers:
“Self-shortage is doing well, partly because of the recession, when people had to move out and put their stuff somewhere.”
According to the Emerging Trends in Real Estate survey, Miami has been ranked first in terms of buy/hold/sell recommendations for industrial property. Over 60% of respondents — the top country’s real estate professionals – advise to buy industrial property in Miami this year.
Houston, Seattle, Los Angeles, and Dallas, the big distribution hubs with healthy local economies, are the next four top industrial markets of 2014.
Multifamily Sales Continue to Hold Steady
Continuous population growth as well as low vacancy and booming rental growth has created a limited number of proposals along with a strong demand from the U.S. and foreign buyers. That is why multistory buildings have emerged to facilitate the housing problem as well as to free up public space.
Being in lower demand comparing to 2013, the condo market remains one of the favorites among the investors. Cities like New York and Miami are witnessing a condo boom:
“This is what the wealthy are after. Inventories of quality, high-end condo buildings in New York are very low after years of no new construction, so developers are having to respond,” says a property agent Vickey Barron.
However, multifamily housing popularity depends on the region. There are still a lot of areas across the country where overbuilding condos slows down the recovery in this sector.
Limited-Service Hotels Gaining Popularity
The hospitality sector continues to benefit from growing tourism and business traveling. The experts put Miami at the top of the list in terms of hotel development and investment prospects. Then comes San Francisco along with New York and Houston.
Limited-service hotels are expected to be in bigger demand comparing to their full-service counterparts:
“High-quality limited service hotel brands where the interior design, look, touch, and feel tend to mimic full-service hotels will continue to proliferate.”
Limited-service hotels provide only basic amenities and usually do not have restaurants or fitness centers. This type of property has significant appeal to travelers since it offers the winning combination of good prices and all the essential services. The best thing about the limited-service hotels is their cost-efficient build and easy maintenance. That is why there are a lot of business ventures in this sector today. The limited-service properties have a growing amount of competition and can also help develop a wider range of business connections. Some of the most successful limited-service hotels are Hampton Inn, Days Inn, and La Quinta.
Office Space Will Struggle to Find Pockets
Office development is facing new challenges this year. In general, there is a predicted gradual reduction of demand for office space:
“There is this constant trend to get more productivity and efficiency out of office space. It will lead to a slower tightening of the office market,” notes one leasing broker.
Cutting edge technologies have made it possible to optimize the working process and minimize the amount of working force needed. It results that today more companies tend to allow their employees to work at home. Most of them want to stay short so that they can adjust and use contractors, part-time or temporary employees. The number one reason for this is cost of health care: by reducing company workforce, employers could pay less tax.
However, in spite of all these changes, the office market is expected to be stable, particularly, in suburban areas. The class B offices are believed to become the most profitable type of investment.
Thus, Boston is the top city for office investment and development, followed by Houston, San Diego, Denver, Seattle and Phoenix. The tech and energy industries in these areas stimulate the demand for new office buildings.
There are also a lot secondary markets that are attractive for investors. Greenville, Charleston, Charlotte, Raleigh, Birmingham, and Nashville are among them. Raleigh, for instance, is expecting the creation of 12,000 jobs this year, which will, in turn, create demand for additional office space.
The Luxury Market Is Expected to Grow Up in Certain Areas
The custom/luxury market has seen some positive changes.The estimates show that the overall demand for architects in designing luxury homes jumped from a score of -2 in 2012 to 16 in the first quarter of 2013.
This trend is particularly popular for such cities, as New York, Los Angeles, Miami, etc., where the influx of tourists and high life standards stimulate the rise of the luxury residential sector.
Retail Is Facing Online Challenges
While in the suburbs, the opportunities for retail development are running out, the urban area remains lucrative for the investors. Overall, retail is showing itself to be resourceful this year. The biggest prospects are predicted for the neighborhood shopping centers.
The only challenge the retail industry is facing today is a robust development of e-commerce and same-day delivery services. We are now witnessing how the line between retail and warehousing is being gradually erased. Many experts predict the emergence of a new type of property – the combination of warehouse and retail.
Seniors Housing and Health Care
Nowadays, the health-care housing market is emerging as an increasingly attractive investment opportunity, especially when it concerns the seniors-housing sector. The amount of senior population – persons 65 years aged and older – has doubled. Moreover, most baby boomers will be retired soon. That is why, seniors housing is expected to become a specialized market, not just a niche as it is now. The emergence of new influential owners and managers in today’s health-care real estate market reduces uncertainty and attracts more investors in this sector.
“We are certainly seeing favorable development of more needs-driven models of seniors housing, As assisted living starts are rolling and trending higher, this could lead to a consistent, higher level of construction for future quarters.”
Thus, due to e-commerce and manufacturing growth, the US industrial real estate will be the main investors’ asset in 2014. Another trend predicted for 2014 is the merging of retail and warehousing sectors to the one.
Hotels will hold a strong second position with the limited-service hotels expected to be the most promising investment sector. Caused by increasing amount of elderly population, the upward in health-care housing development becomes another reason for investors’ optimism.
Multifamily and luxury housing development will lose its positions comparing to 2013. However, multifamily sector will show at least moderate improvement and remain especially stable in Florida.