New Year: Timeless Opportunities for the Commercial Real Estate Sector
December 30th, 2013 by Alisa Sava
2014 is expected to be a fruitful year for the real estate market. Despite the expected Federal tapering of the bond-buying program and mortgage rates rise, investors will see a lot of new business opportunities in the coming year. The sales volume growth and improving of lending conditions assure future economic uplift and business confidence.
“Commercial real estate in now being utilized more efficiently, leading us to the view that the upswing in occupier demand is likely to be less pronounced that in previous cycles. Even so, the majority of major leasing markets should be on more solid footing in 2014,” Jones Lang LaSalle report confirms.
It is also believed that the all-embracing construction and investment revival will make it possible to return back to the pre-bubble growth levels. One of the expected trends in upcoming year is an expansion to secondary markets – the “safe-haven” cities with strong and stable real estate fundamentals. The demographic shifts and industrial sector opportunities will guarantee the future housing market development and higher level of investors’ risk tolerance in the following year.
Global Real Estate Markets’ Outlook
In spite of the real estate investment market’s globalization, most investors will continue focusing on domestic regions and countries. But, for those who are eager to invest internationally the preferable cities will be: London, Sydney, Tokyo, Munich and Toronto.
The Global Investor Sentiment Survey 2014 predicts the following real estate trends for the coming year:
- 70% of respondents worldwide are going to expand their property portfolios
- Globally, it is shown a great demand for property due to high level of risk tolerance
- Competition in stable markets will impact the investor strategies
- US investors plan to expand their business internationally
- Canadian investments in the US real estate will continue to growth
- Office property will remain the top sector to pick up
- The cost of debt is expected to be increased globally with some difference depending on the region, for example, the Pacific region will face more favorable conditions than EMEA countries
In 2014 the main global players will be focusing on the neighboring markets: Canadian investors will be looking at the US, UK investors’ main target will be European market while Asian and Pacific regions will continue to demonstrate a strong linkage between each other.
Investors from UK, Asia and Pacific are more eager to risk for higher return, on the contrary, the EMEA investors (except UK) will be more cautious because of the Eurozone crisis and political instability in the Middle East.
The percentage of investors that are likely to take more risk is distributed among the countries in the following order:
- 33% – the countries of EMEA (Europe, the Middle East and Africa)
- 40% – Central and Latin America
- 44% – Canada
- 50% – United States
- 64% – Australia and New Zealand
- 65% – Asia
- 74% – UK
If we talk about retail demand in the coming year, the top performers in this niche are likely to be Tokyo, Jakarta, San Francisco and Dubai. The luxury retail sector in these countries is the most perspective one.
Below, we present the list of the most attractive regions/cities for investors outside US domestic borders:
Sydney’s Housing Boom Is Expected in 2014
“The only market where you can really buy a genuine core product in Asia is probably Australia,” notes one real estate manager at Western institutional fund.
The steady upward trend and the construction vacancy explain the forthcoming Australian popularity among global core investors.
Despite relatively weak office and retail markets and instability in the financial and mining sectors, Sydney will attract both local and foreign investors in the upcoming year. There will be a big demand for office and residential sectors.
Japan Is Becoming One of the Favorite Markets
After a five-year absence from the top rankings, Japan is becoming one of the favorite markets for investment and development. Since the companies expand, earning increase and tenants become more eager to pay high rents, a recovery in Japan’s property market is expected to keep its track in 2014.
Moreover, Japan’s increasing popularity is motivated by the government’s economy stimulation plan, resulted in rising home prices and increasing purchasing power. Due to the preparations for the 2020 Summer Olympic Games, Tokyo is going to be particularly attractive for investors as the best bet for the hotel business.
Jakarta Is a Third-Ranked City for Investment
Regardless some economic difficulties and the lack of market transparency, Jakarta is seen as an attractive place for investments and development prospects in the coming year. The city has a strong demand from companies seeking office space, especially the under-supplied central business district.
Dubai Real Estate Boost Due to the EXPO 2020
According to Fitch Ratings, Dubai real estate market will continue to improve in 2014 from the renewed interest from investors. Dubai will benefit from the flourishing tourism and hotel business. Furthermore, Dubai’s real estate market will see growth thanks to the EXPO 2020 preparations. The growing population and job rates mean that the housing demand will continue to rise.
Canada Continues to Attract Domestic and International Investors
Today Canada’s economy demonstrates a solid growth, and this trend is expected to continue in 2014. With a perspective infrastructure and urbanization trend, there will be a growing demand for retail, office and residential space as well as redevelopment projects. Thus, condominiums and residential apartments will be the main demand sectors in the country.
“The forecasts show that Canadian real estate players are able to both invest and attract investors. With the US economy on the upswing, we are likely to see even more activity between the two countries.”
According to “Emerging Trends in Real Estate in 2014 for Canada,” Toronto, Edmonton, Saskatoon and Vancouver are the top Canadian cities to invest in.
U.S. Investment Opportunities
Growing industry sector, favorable demographics, increasing home prices and high customers’ demand – all these trends will continue to accompany the U.S. real estate market in 2014. According to analysts’ predictions, in 2014 American real estate recovery will gain its momentum.
As it was already mentioned, expansion to the secondary markets will be one of the main tendencies of the US real estate market. Thus, an increasing number of investors who have traditionally focused on large markets such as Chicago, Los Angeles, New York City, San Francisco, etc., are going to explore other cities in search for higher returns. If there were 6 top markets in 2013, next year the focus will be on 25 top markets. These new markets have a great potential as well as a higher housing demand.
In spite of first signs of forthcoming economic crisis, the majority of analysts predict that the housing market will continue to develop and stabilize. As for the market sectors’ demand in 2014, the rank will be as follows:
So, it is obvious that industrial construction will be aappearsappearpriority for many investors. However, along with the industrial construction growth, multifamily market will remain popular among the investors due to the high demand from Generation Y and baby boomers seeking to rent.
Among the market predictions that will embrace the US in 2014 is the increasing need of new office buildings, particularly in the regions with developing large tech companies and e-commerce.
Secondary U.S. Markets Will Lead the Recovery in 2014
Next year the growing number of investors is going to look for new investment places. Thus, Urban Land Institution has endeavored to make a list of markets by their rank in the annual report “Emerging Trends in Real Estate 2014,” based on the analysis of the surveys submitted by 1.000 individuals – real estate professionals.
So, it appears that in 2014 the top six markets will remain the same as in 2013:
- San Francisco
- Los Angeles
- San Jose
- New York
Then, it goes Seattle which is also seen as one of the most perspective investment markets next year, followed by Austin, Miami, Boston, Orange County, Denver, Nashville, San Antonio, San Diego, Charlotte, Oklahoma, Salt Lake City, etc.
The Suburbs Tend to Be Urban
Despite the fact that the overall interest in suburban market will be low, there is expected the active development of urban-minded projects in the suburban areas with the highest access to amenities and public transport.
Job Growth Will Stimulate the Recovery
The job growth rates as well as the increasing demographic influx will encourage further housing development. Many cities in Texas and the Bay Area have seen strong housing recoveries in 2013 due to the strengthening economy and intensive job rates increase.
“Places with low unemployment can expect better recoveries next year,” notes ULI senior resident fellow for finance Stephen Blank.
The “Smile Investing” Philosophy Will Lead the US Real Estate Market
The “smile investing” philosophy means that the next year investors and developers are going to track a “smile” across the country. They will start their activity from the US Northeast, move to the South (Arizona, Florida, and Texas) and then – back to the Northwest, Northern California and Washington State.
Rising Prices Reduces Housing Affordability
Last year has brought the positive changes in real estate market. If the forecasts are right, the real estate sector is finally ready to lift the rest of the economy in 2014.
After the growing prices’ climb in 2013, now they are looking close to its normal levels. The prices won’t be growing as fast as they did last year, however, they will continue to rise.
As a consequence, growing prices and mortgages mean that housing affordability will be lower in 2014. That is bad news for people who are looking to buy property next year. Despite the less housing affordability, the overall buying process will be less risky.
The real market revitalization is a logical stage of previous economic decline. It fact, the markets with the biggest downturns, such as Sacramento, Detroit, Atlanta, today experience the biggest rebounds.
Trulia’s chief economist, Jed Kolko, has defined 10 main housing markets to watch in coming year:
- Oklahoma City
- Salt Lake City
- Fort Worth
All the above-mentioned cities have demonstrated positive economic indicators, such as construction boom and increasing job growth and coincide with the “Emerging Trends in Real Estate 2014” list.
In addition, the U.S. Federal Government is expected to change their course, which will possibly result in the mortgage rates rise. Regardless the Government policy, the rates will climb up because the economy is persistently strengthening. Moreover, the loan conditions are expected to become stricter: more serious proof of borrows’ ability will be required next year. The Federal Finance Agency is going to reduce the maximum loan limits.
Housing Trends to Expect in the Californian Market for 2014
According to the Californians Association of Realtors, the Californian housing market will continue to improve in 2014. Among the main real estate trends embracing California next year will be the following:
- Mortgage rates will increase up to 5%.
- Stricter conditions on home loans: since January it will be required to prove your borrowers’ ability to repay the loan
- Home prices will go up: the predictions are between 8% to 15% of increase
“2013 has begun the upward progression of the real estate market in California. In the next 3 to 4 years prices and sales will continue to rise bringing us back up to a peak,” Bill Plattos, Executive Vice President of First Team real Estate notes.
- Because of the strengthening economy and home value rise there will be fewer distressed homes that interest investors. 2014 will be a time to buy and sell for home owners looking for a better neighborhood
- The seller’s market will continue to develop in California, but it will be much cooler:
“The market will get closer to normal…It will continue to cool and inventory will come up to moderate level, not too low or too high.”
- People are tired of maintaining the single family homes that will result in growing demand for condo buildings. The condo’s affordability and the fact that most of them are situated in the prime urban areas make them one of the favorite markets in Southern California:
“Since the recession people have been living more frugal lifestyles and they will continue to do so in 2014 which to be reflected in more condo sales.”
The overall real estate market recovery along with the growing investor’s confidence will stimulate higher investment volumes in 2014. The investors are expected to be more creative in finding new opportunities. Next year the success will come only when improving economy with strengthening real estate fundamentals meets an investor’s property operating and management skills.
Australia, Japan, Jakarta, Canada and Dubai will be one of the most perspective international markets to invest in.
The US domestic real estate market is supposed to gain its momentum in 2014. The orientation on the secondary markets, rising interest rates and housing affordability as well as persisting job growth – all these factors will create new promising opportunities for the investors as well as for the first-home buyers.