U.S. Commercial Real Estate Recovery to Continue in 2013, Says New ULI-PwC Emerging Trends Report

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The U.S. commercial real estate marketplace will continue to recover in 2013 with modest gains in leasing, rents and pricing, according to PwC US and Urban Land Institute's Emerging Trends in Real Estate Forecast for 2013, presented on October 17th in a webcast delivered from the ULI's annual conference held in Denver. The opinions expressed in the report were derived from over 900 interviews and surveys of commercial real estate leaders. 

According to survey participants, although the real estate recovery is slower than normal, the prospects for all property sectors are better than in 2012. "Recent job creation should be enough to increase absorption and push down vacancy rates in the office, industrial and retail sectors, helped by the limited new supply in commercial markets," according to the report.  Strong demand for apartments is expected to continue in 2013, even as new projects come online. And even the single family home sector is doing better in most regions. The only problems in the housing arena are in the leisure and second home markets.

"With the outlook for commercial real estate continuing to improve in 2013, investors are expected to allocate substantial sums of capital to the real estate asset class, according to our survey respondents," says Mitchel Roschelle, partner, U.S. real estate advisory practice leader at PwC. "As yields on bonds and other financial instruments tighten in a still volatile market, commercial real estate's income producing and total return attributes offer investors potentially attractive risk-adjusted returns," he said.

Even as riskier secondary markets become more attractive to real estate investors, "many believe the move cannot be made without concentration on leasing to high-quality tenants within growth industries that are sustainable," according to the report. But as property prices rise and even exceed pre-recession levels in San Francisco, New York City, Boston, Washington, D.C., Los Angeles and Chicago, the focus is on the lessee's value, market demographics and job growth, among other factors.

According to survey respondents, investors should use caution in investing in secondary markets and  focus on income-generating properties at the same time partnering with a local operator who understands the market. "Markets grounded in energy and high-tech industries show the most near-term promise, while places anchored by major education and medical institutions should perform better over time," says the report.

The top 10 markets to invest in are San Francisco, New York City, San Jose, Boston, Houston, Seattle, Austin, Denver, Orange County, California and Dallas Ft. Worth. A snapshot of the top five markets in the report lists each one's special attributes, summarized below:

• San Francisco is driven by growth and a strong jobs outlook led by technology. The downtown is stealing the spotlight from suburbia. Continued infill development is supported by one of the best transit systems in the country and its high level of walkabilty is second only to New York City.

• New York City has the second best investment prospects, although there is concern about a run-up in commercial real estate prices. Twenty percent of jobs are in the growing healthcare and education sectors and the market has an important "echo boomer" population.

• San Jose is dominated by high technology jobs. Although there is a lack of job diversity, the 6,600 technology companies employ 225,000 people.

• Austin looks likely to expand its commercial real estate market, given its forecast of a 2.3% increase in population in 2013, which is driven by Echo Boomers.

• Houston is dominated by energy-related employment. Survey participants believe the main buying opportunities are in the industrial sector.