Although unsteady and slow, the U.S. commercial real estate industry does appear to be recovering and will continue moving in an upward direction for the next few months, according to most industry experts. Despite that unsteadiness, commercial real estate (CRE) has been quite attractive to many investors (both casual and seasoned) thanks to overall capital availability, asset pricing and transactional volume. Positive underlying fundamentals continue to support all of the major commercial real estate sectors, but, unfortunately, a slowdown in job creation and ongoing tightened loan requirements have tempered growth in some areas. Perhaps the largest hindrances to the CRE recovery appear to be the general slowdown in national economic conditions, which can be directly attributable to especially weak employment trends, sovereign debt problems and economic stagnation in Europe, as well as slowing growth in emerging markets, such as China and India. Since demand for office and retail spaces is directly correlated to employment data; lack of new jobs translates into less absorption of space, accompanied by softer rent growth and lingering vacancies.
The commercial real estate sectors, as a whole, are showing mixed results. Real estate investment trusts (REITs) have continued to outperform just about everyone’s projections, as well as many of their competitors, such as locally owned and operated CRE firms, and this is primarily due to their higher liquidity and relatively easy access to capital markets. Vacancy is shrinking marginally, and rents are rising modestly in all sectors, but significant changes in the outlook are unlikely before the end of the year. Demand for office space is stalling because of slowing job creation mentioned earlier. Lower demand is also moderating growth of rent prices, with the notable exception of the multifamily market. Demand for apartments is causing rents to rise at faster rates. On a more positive note, industrial space demand appears to definitely be on the upswing. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and especially with Canada. Luckily for the U.S., international trade has been a bright spot and the pace of imports has continued to increase.
For anyone looking for the next big opportunity – I believe LAND is what is going to be the big story in 2013. No one has been willing to buy it because of the three to five-year hold everyone was projecting. That time frame will shorten very quickly. Those people who have purchased the larger parcels from stalled developments will reap the greatest rewards. Cash is king and the deals are there!