At the beginning of each year the real estate economists and analysts at Property & Portfolio Research (PPR), a CoStar company and the leading provider of CRE market forecasting and strategy consulting for the institutional investor community, gather to sift through reams of data and economic analysis and distill predictions on the CRE market for the coming year.
Not to brag, but the economists at PPR made some key calls ahead of 2012. Among their spot-on predictions: that the U.S. employment growth would be just over 1.5 million jobs, projecting that effective rent growth in the apartment sector would top 5%, and that vacancies would begin to rise in the D.C. office market, among others.
Here are a selection of 'solid lead pipe locks' -- predictions on the CRE market for the year ahead that our PPR economists believe you can take to the bank:
Lending Will Shift to Secondary/Tertiary Markets
With yields compressing in almost all investment classes, the odds appear stacked in favor of more CRE lending dollars moving to second and third tier markets during 2013. CMBS non-agency lending has already begun to fan out, totaling over $20 billion outside of the top 6 U.S. markets during 2012.
During 2013, CMBS lending is expected to steadily increase. This should contribute to a more even distribution of capital across markets, as CMBS lenders are more risk tolerant and 'friendlier' towards smaller markets. But other lenders are following their lead. Even life insurers (typically the most conservative CRE lenders) have begun increasing the proportion of their loans going outside the top 6 U.S. markets, a sign of what is to come as equity investors look beyond New York and Washington D.C. in search of higher cap rates.
Cheaper Home Prices Will Take A Bite Out of Apartment Demand
Distress in the U.S. housing market has played a major role in underpinning the muscular recovery of apartment markets. But while apartment rents have moved sharply up, interest rates are still at rock bottom, with prices and construction starts back on the rise in the housing sector, homeownership is beginning to look like an attractive option once again, for those who can secure a mortgage.
This will be less of an issue in markets such as New York or San Diego, where homeownership is still prohibitively expensive. However, apartment investors could see an impact in markets such as Austin, Minneapolis, or Phoenix. All of these metros have lower unemployment rates (i.e., plenty of mortgage-worthy individuals with steady employment) and extremely cheap home prices relative to incomes, two factors that may steer residents increasingly towards homeownership and away from renting.
More Than Half of U.S. Office Submarkets Will Host Rent Growth
Office rent growth was similar to GDP growth in 2012 -- positive, but not too exciting. In fact, substantially positive office rent growth (i.e., over 3% per year) was a rare find in 2012, limited to a select group of seven major cities, including Houston and San Francisco.
But as vacancies continue to compress, the U.S. office market has been slowly and steadily working its way towards more widespread rent growth in 2013. Not only are more than half of U.S. submarkets expected to host rent growth in 2013, PPR expects that the share of office submarkets achieving solid rent growth of 3%-10% will triple in 2013, extending to nearly half of the national RBA. This pendulum shift should make office an increasingly attractive investment option to many investors over the coming year.
Across the Atlantic, London Office Rents Will Run Out of Steam
While office rent growth is expected to become more widespread in the U.S., the same can’t be said for some major office markets across the pond. Absorption is already decelerating across the Central London submarkets as large financial tenants are sitting on their hands. With the UK’s economic malaise and eurozone uncertainty expected to continue, rent growth is expected to stall out in London.
After improving for several quarters, the spread between asking vs. achieved rents also began widening in late 2012. This has typically been a leading indicator that rent growth is about to lose momentum.
To learn more about Property and Portfolio Research, please contact Brian Hare at Brian.Hare@pprglobal.com .