By Elise Couston, SIOR, Senior Managing Director at Newmark Grubb Knight Frank
For this month’s Industrial Insider, I thought it would be interesting to outline some of the Top Trends for 2015 that have been predicted for commercial real estate (CRE). Summarized below are several of the trends shaping this and the next few years.
Increased Allocations and Capital Flows into Real Estate
The continued increase of foreign investors in both primary and secondary markets in the United States allows for the market to regain its prominence as the preferred location for real estate investment. As the economy is strengthening more attractive opportunities are opening up for commercial real estate investors.
The global economy currently reflects more moderate growth, and there are lingering concerns about some geopolitical volatility. These experts are predicting that there is a high probability that economic growth will accelerate within the next year or two. Newsweek recently reported that “the US recovery is on track with growth of 2.5% in 2014 and 3.1% in 2015 likely. Growth for the same quarter in the Eurozone is slower at 0.3%. However, falling oil prices, an end to fiscal contraction and QE seem likely to boost growth in 2015 and 2016.”
Increased Financing Availability and Funding Options
There has been a strong recovery for lenders who are more actively competing for the issuance of commercial mortgages in almost all markets – primary, secondary and tertiary. Banks are continuing to ease lending standards for CRE loans. In addition, construction financing is beginning to be available for new developments, which signals more confidence that the CRE markets are strengthening.
Improved loan performance and lower delinquency rates overall has considerably strengthened CRE financing when compared to a year ago. Anticipated rent growth and more demand from users than available supply have also prompted lenders to reverse the lack of available financing that has been experienced in the last several years.
Low Supply of Available Properties Continues
Recent market rents have not justified new construction because of constraints in the financing markets. Consequently, there is now a high level of potential upside for occupancies and rental rates in most property types.
CRE will continue to benefit from the availability of less restrictive financing, and strong investment from both international and domestic sources. Competition is anticipated to strengthen for top quality assets, and cap rates for the Class A properties continue to compress.
The increasing risk that interest rates will slightly increase in 2015 could potentially impact cap rates and the cost of financing, which may negatively impact some real estate pricing and the velocity of transactions. New construction projects are introducing additional product into the major U.S. markets as transaction activity continues to accelerate. Many developers are looking at acquiring vacant land for new development, which is a trend that is has been dormant for many years. In-fill sites are in short supply, and most developers are looking at land parcels that are 100 acres or less.
Several developers indicated to me that they are not interested in carrying vacant land for the long-term, and they are only acquiring property that can be put into development within 12 months after closing.
A Steady Improvement for Industrial Real Estate
The demand for industrial space has been growing. The economic recovery and increased consumer confidence, and, therefore, spending, have driven increased absorption in most of the major markets. Positive economic growth strongly supports the commercial real estate industry.
The improvement in GDP and lower unemployment numbers supports higher consumer confidence, which is now at its highest level since the beginning f the recession in 2008.
Disposition of assets remain active this year as developers and owners continuing to evaluate their property portfolios based on changing tenant requirements and somewhat limited development activity. This is an opportunity for companies to review their existing portfolios and identify properties for disposition, especially those that have limited growth potential.
Redevelopment and an infusion of capital into older industrial properties has also increased over the last 12 months. This is attributable to lack of supply for functional industrial buildings, increasing rents, and diminishing vacancies.
As we are aware, the increasing use of technology and online sales is creating significant changes within the supply chain. Omni-channel retailers and the speed of delivery to the consumer are helping to improve their competiveness, and the location of distribution centers is anticipated to play a more important role than ever.
Changes in the new development of industrial properties include higher ceiling heights (36′ clear), larger speed bays and column spacing, an increase in the required use of technology; and more sophisticated automated warehouse management systems.
The experts anticipate improvements in vacancy, rent, and absorption levels throughout 2015 and going into 2016. More developers are collaborating with their existing and potential new users earlier in the transaction process to help create improved operational and energy efficiencies, security for their personnel, and potential cost savings.
Some other trends that a few of the developers have predicted:
• Brian Roach at DCT told me that there will be “more entity level investing as property level investing has become too competitive.”
• Tom George at IDI Gazeley/Brookfield Logistics told me that 36-foot-clear ceiling height in the warehouse is becoming more common in new development projects.
• Nate Rexroth told me that he is noticing that tenants are requesting shorter-term leases.
Based on these trends, overall we see a continued upward swing for CRE and positive growth. Most investors believe that real estate offers some of the best risk-reward opportunities that are available today, especially when compared to equity and bond valuations. The predictions indicate there will be higher allocations of money from both foreign and domestic investors, which could drive values up above the peak in 2007.
