Published 4 November 2005
Respondents to the US Emerging trends in real estate 2006 survey expect property markets in the next cycle (beyond 2010) to be more global & more public.
Emerging trends, released this week at the Urban Land Institute’s conference in Los Angeles, is produced by the institute & PricewaterhouseCoopers.
Growth over the next year is likely to be more moderate compared to the robust levels of recent months, with much depending on what happens with a variety of factors such as consumer spending, energy prices, housing demand, job growth, corporate productivity gains & inflation
Despite improving market fundamentals & continuing capital infatuation with real estate, respondents signalled caution over a looming transition to a period of more measured, possibly lacklustre, performance â€“ but nothing dire
The consensus forecast suggests real estate will hold a value edge over stocks & bonds, at least in the near future.
Among the current investment patterns noted by respondents:
a steady supply of buyers paying premium prices without seeming regard to the possibility of a market slowdown
a tendency by owners of well leased, income-generating core portfolios to hang on to their properties
a decline in the availability of “value-add bargains,” (fixer-uppers), and
increasing interest in investment in Asia.
Among the current development patterns:
a steady demand for urban infill projects due to continuous downtown migration by empty nesters & young professionals, and
growing interest in age-restricted & unique resort development, catering to affluent active baby boomers.
Investment tips include:
hold full-service hotels
sell or hold apartments
sell commodity office, and
Looking to 2010 & beyond respondents said US real estate markets would sustain interest from myriad capital sources and predicted that concerns over sprawl, traffic congestion & the likelihood of higher energy prices would accentuate the desirability of both suburban town centres & more convenient urban living environments.
In its “markets to watch” category, San Diego took the top ranking from Washington, with greater Los Angles 3rd: “Southern California parlays extraordinary climate, geographic barriers, deepwater Pacific ports & an extremely diversified economy. Dynamic demand & constricted supply translate into the nation’s best place to invest.”
Other Emerging Trends highlights:
Strength: With occupancy rates approaching 70%, hotels are making a “roaring comeback.” This is by far the market sector with the most potential
Weakness: Higher airline fares & gas prices could curtail some business & tourist travel, or at least decelerate growth trends
Best bet: Resorts & destination cities show the most punch. While New York & Los Angeles appear constrained, Boston & San Francisco should improve, while warm-weather cities in Florida & Hawaii should excel
Outlook: Hotels have legs as long as the economy expands. All forecasts need to concentrate on the direction of fuel prices.
Strength: Retail property performance “cannot get any better,” due to steady jolts from continued consumer spending. Fortress malls and infill neighborhood centres in upscale suburban markets look unassailable
Weakness: Rising energy costs, higher property taxes, higher consumer credit interest rates and increasing medical expenses could start to slow consumer spending
Best bet: Given capital demand, owners have an excellent opportunity to winnow portfolios, holding their best infill properties
Outlook: Temperamental energy prices hold the key. Sustained high (oil, gas & electricity) costs could finally break consumer backs. If oil markets relax and the economy produces more high-paying jobs, shoppers get another life.
Strength: “Rents don’t move much,” but exceptional institutional appetites for this classic core sector ensure ready exit strategies & excellent liquidity
Weakness: In some major industrial hubs, developers step up construction of higher-quality, more flexible, big box distribution facilities. They can offer lower rents, undercutting existing product. Just-in-time manufacturing continues to cut demand
Best bet: Own big box warehouse in the small number of airport & seaport markets serving global transport routes
Outlook: The industrial warehouse sector should “plug along as usual”â€¦expect steady improvement across most markets.
Strength: Stratospheric home prices, higher home building costs, rising mortgage rates & rising numbers of echo-boomer renters will boost occupancy &d rents throughout 2006 and into 2007
Weakness: The condo craze could come back to haunt some high-end apartment markets in which speculative buying has driven demand
Best bet: Dispose of weaker holdings and sell into the continuing buyer wave as long as it lasts. Look for units that can be rehabilitated inexpensively into “B-plus” apartments
Outlook: For 2006, multifamily will be the bellwether for other sectors. If development imbalances can be controlled, increasing numbers of renters should bolster occupancies and increase cashflows, creating a landlord’s market.
Strength: Recovery gains momentumâ€¦vacancies will continue to decline nationally. Development activity bears watching – new construction has been restrained
Weakness: Although the sector looks better, it is “no house of fire.” Given job losses, downsizing & outsourcing, investors “need to accept stabilised vacancy at (a rate of) about 10%”
Best bet: Well located prime assets should make decent holds. Coveted properties feature more flexible floorplates to accommodate changing tenant & technology requirements
Outlook: Office looks risky compared to other traditional core investment categories – except trophy buildings in high barrier-to-entry 24-hour high-growth markets. “Then, buyers should just back up the Brinks truck at closing.”
Strength: As long as interest rates stay low and lenders pursue “forgiving” credit standards, buyer demand can be sustained. Any corrections should be confined to local areas
Weakness: Middling wage hikes promise to “put a lid” on prices
Best bet: Demand by baby boomers for second homes in resort & retiree areas will gain momentum, without regard to the interest-rate picture
Outlook: Mortgage rate movements may not shock most markets, but a “levelling off” in appreciation is inevitable. Over time, home ownership will endure as a solid investment for users, but late investors will fare poorly.
Websites: Urban Land Institute