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Trimming the Sails for Growth
2014 Commercial Real Estate Outlook
Three-quarters of the way into 2013, the CRE industry is marked by continued recovery in asset prices, transactions and capital availability. Asset prices are close to 2007 peaks in the major metropolitan markets and transaction activity has improved in the secondary markets.
Debt markets have improved to a point where refinancing concerns have eased and there is less worry about the maturity schedule. In addition, private equity and international investor interest have increased in U.S. CRE, with the region considered both the most stable as well as offering better overall returns relative to risk globally.
Can this recovery gain momentum as we move into 2014? CRE fundamentals – rents and occupancy – have strengthened since the economic downturn, and are now stabilised across property types. However, as we dig deeper into these fundamentals that drive core revenue growth, we observe that, except for multifamily and hotels, rent growth and occupancy are trending below historical averages across most sub-sectors.
In sectors such as multifamily, which were the first to recover from the recession, fundamentals are beginning to peak and are expected to moderate. Development activity, which provides indications about medium-to-long-term growth prospects for the CRE industry, remains muted for most property types, again other than multifamily and hotels. In addition, lending standards for construction loans remain stringent.
Institutional interest in SF homes has provided the much needed boost to the beleaguered housing market and has led to the emergence of a new asset class in the form of SF real estate investment trusts (REITs). This sector is likely to continue to grow, albeit at a slower pace, and longer-term investor appetite for this new institutional asset class is yet to be determined.
In summary, with economic growth expected to remain protracted, along with uncertainty surrounding the outcomes of impending regulations such as Dodd-Frank and TRIA, we believe that the pace of recovery of the CRE industry is likely to moderate in the near-to-medium term.