2015 Commercial Real Estate Outlook
Interview with Bob O’Brien
What are opportunities and challenges for the real estate industry in 2015? Read this interview with Bob O’Brien, Deloitte’s Global and US Real Estate Industry Leader for insights on industry growth, potential challenges and pitfalls, and the next big thing.
Where do you see the opportunities for growth in your sector?
As we move into 2015, strong market fundamentals and the availability of a diverse array of funding sources will likely fuel industry growth. Rents and vacancies are expected to continue to improve across property types and
From an investment perspective, REITs are likely to continue to offer positive returns against benchmark indices and investors will benefit from additional diversification opportunities from the growing number of REIT conversions in nontraditional property sectors. The private equity real estate funds appear to be having more success raising new capital and have increased opportunity to exit legacy investments due to higher property prices and an active transaction market.
Further, there is an increase in awareness and implementation of sustainability initiatives aimed at energy, water, and waste efficiency as indicated by a growth in green building certifications. The combined demands of occupiers, investors, and regulators are such that tangible benefits can be derived from embedding sustainability into the full investment process. Going forward, adoption, measurement, and reporting of sustainability initiatives will be a business imperative, given the broader benefits
Lastly, companies will likely increase their investments in new technologies such as cloud, analytics, mobile, and social media. As technology adoption advances, CRE owners can consider using a combination of cloud, social media, big data analytics, and mobility to drive more informed decision-making and improved operating efficiency.
What should businesses be mindful of as they plan for growth?
Construction loan availability from banks might fall short of actual demand, even as lenders continue to ease standards for construction loans. However, alternative sources of development capital have emerged from private equity firms, international investors and other capital providers to fill the gap left by banks. Crowd-funding has also gained traction in supplying capital to smaller real estate development opportunities. That said, companies that raise capital through nontraditional channels may need to exercise caution as these sources come with their own quirks. For instance, green bonds require issuers to increase disclosure and transparency about sustainability goals and targeted use of funds to meet the stated objectives.
Further, companies looking to access cross-border capital should understand the investment pattern and objectives of foreign investors to build long-term and mutually beneficial partnerships. Many of these investors lack knowledge of US CRE markets, entitlement processes, and relevant regulations and tax laws, and seek out domestic partners to access local marketplace and regulatory knowledge. Similarly, with respect to outbound investing, US CRE players can leverage long-term partnerships with foreign investors to better navigate international markets.
Lastly, as CRE companies adopt more advanced technology, they will need to develop a customized plan for overall technology adoption as well as invest in appropriate security and privacy practices as a “one-size-fits-all” approach is unlikely to work.
What is the next big thing?
We believe that tenants’ sustainability focus and technology use will have a greater influence on space demand and supply, not only in 2015 but longer term. Consequently, we expect to see increased redevelopment of existing properties to better position those properties to compete with new development. CRE players should increasingly collaborate with potential and existing tenants at the design stage to understand their technology needs and sustainability objective to incorporate them as an integral part of
As companies aim to improve sustainability measurement and reporting, they should focus on quality over quantity (i.e., disclosing the right metrics rather than a large volume of metrics, of which many may be redundant). We expect positive engagement with integrated reporting principles to be the next vanguard for sustainable business practices
Real estate owners will increasingly invest in building automation, and the U.S. building automation systems market is expected to grow by 7 – 9 percent annually during
However, this increased technology adoption also exposes companies to new and complex risks. As CRE systems become more interconnected with systems of tenants and vendors, enhanced
 “U.S. Building Automation Market Primed for Growth,” Electrical Construction and Maintenance, January 17, 2014
What markets do you see emerging in the sector?
The demand-supply dynamics are changing across property types and CRE owners need to assess the usability of existing space and new supply. Let us look at the trends for some property types. For industrial property owners, as
From a property markets standpoint, secondary and tertiary markets will show increased activity as numerous investors are moving up the risk curve in search of higher yields, given cap rate compression in primary markets. Hence, players will potentially benefit from capitalizing on the improved liquidity in the secondary and tertiary markets as competition will likely continue to intensify in prime markets.
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 David Shulman, “Technology