September 1, 2014

The Worst Is Over, But the Best Is Nowhere Near

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The Worst Is Over, But the Best Is Nowhere Near

At a recent legislative and leadership summit for real estate managers, economists and industry leaders pointed out bright spots and investment opportunities, but warned that the economy is far from healed.

The country isn’t likely to fall into a repeat recession, NAR chief economist Lawrence Yun told real estate management professionals meeting in Washington, D.C., last week. But that’s hardly cause for celebration among economists.

On the plus side, the country has added nearly 8 million jobs, replacing all those lost during the downturn, Yun said. Growth in consumer spending and high household net worth also bode well for the economy.

However, Yun was quick to stress, the economy is not thriving by any means. Business spending is growing at the slow, steady rate of 2 percent, he said, rather than a sustained 5 percent to 10 percent rate that would suggest real economic growth. Yun said businesses are “flush with cash.” While corporations typically leverage funding to outspend profit levels, recent data shows business spending and profits to be nearly equal, as executives are leery of overspending. This has resulted in improved balance sheets for most organizations, including banks.

Yun’s comments came during the Institute for Real Estate Management’s 2014 Legislative and Leadership Summit held April 5-9.

Diving into real estate industry data, Yun said commercial real estate is slowly recovering from 2009, when transactions declined by 90 percent. Multifamily has steadily outshined the other sectors, partly because of the inability of many renters to convert to home ownership.

Another factor contributing to the strong performance of multifamily real estate is the lack of supply. “New construction in all sectors has yet to recover in any meaningful way,” Yun said. Housing construction, in particular, would need to rise by more than 50 percent to be restored to previous levels. This persistent underproduction of single-family and multifamily housing will continue to lead to low vacancy rates and rising rents for this sector, Yun said.

After sharing the market outlook, Yun was joined by real estate industry leaders Jeff Day, CEO of Berkeley Point Capital LLC, and Jonathan Miller, partner at Miller Ryan LLC and author of the Urban Land Institute’s Emerging Trends in Real Estate.

When asked where he would invest in the current market, Miller stressed the desirability of “24-hour cities — large cities in global pathways linked by international transportation hubs.” According to Miller, this is where the major part of the economy is growing and where most institutional and foreign capital is concentrated. Other areas are more lackluster, he said, with both market prices and rents for office buildings remaining stagnant for up to two decades in some cases. “It’s a have and have-not situation,” Miller said.

Still, the panel said the big-city model is being successfully replicated in smaller markets, such as Reston, Va., where a town center is home to a vibrant community with condominiums, movie theatres, and other retail spaces, attracting young professionals.

Yun predicted that both the Millennial and boomer generations will contribute to the desirability of condominiums in these 24-hour cities. “I’d invest in 24-hour cities that are developing. Look at areas where traffic is getting worse,” Yun said. “Build condos in 24-hour cities. Apartments are already there, but there is a pent-up demand for condos. A sizable number of renters will want to convert over to ownership. Therefore, property management of condos will be rising.”

The panel also forecast continued economic success in Texas cities and up through the middle of the country in the so-called “energy states.”

Addressing office-sector trends, Day told the audience to look for more amenities being offered on business campuses. The new model is to “glue them to the campus with dry cleaning, food, and so forth,” Day said, allowing workers to interact and complete personal business on-site.

When asked about the demand for green features in commercial real estate, panelists agreed that generally, lenders are interested in making sure they make loans on sustainable income streams. To that end, green features can be desirable, but factor into more of a capitalistic decision than an altruistic one.

Ultimately, the panelists agreed, the outlook for commercial real estate is good, with all sectors in recovery mode. Money is flowing again, they said. This will lead to continued growth in the industry — and demand for professional real estate managers to keep things operating strongly.

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