The commercial real estate market is forging ahead, with fresh opportunities for investors, owners and tenants. That’s in sharp contrast to the state of the industry in the years after the financial crash. Even as the economy recovered, commercial real estate lagged in many markets.
Much of that has changed recently. Owners are making improvements, tenants are seeking nicer spaces at the same or similar cost and probably most telling – investors have returned to the commercial real estate market.
Transaction volume in 2013 is expected to rise to $310 billion from $290 billion in 2012, then rise to $340 billion in 2014 and $360 billion in 2015, according to the Urban Land Institute and Ernst & Young (ULI/EY) Real Estate Consensus Forecast, which was released April 10, 2013.
The top three markets in for investment sales volume for 2012 were New York City, at $30 billion, and Los Angeles and Chicago, at $19 billion each. Secondary markets with substantial volume growth include Austin, Texas (+94 percent), Orange County, Calif. (+82 percent), and San Jose, Calif. (+69 percent), according to the CCIM Quarterly Market Trends report.
However, not all markets are recovering at the same pace and many have not yet stabilized. That means buyers are still able to acquire properties below 2006-07 levels and certainly for less than the cost to replace them. Further, cost of debt is at historic lows, which is beneficial for buyers and creates more cash flow to be passed along to investors.
This has translated into opportunity for commercial real estate investors—and not just the institutional buyers with large pools of money to invest. Retail investors are accessing institutional quality real estate with much lower investment amounts by buying shares of real estate investment trusts (REITs). Both traded and non-traded REITs give investors the opportunity to purchase shares in multi-million dollar, professionally managed real estate portfolios.
High-quality commercial real estate can provide a steady income stream and has historically been a hedge against inflation. For example, multifamily properties can increase lease rates annually or even more frequently to outpace inflation. Investors in these types of properties may benefit from these increasing lease rates.
For many investors, Class A office space, apartment communities and other in-demand properties offer an attractive long-term investment. Commercial office space vacancy rates are expected to drop to 14.8 percent in 2013, 14.1 in 2014, and 13.6 percent in 2015. Office rental rate rates are expected to rise by 4.0 percent for both 2014 and 2015, according to the ULI/EY report.
Demand and lease rates for high-quality properties are expected to remain robust. There’s been little development over the past five years and properties now under construction won’t be ready for occupancy for many months or years. The current positive absorption rate is expected to continue. Many tenants in office properties have multi-year leases with annual increases of 2-3 percent, providing dependable rental rate increases and potentially supporting regular distributions to investors. Capital appreciation is also on the upswing.
Owners and investors in recovering markets are not the only ones benefitting. Lease rates have yet to return to pre-crash heights and many businesses have been able to move to nicer office space without increasing their costs. Some have traded up to Class A from Class B properties, while others are enjoying improved work environments with more amenities in better-maintained buildings.