First a note about the economy. The U.S. economy finally regained all the jobs lost since the recession began. Total employment surpassed the peak set in January 2008 and unemployment is down to 6.3%, it’s best mark in nearly 6 years. According to the Commerce Department, sales of new single family homes leaped 18.6% in May and NAR said the 4.9% increase in home re-sales was the biggest monthly gain in 3 years. Home starts and building permits were strong in April though indications are they will taper to a more healthy level. The Federal Reserve revealed US manufacturing rose for three of the last four months and once winter weather subsided retail sales showed consistent gains. GDP is on trend for a good year but not good enough for us to worry about the Federal Reserve hiking interest rates. The economy shows enough strength to continue QE tapering and most economists agree interest rates won’t increase substantially until late 2015.
Despite the jobs recovery, office building vacancy rates are well above where they were when the recession began. With the exception of only a few major metropolitan areas, the recovery of US office markets has been sluggish. Corporate America is focused on efficiency which creates a lower employee per square foot ratio. Interestingly, REIS, Inc. predicts absorption to outpace building deliveries for the next 4 years. This means current office users will renew or relocate into smaller more efficient offices. The Millennial Generation is starting to have an impact on real estate as the baby boomer generation phases out of the work force. Younger people prefer working remotely and when they do visit the office they enjoy open collaborative floor plans, as opposed to the less efficient private office designs. Another impact Millennials will have over the coming years results from their desire to work in an office environment with amenities and character. The traditional suburban office complexes that are not bike friendly, lack design character, are not green or do not have coffee or smoothie shops nearby will feel the impact as newer buildings are delivered in mixed use or urban settings.
Warehouse and distribution real estate continues to expand as e-commerce, the manufacturing sector and third party logistics companies redefine the industrial landscape. I don’t see any relief in the e-commerce sector, which obviously takes a negative toll on retail real estate. 2013 U.S. exports were up 15 percent from the 2008 previous peak and thus distribution centers in transportation corridors and around ports are adding the most new inventory. Rent growth is occurring as demand focuses on a limited supply of Class A warehouses which offer efficiency and modern amenities. The lack of new construction over the past few years and increased construction cost is also giving a boost to rental rates, which is forecasted to increase 5% in 2014. New construction is expected to increase over 60 percent from 2013 while much of the new supply is pre-leased or build to suit opportunities.
The capital markets and investment outlook shows strong demand from well-capitalized investors. Property values should continue to rise even if gradual increases in interest rates occur. Even a sluggish economy will have a positive impact on real estate fundamentals and liquidity. Overall investment activity is only 85 percent of the 2007 peak and the spread over the 10-year Treasury is higher than the long term average. Suburban office property values are 25 percent below peak while Central Business District assets are 4 percent above the peak. Expect to see more record sales on a per square foot basis as national and international buyers seek to buy marquis buildings in top tier cities.
That’s enough for now. Please let me know if you or a friend have any questions about commercial real estate or if you want to discuss an opportunity that may be a year or two out. I promise you won’t regret allowing more time than you think is necessary to prepare.
For more information, please visit Thornton Oliver Keller at http://www.tokcommercial.com.