The experts are predicting good prospects in commercial real estate in 2007 ... and even better news locally. Stan Ross, chairman of the board of the University of Southern California’s Lusk Center for Real Estate cites New York and Los Angeles among the “leading metropolitan markets” where properties will continue to command top dollar.
The Lusk Center also suggests that, in addition to investing in traditional office, retail, industrial and hotel assets, speculators will examine alternative investments, including urban infill, adaptive reuse and multifamily retail developments near inner city transit centers.
Economists note that throughout 2006, sales and leasing were on a growth curve in the office, industrial and multifamily sectors. They foresee these property types continuing to grow through 2007 and into 2008. The retail property market will be softer.
The expanding U.S. economy and an influx of institutional investment capital are keeping the volume of sales transactions high in the commercial sectors.
“Institutional investors have returned in a big way,” say NAR economic analysts.
Ross calls 2007 the “Year of Recycling” for real estate capital. The Lusk institute chairman explains that capital is not leaving property markets, but it is “being recycled into small equity funds, limited partnerships and alternative investments.”
It’s believed that much of what is now evolving with capital investments is an outgrowth of last year’s privatization push — when some of the larger public Real Estate Investment Trusts went private.
Investors still have access to the inexpensive debt of recent years, which leaves room for potentially higher returns from real estate investments than other types of investments offer. With these factors at work, the USC Lusk Center chairman says, real estate “will continue its dominance as an asset class in 2007.”
For all commercial sectors, lending volume is up and delinquencies are down. Construction costs are keeping speculative development to a minimum. Import and export activity continues at high levels, sustaining demand in warehouse and distribution facilities. Strong corporate profits are stimulating businesses to expand office and production space.
“The U.S. economy is proving very resilient, and that favors commercial real estate,” confirms Kenneth Riggs, CEO of Real Estate Research Corp.
The National Association of Realtors has spoken to those in the know and makes the following 2007 commercial property predictions:
Offices:
A minor rise in new office buildings in 2006 kept office vacancy rate relatively flat, but with healthy job growth, continued robust absorption levels, and moderate speculative development, the vacancy rate is expected to drop by the end of 2007.
Industrial:
A shortage of properties suitable for traditional and inland ports is driving the need for build-to-suit warehouse and distribution facilities. The chic conversion of older industrial properties to mixed-use purposes is also keeping inventories down and rents up. Vacancy rates are forecast to maintain the steady down trend they’ve seen since early 2004. Rents are expected to increase slightly.
RETAIL:
Retail is the dark spot in the commercial marketplace. Hit by still-soft consumer confidence and a mega merger between the Federated Department Stores and the May Department Stores that prompted store closings, retail was the only commercial sector in which vacancies rose and rent growth decreased in 2006. Regional shopping centers and neighborhood centers alike are suffering from store closures and softening consumer confidence. Retail vacancy rates are predicted to rise slightly in 2007. Average retail rent is forecast to increase marginally.
MULTIFAMILY:
The apartment market is strengthening as potential home buyers remain in rental housing and echo boomers enter the rental market. Vacancy rates will continue to be marginal at best.
Our country will continue to be appealing to foreign investors. U.S. property prices look competitive from a global perspective. “The weak dollar also has given global investors more buying power in America,” observes Ross.
The commercial market will be lucrative, but not as lucrative as in years past. “Investors will have to look for ways to enhance value,” concludes Riggs.
Jodi Summers negotiates properties for Sotheby’s International Realty. Contact her at jodis@verizon.net or (310) 260-8269. Visit her Web sites at www.SoCalInvestmentRealEstate.com or www.santamonicalandmarks.com.
