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Commercial rebound to focus on secondary markets


CHICAGO – Nov. 7, 2013 – The U.S. real estate recovery is set to continue into 2014, as investors increasingly look beyond some traditionally popular markets for higher yields in secondary markets, according to Emerging Trends in Real Estate 2014, co-published by PwC US and the Urban Land Institute (ULI).

As opportunities in core markets become harder to find and the best assets more expensive, investors will look to secondary markets for higher returns. The report suggests that 2014 may be the year for many investors who have focused on large established markets such as Boston, Chicago, Los Angeles, New York City, San Francisco and Washington to expand their focus, given the steady pace of improvement in market fundamentals in secondary markets.

Respondents were particularly positive about the prospects for equity capital from foreign investors, institutional investors and private equity funds, as well as debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.

“Real optimism has emerged as a key theme in the real estate market for 2014 as trends are progressing significantly through the economic and real estate recovery cycles,” says Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “The steady economic recovery and job creation has created ‘tailwinds’ that have propelled the commercial real estate market forward, and momentum of this recovery seems powerful enough to weather spikes in interest rates that may be inevitable.”

According to the Emerging Trends report, the key threat to recovery is the timing and pace of any interest rate increases. It expects a modest interest rate increase in the short term that won’t cause a major disruption to the recovery – it will be offset by greater demand and therefore higher rents.

However, the report cautions that faster-than-anticipated interest rate rises could undermine the recovery.

A number of the markets anticipated to perform well in this year’s report are benefiting from the continued influx of foreign capital. Miami, which rose to number eight in the 2014 forecast from 12th and 17th place in 2013 and 2012, respectively, is benefiting from South American investment. Respondents particularly favor its homebuilding prospects.

Property types

In terms of market sector prospects, industrial tops the ranking in this year’s report, with warehousing standing out as a particularly strong subsector. Warehousing was a clear favorite among survey respondents, with 64 percent making a “buy” recommendation for the subsector and less than 10 percent advising selling. With retailers and manufacturers continuing to shorten their supply chains, the ongoing growth in e-commerce, especially in same or next-day delivery, is fueling the requirement for vast fulfillment centers close to major cities. Research and development industrial, self-storage and data centers are also expected to show further improvement.

As a sign of improving investor optimism, the report signals that in 2014 there may be an increase in new development activity in subsectors such as central business district office and limited service hotels that have not seen new construction in several years.

Multifamily housing, which has been the most popular sector in recent reports, is still popular with investors, as the underlying fundamentals remain intact, due to demand from Generation Y seeking to rent and baby boomers looking to downsize from houses to apartments.

© 2013 Florida Realtors®

Related Topics: Commercial