The U.S. commercial real estate industry is not only recovering, it is performing better than real estate in many other nations. That’s according to findings of IPD, which hosted a conference to unveil its U.S. annual real estate index and discuss the state of the market. But in this volatile market, performance varies not just by market but by submarket, as well as by property type and quality of property.
“What’s interesting is really the shape of recovery,” observed Simon Fairchild, managing director for IPD North America. “(Real estate) recovered probably stronger than most people expected despite the debt overhang and fundamentals have been less impacted as well.”
According to the IPD index, the United States turned in a 14.2 percent total return for 2010, about half income return and half capital appreciation. That’s compared to negative 18.7 percent in the previous year and negative 35.2 percent total over the previous two years. The United Kingdom performed slightly better last year, delivering a total return of 15.1 percent. Among other countries, by comparison, Canada saw an 11.1 percent return, the Netherlands came in at 10.4 percent, Australia at 9.5, Denmark at 5.3, Sweden at 4.6 and still-suffering Ireland at negative 2.4.
For the United States, the performance was the third best in the past decade, according to IPD North America director of performance and risk analytics Jim Valente, who predicted a few more quarters of appreciation. After that, he noted, it becomes a question of where net operating income growth is going to come from as yields come down. And there is still a significant difference between primary and secondary markets, he added. “We’re not seeing the growth lift all the ships.” That applies to property types as well: He predicted a steady demand for apartments, while power centers are doing better than expected, given big-box performance and an increase in Internet shopping during the past year and a half. Office is doing well, he said, although with the decline in employment so much greater than the decline in available office space, it is unclear where occupancy improvements are going to come from. Industrial will probably do better in the second half, he said.
Overall, there is still room for the 10-year Treasury rate to go up before mortgage rates rise significantly, but with cap rates starting to drop, it begs the question, “Are we back in a situation we were in just a few years ago?”
The economy rebounded a little bit last year, with more expected this year, affirmed Steven Cochrane, managing director of Moody’s Analytics, during his economic overview. He has already pared back his expectations for GDP growth this year, from 3.9 percent in January to 3.5 percent, citing such concerns as oil prices and government cutbacks. But he predicted 4.1 percent next year, expecting real economic growth to take place then (he does not anticipate job growth reaching sufficient levels to support growth before then). In 2012, he forecasted, there will also be 2 percent profit growth.
However, this year, the recovery will expand from the small metropolitan areas, where it began in the manufacturing sector, to larger ones, he said. Already, the only states still in recession are Nevada and Mississippi, while North Dakota and Alaska are actually expanding, thanks to energy production. And “broadly speaking, the recovery is now in place across the country.” The strongest metro areas, he said, are Boston, Washington, D.C., Seattle, San Jose and Dallas.
The forecasts were followed by a panel discussion among Jeff Barclay, managing director at Goldman Sachs; Michael Giliberto, president of S. Michael Giliberto & Co.; Bob Ruggles, RVA, U.S., president of Altus Group; and Bob White, founder & president of Real Capital Analytics. Barclay warned of a “distinct” bifurcation among markets and even among submarkets, with pockets of strength in the office market varying by geography and industry. In the industrial sector, he said, “I think there are opportunities that haven’t been realized.”
Ruggles agreed, noting that the industrial sector has held value for the past year and a half; the major industrial markets are filling up and rents will follow, he said. He expressed less optimism regarding the office market, citing shadow space.
Assets and property types that have yet to experience a capital markets boost will see it, White affirmed. He said he is bullish on Class A rents next year, although Class B and C properties are going to have a harder time improving.
The debt side is likewise showing improvement, Giliberto said, suggesting that investors who plan to keep loans on their books for seven to 10 years are going to see continued progress going forward, especially this year. He also predicted the potential for 5 to 15 percent more appreciation in returns, with perhaps 12 to 13 percent this year. Ruggles agreed, citing low to mid teens returns.
“There is still an opportunity to get some very good returns,” Ruggles said.