LOS ANGELES-Commercial real estate professionals had an unexpected Happy Hour during the first half of the year, but most agree the second half is like waking up with the hangover, with cold reality setting in. And it gets worse -- locally based PricewaterhouseCoopers and the Washington, DC-based Urban Land Institute confirmed Wednesday during a webcast that fundamentals, and thus demand, are not expected to get better in 2012.
If there’s a motto for next year, according to the partnership’s Emerging Trends in Real Estate 2012 Forecast, is that there’s a long grind ahead. According to hundreds of respondents to the annual survey sponsored by PwC and ULI, commercial experts still remain sold on walkable, 24-hour cities, though yields will stay small and anywhere else remains high risk. Almost any class of apartment property is also a good investment, as are technology sectors, but other markets are stable, at best, according to the executives.
Jonathan Miller, a partner in New York City-based Miller Ryan LLC, is the author of the forecast. He said during the webcast that even though there’s capital trying to find deals today, the demand drivers just don’t exist except in the top markets. “The rest of the real estate landscape is still not doing particularly well,” he said. “There’s a lot of headwinds facing the markets today.”
Stephen Blank, a senior fellow with ULI, said there’s seven major obstacles that are going to slow real estate recovery over the next year. These include the global financial mess, the jobs stagnation, the cost of productivity and the correction of profit expectations in the professional sector. “It’s not easy to make money in this industry anymore,” Blank said.
He also said that personal and government debt load, combined with shifting demographics as Baby Boomers start collecting retirement and social security, will keep spending low next year. “Retail and housing will continue to struggle,” Blank said.
The core markets will likely stay priced too high, and quality distressed properties will be too hard to find, Blank said. “We expect transaction activity to be restrained in 2012,” he said. “Investors need to follow the money. If things look out of control, and sub 5% cap rates should be a red flag, retreat.”
Chuck DiRocco, director and head of real estate research at PwC, said if someone regularly drives to work, school or just out shopping, they’re not likely in one of the core markets. These cities, such as Washington, DC, San Francisco, New York City and Boston, are all walkable communities, whereas areas where a driver’s license is a necessity are likely to be less desirable by investors. Also, he said, cities with large populations are faring better when compared to smaller markets.
Washington, DC, Texas, California, New York City and Boston all fared well on the survey, with every market in Texas showing strong growth and fundamentals, DiRocco said. “The job growth they’re expected to have in Texas is at about 1.5%, whereas the nation’s expected job growth is at one-third of that,” he said. Las Vegas; Sacramento, CA; Providence, RI, Jacksonville, FL; and just about every Midwest market except Chicago did not have the respondents’ confidence for 2012, he said.
Miller said that 2012 will be a time to just maintain liquidity as the markets gradually return to some sort of normal. “This is not a time to be all in,” he said. “Lock in your fixed-rate debt and focus on the blue-chip gateway markets. The prices may be outrageous, but as some of our respondents said, do you have confidence anywhere else?”
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