CHICAGO-If it wasn’t for that pesky European crisis, as well as lagging fundamentals such as low housing sales and high unemployment, commercial real estate professionals would likely be out dancing in the streets by the end of this year. These factors, at least for the property sectors of office, industrial and retail, were dampened in the second half, and instead of dancing, picture maybe a mild, sitting cheer predicted for the coming year, according to Jones Lang LaSalle’s 2012 Outlook Webinar on Thursday.
While everyone has already heard the prediction of slow, steady growth for 2012, it’s heartening to think about where sentiment was at the end of 2009, when any thoughts of upward movement were greeted with dancing. And there are positives out there, said Benjamin Breslau, managing director of Americas research for JLL.
“Many of the core indicators, such as GDP, employment, corporate profits and industrial production are heading in the right direction,” he said during the Webinar. “At least we’re able to take the double-dip recession talk off the table. Things are moving not at the pace we’d like to see, but the US is in healing mode, and we’re in better shape than many places around the globe.”
The national office market, most dependent on job growth, is the most worrisome sector. Even the super core markets such as New York City and Washington, DC have seen a slowdown in the past two quarters, said John Sikaitis, SVP and director of office research for JLL. “In 2012, most office markets will still benefit the tenants,” he said during the Webinar. “Rents will stay heavily discounted, and concessions are on the uptick. Vacancies should hit about 17% by 2013. Having no speculative construction on the horizon will help lead us through the recovery.”
Lauren Picariello, VP and director of occupier research, added that along with consolidations, companies are using technology to do more with more office space. However, that is creating new demand for “smart” buildings. “There’s a movement toward retrofitting assets, and in areas where this isn’t possible, you may see new construction even if there is double-digit vacancy, because a product isn’t meeting demand standards,” she said.
The industrial market is faring better, said Aarin Ahlburn, JLL director of industrial and retail research, because there’s a lack of available big box property. “There’s a crunch for large tenants in the market,” he said. “Picture a holiday-time parking lot that’s almost entirely full, the fight for the last space is now occurring.” Companies that can’t find space are adding to a growing build-to-suit pipeline, Ahlburn said, though rising oil prices and shrinking inventories may keep the market also at slow growth for 2012.
For retail, the case of the haves and have-nots continues, as both luxury and bargain sectors see 12% and 11% gains for the year, Ahlburn said. “There’s increased pressure on the middle-of-the-road retailer,” he said. “Expect redevelopment of shopping centers as owners try to attract customer spending, though with retailers now fitting into smaller spaces.”
The two superstar sectors going into 2012 are the hotel and multifamily markets. Revenue per room has risen at its fastest pace in five years, says Lauro Ferroni, research associate for hotels for JLL, and transaction volume in 2011, at $14.5 billion, was 30% higher than 2010 and much, much higher than 2009. “We’ve seen 24 assets sell at more than $100 million this year, where there were only 15 at that size last year,” Ferroni said.
Where REITs led the investments in hotels in the first half, the volatile stock market caused the trusts to hold off in the second half of 2011, but private equity then picked up its pace. “We expect that trend to continue,” Ferroni said. “The overall hotel landscape for 2012 should mirror this buoyant second half of the year.”
Surprisingly, Breslau had some negative thoughts about multifamily, though they’re reserved for 2013. The sector will continue to soar for 2012, he predicted, and will absorb the substantial amount of new construction in the second half of next year. “2013 could be more of a rebalancing year,” he said. “That could also coincide with finally improved employment and housing.”
For the most part, investors will try to stay safe in 2012, continuing the trend in these past two quarters, Breslau said. Purchases of office, industrial, retail and multifamily will likely remain set on properties in the 90%-occupied range, a high mark, as most investment in the past decade has been in properties occupied in the mid-80% range. “There will remain a shift away from risk,” he said.
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