Commercial real estate posts gains in every major sector, 2013 Viewpoint reveals Jan 22, 2013

Commercial real estate is starting the new year on a positive note. Our 2013 Viewpoint report shows gains in each major commercial market, and the upswing is projected to continue throughout the year. Examples of improvements include compressed capitalization rates across the board and higher occupancy rates in the office and multifamily sectors.

Despite these encouraging numbers, commercial real estate still faces several challenges, not the least of which are Washington’s ongoing fiscal policy discussions and the tax increases passed as part of the fiscal cliff deal. But with comprehensive improvement evident, it’s hard not to have a sense of cautious optimism.

FOR IMMEDIATE RELEASE

 Commercial Real Estate Improves Across All Major Property Sectors in 2012

The 23^rd edition of the IRR Viewpoint report forecasts continued recovery and expansion for many local, national, and international commercial real estate markets in 2013

NEW YORK—January 22, 2013—Integra Realty Resources (IRR) just released its 2013 Viewpoint report, which shows growth and improvement across every major commercial real estate market in 2012. Viewpoint, an annual compendium of commercial real estate valuation trends and forecasts, found that capitalization rates compressed across all commercial property types in 2012, indicating increased optimism among investors. Improved property fundamentals and compressing capitalization rates have driven a strong rally in commercial real estate valuations. Stronger valuations have translated to a very strong performance among publicly traded REITS, which have outperformed the general equity markets over a five-year holding period.

“Commercial real estate markets in the United States improved across the board in 2012, signaling a growing confidence in the economy and a recovery from the recession,” said Raymond Cirz, MAI, CRE, FRICS, Chairman of IRR. “Real estate has proved one of the preferred asset classes for investors seeking yields backed by relatively safe fundamentals in the current historically low interest-rate environment. The new year presents new challenges for the sector as the government’s fiscal crisis continues and higher tax rates go into effect, but our forecast remains largely positive for 2013.”

Key findings of this year’s Viewpoint include the following:

Capitalization and Discount Rates

• Average capitalization rates across all product types compressed in 2012, and the general rank of property types by capitalization rate remained relatively unchanged from 2011. One exception is that the average cap rate for general industrial properties compressed inside of rates for suburban office, marking a notable change in investors’ relative value and risk preferences between these two asset classes.
• The discount rate range remains the widest in the CBD office sector, where primary office market discount rates are far tighter than those utilized in analyzing and investing in more secondary market CBD assets.
• The spread between going-in cap rates and discount rates widened slightly in 2012 as a result of faster compression in going-in rates. Such a widening spread could indicate that the valuations of commercial real estate assets in some markets are approaching a crest.

Office

• Survey responses indicated that major CBD office markets across the country are in the early stages of recovery. Weighted average vacancy rates dropped from 14.01% to 13.16%.
• Average office prices (as measured by average transaction price per square foot for the MSA) lagged or remained unchanged from historical averages, with only San Francisco experiencing a material price spike in 2012.
• IRR predicts that the largest increase in forecasted total value change from 2012 through 2014 will occur in Seattle and Phoenix (both 20%), and Chicago (15%). The only cities that will decrease in office CBD values are Las Vegas (-10%) and Dayton, Ohio (-5%).
• The Western region exhibited the tightest average CBD office cap rates by a margin of 65 basis points under the Northeast; however, the West’s tighter margin for suburban cap rates was far less, at 33 basis points.

Retail

• The retail sector continued a strong recovery in 2012 with grocery-anchored retail properties in urban locations becoming one of the hottest investment assets across any real estate sector. Nearly all of the markets surveyed can be labeled as recovering.
• The top four markets with the highest forecasted total value change for retail properties from 2012 through 2014 are Coastal New Jersey and Seattle (both 15%), and San Francisco and Los Angeles (both 12%). The only city with a forecasted decrease in property values is Providence, R.I. (-5%).
• Retail transaction volumes in 2012 were above average across most markets except for Atlanta and Houston. In addition, 2012 transaction prices were very strong, especially in Boston and San Francisco, compared to historical averages.
• Driven by the historically low U.S. Treasury yields, overall retail cap rates are approaching all-time lows while risk premiums are exhibiting all-time highs.

Multifamily

• The multifamily sector remained the hottest property sector in 2012 and was the sole sector experiencing significant expansion across the country, with almost all regions not only demonstrating strong property fundaments, but also experiencing all-time-low cap rates.
• The top three cities with the highest forecasted total value change are Charlotte, N.C. (20%), Seattle (15%), and Tulsa, O.K., and Oakland, Calif. (both 12%). The three cities with the smallest forecasted increase in property values are Indianapolis, Ind. (2%), and Baltimore and Washington, D.C. (both 3%). Chicago (-5%) is the only city projected to lose value this year.

Industrial

• An upward swing continued in the industrial sector, although all eight markets surveyed revealed that the sector is in the recovery phase. Despite cap rates approaching historical lows, risk premiums were at an all-time high.
• Baltimore, Boston, Miami, and San Jose, Calif., outpaced normal transaction volumes in 2012.
• The top markets with the highest forecasted total value change for industrial properties are Phoenix (20%), Los Angeles, (15%), and Coastal New Jersey (12%). The cities with the largest forecasted decrease in property values are Las Vegas (-10%), and Greensboro, N.C. (-3%).

Seniors Housing

• Baby boomers are turning 65 at a rate of more than 10,000 a day, and the population of adults over age 65 is forecasted to grow at an annual rate of 2.93% over the next five years (for comparison, the overall U.S. population will grow at a rate of 0.77%). This “graying of America” will lead to larger growth in demand for seniors housing over the next twenty years and will also increase inflows of debt and equity.
• Cap rates for Class A and B assets are generally within 6.75% to 8.75% for independent living properties, 7% to 9% for assisted living locations, and 12% to 14% for nursing care facilities.
• The acquisition market is expected to remain active in the seniors housing sector, but less so in the nursing sector.
• The improving job market and housing market will positively affect occupancy and rent levels in the next year by allowing seniors to sell their homes and make the move to seniors housing.

“Commercial real estate values continued their recovery this year, as we projected in the 2012 Viewpoint,” said Cirz. “Of course that doesn’t mean the lingering uncertainty around each market is gone, but with the majority of markets in the recovery or expansion phase for each property type, we expect uncertainly to further diminish in 2013.”

The full 2013 IRR Viewpoint report, compiled by IRR appraisers and analysts, among which are more than 160 MAIs, 42 FRICS, and 44 MRICS, covers 65 markets throughout the United States, the Caribbean, Mexico, Japan, and Canada. The report includes thorough data and in-depth analysis for eight industry sectors, including office, retail, multifamily, industrial, lodging, senior housing, gaming, and self-storage properties. Additional resources included are documented methodology, 30 graphs, and 18 tables. Download Viewpoint for free on IRR’s home page at www.irr.com.

ABOUT INTEGRA REALTY RESOURCES, INC. (IRR)

With corporate offices in New York City, Integra Realty Resources, Inc. (IRR) is the largest independent commercial real estate valuation and consulting firm in North America, with 65 offices and 900 employees located throughout the United States, the Caribbean, and Mexico. Founded in 1999, the firm specializes in real estate appraisals, feasibility studies, market studies, expert testimony, and related property consulting services.  Many of the nation’s largest and most prestigious financial institutions, developers, corporations, law firms, and government agencies are among its clients.  For more information visit www.irr.com or blog.irr.com.

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Author: Raymond T. Cirz