November 21, 2013
RCLCO U.S. Real Estate Chart Book - November 2013
RCLCO U.S. Real Estate Outlook
As is typical for this point in real estate recoveries, markets are now recovering at varying paces both by property type (apartment leading and retail lagging) and geography (think high-productivity, service-based sectors). With construction returning rapidly to many markets, pickings are slimmer and buyers should be more selective about new investments. However, a number of opportunities still exist as construction is just returning in many areas, rents and occupancies are generally rising (with some exceptions), and service-based jobs are growing by more than 2% a year in areas such as Austin, San Jose, and Salt Lake City. Simultaneously, a number of secular changes are also impacting many property types.
The apartment sector continues to be in the most advanced stage of the cycle of all property types with completions meeting or exceeding demand in nearly half of the top 20 markets this quarter. In addition to new completions, a nascent rental play is emerging in the newly institutionalized for-rent single family sector, and the owned single-family sector is improving despite a bump in interest rates this summer.
The slow improvement in the U.S. office sector masks underlying regional variances. Despite lower space usage per employee, office employment is growing quickly in several markets, reigniting construction pipelines in Texas and coastal markets.
Retailers continue to explore e-commerce options in lieu of expanding physical space. Top performers are Class A malls, deep discounters, and luxury brands. While these properties are aggressively priced, B properties in non-strategic locations may not be discounted enough.
Industrial absorption is significantly outpacing retail, in part due to a number of e-commerce tenants who have been building million square foot facilities in key locations. Competition is fierce geographically as several east coast markets scramble to improve ports in anticipation of new traffic from the 2015 Panama Canal expansion. However, warehouse demand may skip over some of the smaller coastal markets in favor of inland markets with larger population and employment bases, and more diverse transportation infrastructure.
The big question remains whether—or rather when and by how much—interest rates rise and what the impact will be on property markets. Jobs, inflation, and the housing market are not showing enough strength yet to lead to Fed tightening, although volatility similar to the 100 bp rise in treasury yields this summer could occur again as the market continues to stabilize to more sustainable long-term monetary conditions. The good news is that after short-term weakness this summer, REITs, CMBS, and mortgages have all strengthened recently in line with higher treasury prices (lower yields). Additionally, spreads between interest rates and property yields remain wide, which, combined with growing incomes, should provide some cushion to the property markets—at least in the near-term.
To view the chartbook, please click on the PDF link above.