April 6, 2015
PREA Forecast: Industrial, Office to Deliver Highest Returns for Institutional
Investors
The Pension Real Estate Association (PREA) recently released the results of its first quarter
2015 Consensus Forecast survey and it looks like its members expect total annual returns
on their commercial real estate investments over the next four years to be in the high single
digits. The forecast was based on the NCREIF Property Index (NPI), which measures
unlevered returns in the institutional real estate market. The PREA survey respondents
expect industrial properties to outperform other asset classes over the next few years, with
forecasted total return of 10.3 percent on the NPI for 2015 and a forecasted total return of
8.5 percent on average in the years between 2015 and 2019, higher than any other
property type. The NPI total return for all property types in 2015 is forecasted at 9.8
percent and the annual return from 2015 to 2019 is forecasted at 8.1 percent. This forecast
jibes with the results reported by the Moody’s/RCA Commercial Property Price Index (CPPI)
for the 12 months ending January 31, 2015, which showed the value-weighted price
composite on industrial assets rising 17.8 percent, higher than any other property type.
Not surprisingly, multifamily properties, which have seen an uptick in new development
over the past few years and have been trading at premiums, will deliver the lowest total
returns of the four core property types during the same period. The total NPI return for
apartments in 2015 is forecasted at 9.0 percent and the annual return from 2015 to 2019 is
forecasted at 7.5 percent. The figures looked largely similar for forecasted appreciation
returns, with industrial properties forecast to deliver appreciation return of 4.6 percent in
2015, above the 4.5 percent figure for all property types, and apartment properties
forecasted to deliver 4.0 percent in appreciation return. On a longer-term basis, however, it
should be office investments that deliver the highest annual appreciation returns, at 2.9
percent, compared to 2.8 percent for all property types. PREA’s consensus survey was
conducted in February and based on responses from 25 firms, which included investment
management, advisory and research firms focusing on the U.S. real estate market.
(National Real Estate Investor/Elaine Misonzhnik)
▪▪▪
Investment Sales Climbed 38 Percent in the First Two Months of 2015, RCA
Reports
Investment sales volume in the commercial real estate sector jumped up 38 percent yearover-year in the first two months of 2015, to approximately $88.4 billion, according to the
latest data from Real Capital Analytics (RCA), a New York City-based research firm. The
figure represents a strong start to the year and was to a large extent driven by transactions
involving the five core property types and portfolio deals. RCA reports that portfolio sales
and company acquisitions in the five core property sectors rose 69 percent in January and
February, compared to the same period last year. Multi-asset deals and
mergers/acquisitions were particularly prevalent in the retail and industrial sectors. The
volume of single-asset deals involving the five core property types went up as well, but the
increase was more subdued at 24 percent compared to the same period in 2014. RCA
researchers note that the low 10-year U.S. Treasury rates in January and February,
combined with increased originations by CMBS lenders and regional/local banks, were
largely responsible for the uptick in trading volume at the start of the year. Last year, CMBS
lenders were responsible for 27 percent of all commercial real estate loan originations, while
national banks and regional/local banks accounted for 14 percent each. Government
agencies, which typically focus on multifamily loans, were responsible for 16 percent of all
originations. It remains to be seen, however, how much a potential hike in interest rates
later this year may affect the steady progress in loan originations and therefore transaction
volume in the commercial real estate sector. “Certainly if the 10-year U.S. Treasury climbs
in a predictable steady path due to positive economic news such as positive job growth and
steady corporate investment, a narrowing of the [spread over Treasuries] could be easy for
lenders to manage,” RCA researchers write. “The real fear is that conditions do not evolve in
a nice, steady path implied by consensus, but instead are driven by shocks.” (National
Real Estate Investor/Elaine Misonzhnik)
▪▪▪
Most U.S. Office Markets Firmly in Recovery, Expansion Mode
Researchers are now painting most national office markets as heading out of recession and
into recovery. Due to high demand for space and tight supply conditions, owners are taking
control back from tenants, signaling a warning sign for occupiers that rents will likely
increase in the next few years. For example, a recent report by commercial real estate
services firm CBRE shows that since the recession, new demand and strong absorption have
made the sector a good investment. Annual net office absorption totaled 52.7 million sq. ft.
in 2014, the highest amount since 2007. National office vacancy, at 13.9 percent at yearend, was at its lowest level since 2008. According to CBRE, 48 of the 54 national markets
recorded positive net absorption last year, led by markets with a lot of technology jobs. The
markets ranked by CBRE as having the most favorable conditions for owners, due to factors
such as positive net absorption, stable or increasing occupancy, strong leasing activity,
increasing rents or limited new supply, include Denver, Manhattan and Midtown South in
New York City, San Francisco, Houston, Seattle, Atlanta, Boston, Chicago and Philadelphia.
Markets ranked as most favorable for tenants, because of factors moving in the opposite
direction, include Dallas/Ft. Worth, Washington, D.C. and Los Angeles. Colin Yasukochi,
director of research and analysis with CBRE, says further expected economic growth will
boost office space demand during the next three years, with national vacancy expected to
hit 12.2 percent by 2018. By next year, he says, 10 of the 14 major downtown markets and
eight of the 13 major suburban markets will see rent increases. “We generally feel that
with the economy slowly improving, and the pick-up of more and more office jobs, the
balance of power is shifting away from the occupiers,” Yasukochi says. “Thus follows the
implied advice to tenants to make occupancy decisions sooner if possible, to get ahead of
the cost increase in the future.” Another geographic comparison has been released by
consulting firm PwC. The “Q1 2015 Real Estate Investor Survey” presents highlights of the
national commercial real estate markets. For office, the report is positive, classifying 32
downtown areas as being in the “expansion” phase, which includes strong demand, tight
market conditions leading to low vacancy rates, robust rental growth and decreasing overall
cap rates. These markets include most of the Northeast (except for Newark, N.J.), a good
part of the Midwest and half of the South, including Miami, Dallas and Charlotte, N.C.
However, only seven of the 18 markets in the West are ranked as being in expansion,
including Los Angeles and surrounding markets, San Diego, Portland, Ore. and Salt Lake
City. An additional 12 markets mentioned in the report have recovered from the recession,
but are just now heading toward expansion, and are classified as being in the “recovery”
phase, characterized by tightening market conditions and a shift in the supply/demand
balance leading to reduced vacancy rates, more balanced rental growth and a stabilization
of overall cap rates. These markets include Cleveland, Minneapolis, Phoenix, Memphis,
Tenn., San Antonio and Atlanta. To round out the PwC rankings, there are only seven
markets out of the 57 included that are classified as still being in a “recession” mode,
including Cincinnati, San Jose, Calif., Ventura, Calif., Albuquerque, N.M., Newark, Houston
and Washington, D.C. These markets have low demand for space combined with a lot of
supply, and continue to display other negative market dynamics. Another seven markets are
in the “contraction” phase, characterized by too much supply and a reversal of recovery.
These markets include Honolulu, Riverside, Calif., Austin, Texas, Fort Worth, Texas,
Nashville, Tenn., Seattle, and most surprisingly, San Francisco. Mitch Roschelle, national
practice leader, real estate advisory, for PwC, says that the national office market is really
in good shape, with not a lot of recession pockets left. The past few years have seen only a
1 percent or less in additions to national supply, much lower than historically expected, he
says. “When you compare our new supply to previous recoveries, we’ve clearly
oversupplied following recessions several times, as much as three times what we’re adding
today,” Roschelle says. “It appears we’re not overbuilding this time, which should lead to a
relatively sustained recovery.” (National Real Estate Investor/Robert Carr)
▪▪▪
Colorado Business Confidence Continues to Rise, says CU-Leeds Report
Confidence among Colorado business leaders about the coming months rose again at the
start of the second quarter of 2015 from previous quarters, and hiring expectations were up
sharply, according to the latest quarterly Leeds Business Confidence Index report from the
University of Colorado Boulder's Leeds School of Business. The university's index, based on
a survey of 321 state business leaders, was released Wednesday. It rose to an overall
business-confidence level of 61.7 for the year's second quarter, up from 60.8 in Q1 2015,
59.5 in Q4 2014, 61.2 in Q3 2014 and 61 in Q2 2014. A reading of 50 or above on a scale
of 1 to 100 signals a positive outlook for business over the coming quarter. The quarterly
report has indicated positive business expectations for 14 consecutive quarters. "Overall,
the greatest optimism is in sales expectations [and] the greatest boost in optimism was
recorded for hiring expectations," the report says. Business leaders were less optimistic
about capital expenditures over the coming quarter. Business leaders' outlook improved
despite the deepening slowdown in the state's oil and gas industry, the report said. The
report has shown greater stability over the last several quarters in terms of expectations for
business than at any time previously in its 11-year history. “People are not only evaluating
the economy and saying, ‘things look good,’ but they’re very confident quarter after quarter
that their beliefs are very solid,” said economist Richard Wobbekind, executive director of
the Leeds School’s Business Research Division, which conducts the index survey. “They’re
on firm ground. This really bodes well for not only just the next quarter or two, but for the
longer term." (Denver Business Journal)
FED TARGET RATE
3 MONTH LIBOR
PRIME RATE
10 YEAR TREASURY
30 YEAR TREASURY
CURRENT
.25
.27
3.25
1.85
2.49
1 MONTH PRIOR
.25
.26
3.25
2.11
2.72
1 YEAR PRIOR
.25
.23
3.25
2.80
3.63