It’s that time of the year again when everyone and their mother posts their yearend review for 2013 and/or forecast for next year, 2014. I’m not going to do that, but instead linked is Deloitte’s 2014 commercial real estate forecast, which is long, detailed and usually fairly accurate. I will summarize and editorialize a bit though.
Since I’m licensed in California and Ohio and have reciprocity in 11 other states, I read this report thoroughly as I find it helpful for the segments I work with – triple net, single tenant, retail and industrial / distribution / warehouse. Plus medical office. Columbus commercial real estate for sale or lease, and Los Angeles commercial real estate for sale or lease are my primary markets, but I’ll go anywhere.
Commercial Real Estate Fundamentals
The fundamentals have strengthened somewhat during 2013, especially in multifamily and hospitality. Triple net leased, single tenant, national credit retail has also done very well. Other segments have trended below historical averages when coming out of a downturn. Multifamily is expected to peak and moderate as much new supply comes on line. There’s still little new supply for single tenant, net leased retail and office so expect some tightening there for the foreseeable future. Additionally, lending standards for construction loans remain stringent so that will contribute to restrained development.
Forecasts for 4th quarter GDP growth are in the 2 percent to 2.5 percent at the high end, and around 2 percent for 1st quarter 2014. This is still a very lackluster recovery and remains the weakest recovery since WW II.
What is not known yet is the effect that the increased out of pocket premiums for the ACA will have on growth in 2014.
While the commonly U3 reported unemployment rate has fallen to 7 percent, the more important U6 rate remain exceeding high at 13.8% as of the end of November. The labor participation rate is at a post 1978 low of 63.2. The high structural unemployment is still a drag on the overall economy.
While the employment situation appears to be moving in the right direction, threats for 2014 include the fed backing off on the stimulus and the impact of sharply higher ACA health care premiums as a drag on the economy.
I generally work the national credit, net lease, single tenant market with Columbus triple net properties and Los Angeles triple net properties for sale or lease so the retail properties segment is of great interest to me.
For a quick summary, the vacancy rate overall is down 60 basis points year over year compared to 2012. Effective rents actually dropped slightly at 0.3 percent year over year. Net absorption was 8.1 million square feet year 2nd quarter 2013 over year as compared to 4.5 2nd quarter 2012.
New retail development is at a record low which should provide for some net increase in rents due to restrained supply tempered by a steady increase in online shopping.
Westerville, Worthington, Dublin, Powell, New Albany and Columbus triple net retail area markets have tightened considerably for the desirable properties plus we are seeing some new development in the East Broad Street, Columbus Commons, Olentangy River Road and Grandview Yard markets. Most of this product is ground leased and not for sale.
The coastal Los Angeles market, including West LA, Santa Monica, Venice, Marina Del Rey, Beverly Hills has also gotten much tighter with major rent increases over the last year. Most of this market is not ground leased so you’ll see Los Angeles retail properties for lease and sale.
The office vacancy rate has declined to 15.2 percent from 15.8 percent a year earlier and rent growth up to 2.1 percent versus 3 percent a year earlier. As with net leased retail, new development is just about nil.
Vacancy has improved to 12 percent from 13.1 percent a year earlier and net absorption was a very strong 45 million square feet in 2nd quarter 2013 versus 24.2 million in 2nd quarter 2012.
Remember that even online retailers need warehouse, shipping and distribution space.
The link to the 32 page Deloitte report is below:
Deloitte 2014 Commercial Real Estate Outlook