Real Estate Returns Expected To Be Subdued By Macroeconomic Transformations

US real estate is unlikely to see another boom anytime soon, and investors should prepare for smaller returns according to a new report. Among commercial markets, clear winners …

US real estate is unlikely to see another boom anytime soon, and investors should prepare for smaller returns according to a new report. Among commercial markets, clear winners are emerging in centers of innovation and intellect like Denver, Seattle, San Francisco and Dallas, while hard-hit housing markets will continue to suffer. See the following article from Property Wire for more on this.

There’s light at the end of the tunnel for the US real estate, but the industry’s recovery will play out in an ‘era of less’, according to the Emerging Trends in Real Estate 2011 report from PricewaterhouseCooper and the Urban Land Institute.

Every property sector will be affected by macroeconomic transformations that have taken place. As a result, the conditions that caused property values to surge to vertiginous heights in 2007 are not likely to materialize again.

What it means is that the US is seeing a return to multigenerational households. Children are living with the parents for longer due to diminished job prospects and high student debt loads. And baby boomers with reduced savings are increasingly living with their children rather than relocating to swank retirement communities, the report suggests.

In addition, scaling back will mean fewer cars, smaller offices and fewer distribution links. As a result, every commercial real estate sector faces some continued scaling back rather than any increased demand for new space in the near future. In this climate, investors should anticipate high single digit returns for core properties and mid-teen returns for higher risk investments.

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Jonathan Miller, the report’s principal author, and Stephen Blank, a senior resident fellow for real estate finance with ULI, both emphasized that the outlook for commercial real estate had clearly improved from a year ago but that any enthusiasm should be restrained by the many challenges that remain.

Overall property values are continuing to re-set to levels below the 2007 peaks and the pricing on some deals does not appear to take this into account. Meanwhile, for lower quality assets it’s hard to tell at all what their values are. Investors don’t want to look at them at all,’ said Blank.

‘Regulators looking the other way for a long time certainly have helped. Low interest rates and other conditions have helped lenders and put them in a position to originate loans. But they only want to look at the best assets,’ Blank explained.

The outlook also varies by market. According to the report, the top 10 markets in the country are Washington D.C., New York, San Francisco, Boston, Seattle, Houston, Los Angeles, San Diego, Denver and Dallas. What the best markets have in common is that they are generally 24 hour cities that boast high concentrations of brain power, echo boomers, empty nesters and are investor magnets.

On the other hand areas such as the Southwest, the MidWest and Florida where house prices have also plummeted, have the bleakest outlooks, according to the report.  Yet apartments are ranked as the most attractive investment option among all property types.

In the retail sector, only fortress malls and top-tier neighborhood center in infill markets are performing well. Class B and class C malls continue to struggle as do those built on the fringes where population growth has faltered.

The report predicts that it will be a long time before the industry will require large amounts of new construction. It could be three to five years before volume rises significantly and even longer than that for the retail sector, is regarded as the most overbuilt.

This article has been republished from Property Wire. You can also view this article at
Property Wire, an international real estate news site.


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