According to Michael Bull, Commercial Real Estate Will Continue to Recover in 2013, but a Boom Won’t Come Until Later.

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The commercial real estate industry has made a slow but steady recovery since the depths of the Great Recession, and 2013 will see more of the same. And while the phrase “slow but steady” may not initially excite you, don’t fall asleep at the wheel or you’ll pass by some truly great opportunities. On a recent episode of “America’s Commercial Real Estate Show,” Robert O’Brien, a partner and vice chairman with Deloitte & Touche and the leader of the firm’s U.S. Real Estate Services Group, presented the company’s top issues for 2013. Then I presented investor tips and my projections about the industry’s performance in the year ahead.

 

Certain macro-economic factors, such as below-average GDP growth, will prevent the various commercial real estate sectors from truly taking off, according to O’Brien. “Although we’ve seen a great recovery in real-estate fundamentals over the past couple of years, we think without more robust economic growth, it’s going to be difficult for real significant growth in real estate,” he said.

 

Deloitte & Touche recently released its "Commercial Real Estate Outlook: Top Ten Issues in 2013" report. According to O’Brien, multifamily is currently the strongest commercial real estate sector, followed by lodging, office, industrial and retail. “We have seen improving consumer confidence and improving consumer sentiment, which should be good for retail,” O’Brien said. “But to some extent, that’s been offset by an increase in online sales, which is obviously having an impact on retail real estate.”

 

The industry’s access to capital has improved in certain instances and should continue to do so next year, O’Brien added. “Well-leased, well-located properties have great access to debt capital,” he said. “Properties that have some issues, properties that need to be turned around, [new] development — lending [in those instances] is still very, very slow.”

Investment sales next year should be at about the same level as this year – in the $200 billion range, according to O’Brien. Annual growth in investment sales has slowed as the cap-rate compression for Class A assets in gateway cities has driven some investors to the sidelines, he added.

 

People regularly ask me about the state of the market, so after my interview with O’Brien, I went on the airwaves to present my forecast for the next year. I see continued slow growth in 2013 with some interesting opportunities. As I joked on the show, if everyone at the cocktail party is talking about how great real estate is, steer clear. When they’re gabbing about how bad the industry is, that’s when your ears should perk up. Slow growth and low interest rates allow time to consider interesting opportunities.

While rising Internet sales may be hurting the retail real estate sector, they are benefiting the industrial sector, as online retailers fill warehouses with goods en route to customers. “It’s a good time to buy industrial and here’s why: We’ve had several quarters of positive absorption, and like the office market, we’ve had little to no new construction.”

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• The apartment market will continue to do well next year, in part because an unsteady job market will add to the reasons many people will be reluctant to take the homeownership plunge.

• Speaking of jobs, the sluggish market will also limit the office sector to slow improvement.

• Demand for infill land for commercial development will continue to increase.

• Distressed property sales will remain prevalent.

• Investor demand for single-tenant, net-lease properties will remain high.

• Healthcare and medical properties also will be much sought after by investors in 2013 and beyond. Baby Boomers are getting older, they’re living longer and they have more active lifestyles. Healthcare properties should see further cap rate compression and strong buyer demand in 2013.

 

Future is Bright

 

Having just gone through the beating of a real estate-based recession, it may be hard to realize just how much rents and values will increase in the next 60 months. Lenders have not and will not quickly get over the memories of heated loan workouts, foreclosures and loan losses. This will continue to constrain new construction. The economy will cycle to good times, bringing inflation back in the picture. With the lack of new product and an improved economy pushing demand, rents will increase quickly. In five years we will see values at levels many of us may find hard to comprehend right now.