Slow, Steady and Strong Growth Primes Investment Market into 2013 Jones Lang LaSalle's 2013 Cross Sector Survey shows greatest investor demand for multifamily, office and industrial product
CHICAGO, Oct. 17, 2012 /PRNewswire/ -- Strengthening fundamentals and higher yields relative to other asset classes continue to give commercial real estate great investment appeal as the global economy struggles to recover from the Great Recession. The commercial real estate industry's measured and steady recovery is expected to bolster further growth in the United States in 2013, with the greatest demand amidst the multifamily, office and industrial sectors, according to respondents of Jones Lang LaSalle's 2013 Cross Sector Survey. Presented today at the Urban Land Institute's Fall Meeting in Denver, the survey provides a roadmap of investors' future attitudes and points to increasing investment activity in this appealing asset class in the year ahead.
Jones Lang LaSalle's 2013 Cross Sector Survey is an independent analysis based on a collection of independent research findings and survey responses from more than 480 industry real estate development professionals, investors and property owners, many of whom will attend this year's Fall ULI Conference. View this video: http://youtu.be/rgqiacdS25Y
While unemployment and Eurozone fears remain top of mind and an uncertain United States political picture is introducing more cautious action, 56 percent of industry respondents to the Cross Sector Survey expect their investment activity to rise by as much as 20 percent in 2013, compared with last year. The increasing investment trend was already evident in the third quarter as apartments transactions picked up strength in August after a July lull, the suburban office market showed improvements from medical office portfolio sales and the market registered gains in malls and other retail, outside of strip; as well as growth in industrial outside of flex.
"This year, we're likely to close 2012 with only a 10 percent improvement over last year in investment trades for all sectors, excluding hotels," said Jay Koster, President of Jones Lang LaSalle's Americas Capital Markets. "While the growth rate has slowed, the investment transaction market is still markedly above the 2009 floor and transactions are still improving in the face of significant economic headwinds. The record-low Treasuries are also giving the transaction market a boost as an attractive lending market should continue to pave the way for a strong fourth quarter and an increase in investment transactions in 2013."
Property owners and investors are also recognizing the improved health of the tenant market as corporations today hold stronger balance sheets and improved economic outlooks. More than three-quarters of study respondents (77 percent) indicated the occupancy of their portfolios should increase next year, and in healthy percentages. Fifty-seven percent of the optimistic majority expects the occupancy of their portfolios to increase by 10 percent in 2013, and an additional 20 percent expect an increase of 10 to 20 percent in 2013, over 2012.
While investors indicate an interest in more investment activity in 2013, they have a finicky appetite for prime product. The main gateway markets continue to set a solid pace for transactions as the clear preference, but the secondary markets are showing increasing signs of improved transaction activity. While investors want to buy core product in the top cities, the amount of healthy competition is pricing many out of the primary markets and into secondary and even tertiary markets.
"Through September 2012, the share of secondary market transactions in the office sector outpaced 2011 levels with 43 percent of the investment trades compared to 36 percent last year, and even the tertiary markets captured five percent share compared to three percent, " said Marisha Clinton, Director of Capital Markets Research for Jones Lang LaSalle. "Investors are spreading their appetite for calculated risk to a broader set of locations and that should increase in 2013 as property values gain more ground. For example, Seattle and Austin transaction volumes YTD are already aggressively ahead of 2011 levels, with Phoenix not too far behind year ago totals as the strength of technology and energy occupiers drives growth in those markets."
Investors are clear about their property preferences for 2013 investment. They ranked multifamily as the most appealing product type (43 percent), followed by 27 percent who chose office as their secondary preference. Industrial ranked in third at 14 percent, retail fourth with 12 percent, and hotels with 4 percent of respondents ranking it as the fifth most appealing product type. There are several unique factors in each product sector that are influencing investor appetite to purchase and hold in the top sectors of demand:
As the top sector in demand, competition for the high performing "flight-to-safety" product has been prevalent. The saturation and competition at the top of the market has been compressing yields, and driving investor demand for secondary and tertiary assets. The strength of the lending markets is fueling multifamily trades with Freddie Mac lending up to an 80 percent LTV ratio (based on the purchase price) for Class A in primary locations and a LTV ratio of up to 75 percent for secondary assets and locations.
"The apartment development pipeline has amplified and investor appetite for core multifamily properties has pushed towards peak levels. We anticipate a spike in transaction volume as sentiment toward risk aversion fades, investors pursue higher yields and entrepreneurial value-add strategies re-emerge," said Jubeen Vaghefi, Managing Director and leader of Jones Lang LaSalle's Multifamily Capital Markets business. "While investor appetite is strong now and will remain so in 2013, the compounding occupancy and rent growth the multifamily market is experiencing now may begin to lessen in 2015 and beyond."
Prime office is still a top investment as evidenced the estimated $19 billion in office product that traded in the third quarter of this year, and the secondary ranking by the Cross Sector Survey respondents.
Investment interest tends to follow occupier growth regions given the increase in corporate demand for space which increases the value of office properties. The growth in technology and energy sectors, while slowing, has supported office leasing and sales volumes particularly in markets such as parts of Manhattan, Houston, Silicon Valley, San Francisco and Seattle, with absorption traveling westward across the United States. View this video: http://youtu.be/Y-FXNbJiY3c
As the third highest product preferred, buyers in the industrial market this year have remained tightly focused on fully-leased Class A properties in the nation's primary distribution hubs. Both publicly held and privately held REITs have been the dominant player in this sector, bolstered by immense buying power. To date, U.S. REITs have accumulated $44 billion in fundraising which is likely to outpace the 2011 level of $51 billion raised. In the industrial real estate sector, institutional investor Blackstone has been the most active buyer in 2012 due to its unique ability to complete extremely large portfolio acquisitions.
"Industrial is on the short list for investors, but the active players are beginning to be priced out of the primary markets and are starting to look at well-located properties in secondary markets," said John Huguenard, International Director of Jones Lang LaSalle's Industrial Capital Markets. "While demand for single-tenant properties has been higher, value-add plays are still relatively rare due to the spread between sellers' expectations and buyers' pricing. Speculative development is now occurring in both primary markets and the best secondary markets, though it is still limited to a handful of players. The industrial owner's opportunity area in 2013 will be to attract the active e-commerce and food & beverage industry tenants to boost portfolio value and potential trades next year."
While retail ranked the fourth priority for investors as they look toward 2013, there are a number of institutional buyers looking for core product, particularly grocery-anchored and trophy malls, in major markets. The challenge is finding those assets as supply is still very limited. When sold individually, single-tenant drugstores are still hot commodities, especially those with 10 to 20-year leases in place. Investors interested in this segment are optimistic about retail occupancy and rental rates as new long-term anchor leases continue to drive long-term growth in the sector.
"We expect new development will increase and redevelopment will remain a relevant trend," said Margaret Caldwell, Managing Director and co-leader of Jones Lang LaSalle's Retail Capital Markets. "Retailers and investors are still keenly interested in major markets, but population growth will be key to performance in 2013, which we expect to be led by the Sunbelt and Southwest."
The hotel market is a specialty play for the respondents of this study, but there are a number of registered and active buyers of hotels in the United States, particularly private equity funds and REITs, and to a lesser extent, off-shore investors. Jones Lang LaSalle Hotels estimates that the current buying power among these groups of investors is approximately $55 to $64 billion for hotel purchases over the next several years. Overall, strong hotel operating fundamentals, increasing debt levels, the high amount of equity and a lower cost of capital will continue to underpin buoyant transactions market in 2013 and beyond.
Survey respondents were asked to write in the one factor that would influence their development/investment activity in the year ahead. Respondents overwhelming pointed to the economy, a lack of job growth and the European debt crisis as their major concerns regarding the greatest hurdles to market improvements in 2013.
These market pressures and opportunities will be among the prime discussion topics for leaders attending the Urban Land Institute Fall Meeting October 16 to 19, 2012. For an insider's perspective of all the happenings at the ULI Fall Meeting in Denver, visit Jones Lang LaSalle's one-stop web repository for news, speaker's updates and video blogs of experts attending the conference: http://www.us.am.joneslanglasalle.com/unitedstates/en-us/pages/uli.aspx
Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm's in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2011 alone, Jones Lang LaSalle Capital Markets completed $60 billion in investment sale and debt and equity transactions globally. The firm's dealmakers completed $52 billion in global investment sales and buy-side transactions, equating to nearly $216 million of investment trades completed every working day around the globe. In the United States, Jones Lang LaSalle grew its total Capital Markets volumes by 122 percent in 2011 and is quickly gaining market share across all property types. The firm's Capital Markets team comprises more than 1,200 specialists, operating all over the globe.
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About Jones Lang LaSalle
Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company's investment management business, is one of the world's largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com.
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