"The election itself doesn't clear the air of the uncertainty in the marketplace," said Ben Breslau, Jones Lang LaSalle's Americas Research Managing Director. "We have reasonable confidence that some, or all, of the fiscal cliff may be averted, but the Euro crisis may get worse before it gets better, and will continue to drag on global confidence and the U.S. economy into 2013."
A recession is unlikely in 2013, Jones Lang LaSalle's researchers concluded, but businesses, lenders and investors are still waiting to see how legislators will deal with the fiscal cliff, which consists of tax cuts set to expire at the end of the year and federal spending decreases scheduled to begin in January. Most aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, too, will be implemented starting in 2013.
"It takes time for policy action to translate into business activity," Breslau said. "If we're able to clear some of these hurdles without a big near term fiscal drag, the release of some pent up demand could accelerate growth in the second half of 2013."
With a new recession unlikely, the forecasters called for moderate performance improvement in the multifamily, hotel, and industrial sectors nationwide, while balanced new construction and absorption will negate any net change in retail fundamentals. Growing bifurcation in the office market will increase rent growth and net absorption in urban markets driven by technology, healthcare and energy jobs, while occupancy and rent stagnate in most of the nation's suburbs and in markets with little exposure to those growth industries.
2013 Commercial Real Estate Outlook Highlights
In office, a flight to efficiency is increasing demand for large floor plates and newer properties that help to attracts young talent and reduce tenants' operating costs through occupancy rightsizing.
E-commerce and m-commerce, or purchases over mobile devices, is increasing demand for large distribution centers (500,000 square feet or more), with 36-foot clear heights and extra parking for labor-intensive picking of products and next-day delivery.
"Experience shopping," and retail centers offering restaurants and entertainment to attract customers, will fair best in an otherwise challenged retail landscape.
Multifamily performance to remain healthy as renter population growth diminishes the threat of new deliveries. Investors to become less risk-averse as they seek higher returns in secondary markets.
Hotel revenues per room to increase between 4 percent and 6 percent in 2013, fueling heady pace of investment activity reached in second half of 2012. Lending for hotels to increase.
Total investment transaction volume to increase by 10 to 15 percent in 2013, continuing 2012's slowed pace of trading following a 64 percent spike in 2011.
2013 Real Estate Sector Forecasts
Investment transaction volume will climb to more than $200 billion in 2013, but at a slowing pace. Yields will remain relatively attractive given the widened spreads between U.S. Treasury rates and real estate cap rates. Investors will continue to favor primary markets, but those with greater risk tolerance will seek larger yields in rapidly growing secondary markets including Seattle and Austin.
Despite structural constraints on U.S. banks, the cost and availability of debt will support increased transaction volume. Banks and insurers are active, real estate investment trusts are on fire, and securitized lenders will fill funding gaps where buyers seek higher leverage.
Policy & Politics
The election brought some certainty over the direction of federal regulations and health care. Questions remain over whether, or how, legislators will deal with a $16 trillion U.S. debt, constant annual deficits and the more immediate threat of the fiscal cliff and near-term deadlines on expiring tax cuts and spending cuts, said John Sikaitis, Jones Lang LaSalle's Director of Office Research.
"In order to get past a lukewarm recovery from the economic and real estate standpoint," Sikaitis said, "we really need some direction from Washington on what the overall fiscal and political direction of the country looks like moving forward."
Outlook for Property Sectors in 2013
Office: Overall leasing activity is declining, with absorption highly segmented both among and within markets. Job growth in technology, health care and energy – particularly natural gas – is driving absorption in the major Texas and California markets, Denver, and a few others. Within metros, tenants are migrating to more efficient, urban space and reducing space requirements per person in the process.
Multifamily: Growing populations of adults under the age of 35 and over 55, along with continued challenges towards home ownership for members of Generation X and Y, will keep demand brisk for the U.S. apartment market. Look for investment patterns to shift in 2013, however, as high pricing and competition for assets drives buyers to secondary and tertiary markets in search of more lucrative yields.
As lending requirements ease in 2013, more private investors will enter the multifamily market. Some markets begin to see a risk of overbuilding.
Hotels: Transaction volume in hotels is on pace to reach $15 billion by the end of 2012, remaining steady on 2011 levels.. Availability of debt for hotel acquisitions will be at its highest levels since 2007, and from a variety of lending sources.
Private equity investors will again be the most active hotel investment group, focusing on value-add strategies. REITs will be the second most dominant investor type, buying up mostly established, well-located hotels in core markets. Offshore investors will continue to be players in gateway cities.
Industrial: E-commerce is changing the way online retailers and distributors use industrial space. Fulfillment is as much as five times more labor intensive than traditional retail distribution as workers pick and ship orders directly to customers. Tenants want distribution centers close to population centers, too, in order to reduce delivery times.
Limited supply and functionality of existing stock will lead to increased build-to-suit activity in 2013. Look for a potential boost in demand in 2013 from companies serving the recovering housing sector.
Retail: Retailers will continue to struggle with the battle between e-commerce and m-commerce sellers, with firms that are able to adapt to these new models coming out ahead. The shift to online sales has retailers moving out of less-successful stores and adopting smaller footprints.
Retail centers with restaurants or other entertainment venues will outperform competing properties lacking in "experience retail offerings." Traditional groceries are on the ropes while high-end grocers will add stores in 2013. Mom and pop shops, office suppliers, and sellers of physical media such as video games will suffer.
Some retail markets hardest hit by the housing collapse, including Las Vegas and Phoenix, will bounce back in 2013 as housing recovers.
Click here for a replay of Jones Lang LaSalle's 2013 Forecast presentation.
For greater detail on Jones Lang LaSalle's research forecasts, visit the firm's research reports at: www.us.joneslanglasalle.com and follow JLL research on Twitter at @JLLResearch.
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.