Despite Slow Recovery in Commercial Real Estate, Innovation Key to Long Term Growth: Deloitte

According to Bob O'Brien, vice chairman and Deloitte's real estate sector leader, "Overall, we are seeing recovery in commercial real estate activity; however, the pace of recovery is likely to be more modest across several property types until the broader economy picks up. Sustainability is gaining a lot of traction in the real estate industry, and there is renewed interest in foreign investment, especially in emerging markets. In addition, investors from emerging countries like China are looking to the U.S. for stable investments."

O'Brien continued, "It is critical for CRE players to aggressively adopt technological innovation, like cloud computing, analytics and social media, to spur growth and maintain their competitive edge."

According to the report, the top 10 issues in commercial real estate in 2013 include:

• Issue 1 – Macroeconomic Fundamentals: Contagion of the European crisis together with structural issues of the U.S. economy has resulted in slower hiring, weaker consumer sentiments and reduced manufacturing. While key CRE parameters – fundamentals, transactions, lending – have been on the mend, we will likely see a more modest pace of growth given the continued slow macroeconomic growth.  
• Issue 2 – CRE Fundamentals: CRE fundamentals have improved across all sectors, with flat to positive net absorptions. Leasing activity has improved across most property types. Revenue growth for CRE players is unlikely to reach pre-recession levels over the next few years, especially as construction and delivery of new properties remains minimal. While the apartment and lodging sectors continue to grow strongly, comparatively slower recovery in office, industrial and retail suggests more sluggish growth.
• Issue 3 – CRE Lending: While banks have eased underwriting standards and increased commercial mortgage originations in the first half of the year, the high level of maturing debt remains a significant barrier to recovery in the CRE market. High commercial mortgage backed securities (CMBS) delinquencies at 8.9 percent also remain a concern. However, the increased focus by lenders on permanent loan resolutions through pre-foreclosure sales will likely provide opportunities for investors to acquire overleveraged properties at attractive prices.  
• Issue 4 – REITs and PERE: REITs (Real Estate Investment Trusts) are one of the best performers in the CRE recovery, given the easier access to capital, high acquisition activity and superior investment returns compared to traditional asset classes. However, private equity real estate (PERE) has had a comparatively slower recovery as investors remained on the sidelines amid the uncertain macroeconomic scenario and delayed private equity exits.
• Issue 5 – CRE Deal Flow: Transaction activity has been a bright spot in the CRE recovery process, driven by REITs and distressed deals. However, CRE deal flow appears to be decelerating due to the slow economic growth.
• Issue 6 – Single-family Homes: The single-family homes market continues to improve slowly, with low but relatively stable prices and home equity value, choppy sales, moderate supply, foreclosures and limited mortgage financing options. Most efforts made by the government to stimulate the residential sector have failed to deliver. However, the recent effort aimed at encouraging private participation to clear the glut of foreclosed homes has generated investor interest.
• Issue 7 – Globalization of CRE: The European slowdown is driving global real estate investors to favor Class A properties across the globe. From a regional perspective, the relatively high-growth emerging markets such as Brazil and Asia Pacific continue to attract the interest of foreign investors seeking higher returns.
• Issue 8 – Sustainability: As buildings in the U.S. account for nearly 41 percent of energy usage, 73 percent of electricity consumption, 13.6 percent of potable water usage and 38 percent of greenhouse gas emissions, investors' and tenants' decisions are increasingly influenced by sustainability. It is imperative for CRE players to follow established benchmarks and guidelines around sustainability reporting and disclosure. Furthermore, sustainability initiatives can be a powerful driver for developing innovative processes and operating models to reduce operating costs, boost revenues and mitigate enterprise risk.
• Issue 9 – Technology: CRE players are increasingly embracing technological innovation, such as cloud computing, mobile applications and social media, to better reach their end customers who are using advanced interfaces. Cloud computing drives operational efficiency, mobility improves the customer experience and social media helps CRE firms gather pertinent data around consumer behaviors. For an industry that has traditionally been slow to adopt new technologies, it is more important than ever that CRE players re-strategize and adapt to maintain their competitive edge.
• Issue 10 –Analytics: CRE players need to address new business challenges and simultaneously improve operational performance and effectively manage enterprise risk. Analytics can help CRE players address these needs by integrating capabilities in data management, statistics, technology, automation and governance into a potent catalyst for making better and faster decisions. In the long-term, the level of analytics implemented will likely be a key differentiator in assessment of tenant mix and retention strategies across real estate sub-sectors.       

A copy of the report is available on Deloitte's website at: www.deloitte.com/us/2013creoutlook .

About Deloitte's Real Estate Group
Deloitte's Real Estate group draws on the insights and experience of Deloitte's four primary businesses — consulting, audit, tax and financial advisory.  The group provides local, national and global real estate services to clients that include: REITs and property companies, real estate funds and investors, homebuilders, developers and land owners, engineering and construction companies and service providers.

For more information about Deloitte's Real Estate group, please visit http://www.deloitte.com/view/en_US/us/Industries/Real-Estate/index.htm .  

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

SOURCE Deloitte