Experts Predict How Interest Rate Hikes, Improving Economic Conditions Will Impact Real Estate

HOUSTON, Feb. 24, 2014 /PRNewswire/ -- Uncertainty was a theme that dominated discussions of the U.S. economy during 2013, but signs are looking up as Congress was finally able to reach a budget agreement at the end of the year, according to the first-quarter edition of "Insights + Trends + Opportunities" report by Transwestern and its research affiliate, Delta Associates. Each edition of "Insights + Trends + Opportunities" features a review of the economic impact on commercial real estate, as well as valuable information for commercial property owners, investors, tenants and developers.

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RATE OF INCREASE
2013 marked a clear increase in long-term interest rates that will gradually – but meaningfully – affect investors' decision-making in 2014. With the national economy showing signs of more significant traction during the second half of 2013 (notwithstanding recent weak jobs reports), and with the Federal Reserve making it clear that tapering of its bond-buying program will proceed in 2014, long-term interest rates are likely to continue their ascent. J.P. Morgan forecasts 10-year Treasury yields stabilizing at 4.5 percent to 5.0 percent in 2018, with a 200 to 300 basis point spread for core real estate. That would make commercial real estate mortgage rates of perhaps 7.25 percent in 2018. Delta Associates sees this as sensible for investment planning purposes.

HEALTHY ASSETS
The Affordable Care Act's (ACA) impact on medical office buildings is becoming more apparent. More physicians are relying on hospital systems for financial stability in today's changing healthcare sector. Hospitals and physicians have embraced one another to withstand recent transitions brought on by the ACA, which diminish reimbursements for both parties. The legislation also requires physicians to spend precious capital to meet technology requirements, which have left many physicians in a precarious financial position. In a defensive maneuver, hospitals are preserving their admission revenue by acquiring physician practice groups. Contrary to public perception, this paradigm shift evoked by the ACA will have an overall positive effect on medical office buildings and healthcare facilities over the long term.

EXIT STRATEGY
Many tenants in various property types are facing costly consequences for neglecting a "must" in lease negotiations – an exit strategy. Evaluating exit strategies should be a top priority for tenants upon entering a lease agreement. Many companies fail to plan for a possible shift in their real estate requirements. In the worst case scenario, firms could eventually need to close some or all of their operations, or they may be forced to relocate if they need to expand but there is no more room in their current building. Negotiating an exit strategy is insurance against an unforeseeable future. Tenants need lease protection in case changes occur in the economy, their company or the industry in which they operate. Business shifts are often unimaginable to the tenant at the beginning of a lease term, but planning for them is as important as negotiating any other element in the agreement.

DEVELOPMENT SPOTLIGHT
Office buildings of the future are finally taking shape, and owners and developers are raising the bar even higher for this latest generation of premier office space to attract high-quality tenants. The BHP Billiton Tower in Houston is a 600,000-square-foot, Class AA tower under construction in the Galleria submarket. The building, which broke ground in November 2013, is part of Four Oaks Place, a four-building, 1.7 million-square-foot complex owned by TIAA-CREF, a New York-based financial services firm. The 30-story tower designed by Pickard Chilton Associates is intended to meet LEED^® Gold certification standards. When the building is delivered in the first quarter of 2016, its premier architecture will enhance the skyline of one of Houston's most dense business districts. Even before its completion, this landmark represents the future development direction for top-quality office space in the United States. 

Download the full publication here:
http://www.transwestern.net/public/corporate/Insights/1Q2014_media/Insights_1Q2014_Media.pdf

ABOUT TRANSWESTERN
Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit transwestern.com and follow us on Twitter: @Transwestern.

SOURCE Transwestern