HOUSTON, Dec. 11, 2014 /PRNewswire/ -- The Thomson Reuters/University of Michigan overall consumer sentiment index peaked in October at 86.4, the highest level since July 2007. Delta Associates, Transwestern's research affiliate, is already seeing this consumer optimism act in harmony with the slow and steady revival of the national economy, helping to drive the recent increase in Gross Domestic Product (GDP). The upbeat news on GDP bodes well for the commercial real estate industry. Retail and industrial asset types are particularly poised to benefit from consumers' improving take on the national economy, according to the fourth-quarter edition of "Insights + Trends + Opportunities" publication by Transwestern and Delta Associates. Each edition of "Insights + Trends + Opportunities" features a review of how the economy is impacting commercial real estate and valuable information for commercial property owners, investors, tenants and developers.
COMMERCIAL REAL ESTATE
A tightening labor market will continue to increase overall disposable income, in turn increasing retail sales. Job growth combined with the upward progression of consumer sentiment could increase demand for retail space in the year ahead. More specifically, there are pockets of strong demand for new or renovated space in urban mixed-use centers driven by Baby Boomers and Millennials. Notwithstanding the recent optimism on consumer sentiment, retail sales growth remains tepid – for now – and construction activity remains moderate. Although double-digit vacancy rates have kept rent growth for shopping centers at a measured pace, their vacancy rate has been declining.
As a growing portion of consumer spending is conducted through e-commerce, the need for seamless distribution services will continue to trigger e-retailers' demand for warehouse and distribution space. Consequently, the national vacancy rate for warehouse and distribution space declined 40 basis points during the first three quarters of this year, to 11.2 percent, the lowest level of the current cycle.
While urban office buildings typically have attracted financial institutions and professional services firms, a new type of tenant is emerging as an important part of the downtown mix. Higher education institutions and graduate-level professional schools are contributing to urban renewal be relocating from suburban and standalone campuses to Central Business Districts (CBDs). Driving this trend is a desire to be closer to their targeted student population, many of whom work full-time. Just as today's progressive companies select office space that appeals to younger employees, schools want to locate in highly visible buildings in 24/7 environments that meet their students' desire to live, work and play in a central location. In addition, changes to how people learn – specifically through online classes – are prompting schools to lease space with fewer and smaller classrooms and more collaborative areas.
With the end of Quantitative Easing, Federal Reserve officials are now debating when to begin raising interest rates. Economists forecast an initial rise in rates in mid-2015, with additional increases over the next couple of years. Real estate investors have become accustomed to low interest rates, but the time has come to formulate strategies based on a new interest rate environment. Movement in interest rates will not immediately impact capitalization rates, as the former is historically more volatile than cap rates. Institutional owners and other investors that rely on leverage have the most to gain from taking action before interest rates rise. Investors that have a hold strategy on core real estate are advised to lock in longer-term debt at today's lower rates. Likewise, today is an excellent time for short-term holders to sell if the property is stabilized.
Although forecasters have begun to warn of potential overbuilding in the multifamily sector, development in the U.S. has yet to meet pent-up demand. Annualized effective rent growth was 4.1 percent in August 2014, the highest since October 2011. At the current rate of development, Transwestern Development Co. anticipates production capacity and demand will reach equilibrium by mid-2015. Subsequently, the industry could enjoy up to six additional years of sustainable production, if developers and lenders carefully monitor demand and modify deliveries accordingly.
Download the full publication at twurls.com/insights4q14.
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 180 offices in 38 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.