CRE faces long grind to recovery, new forecast says
The commercial real estate industry will face sporadic growth followed by a long, grind-it-out recovery, according to a forecast released Wednesday by PricewaterhouseCoopers and the Urban Land Institute. Survey participants predict that 2012 will see an increased supply of properties for sale, but diminished buyer interest. The report recommends investors focus on markets where tech and energy companies are thriving, and said growth likely will be confined largely to a few real estate markets that offer 24-hour transportation hubs with global access, according to respondents of the "Emerging Trends in Real Estate 2012" report released during the annual Urban Land Institute conference under way in Los Angeles. The absence of dynamic jobs generators will weigh on the market and reticent consumer spending will compromise growth in retail and industrial sectors, but multifamily, which began heating up this year, should gain additional traction in 2012. "Job creation is clearly the critical ingredient for a sustained recovery in commercial real estate and the market participants we surveyed uniformly struggled to identify new employment engines," said Mitch Roschelle, a partner and U.S. real estate advisory practice leader at PwC. "In 2012, investors expect pricing to level off in the top markets — and overall 'buy' sentiment will subside, selling appetites will increase, and more owners will hold until the economy untracks. This is part of 'the new normal' as investors are coming to grips that they may not be selling for more than they paid," he said. Survey participants predicted that well-leased core real estate in leading markets will continue to produce solid single-digit, income-oriented returns. "The return landscape for 2012 presents a mixed bag, and all depends on where and when investors bought, the amount of leverage employed, and asset quality," said Stephen Blank, ULI senior resident fellow for real estate finance. "Many players will back off from bidding on trophy properties in top-tier markets, fearing that pricing is outpacing the potential for recovery in net operating incomes. Banks and special servicers holding distressed debt will continue to dribble out loan pools with various embedded gems, and cash buyers can claim single-family lots for cents on the dollar, the report said. Only one of 51 U.S. cities surveyed — Washington, D.C. — failed to improve its investment score over last year's report. More than 60% of the cities rate as fair or better prospects for 2012, compared with only 40% in 2011. Washington, D.C., although its score declined, remained the No. 1 city for CRE investments, but some worry that the city has become "too frothy" and may cool down if the federal government shrinks its ranks. Austin, Texas, ranked second, followed by San Francisco (third), New York City (fourth) and Boston (fifth). Apartment construction leads all commercial property types with opportunities for investment and development in 2012. More than 950 real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants were surveyed and interviewed for the report. Write to Kerry Curry. Follow her @communicatorKLC.