PricewaterhouseCoopers LLP’s (PwC) first quarter report, “The Pulse of the Commercial Real Estate Industry,” reveals that the barometer for commercial real estate is positive overall but the rates of recovery and growth vary between markets.
According to Chuck Di Rocco, director of real estate research with PwC’s Washington, D.C. office, the outlook for commercial real estate is generally good for 2012, due to the fact that the jobs outlook has improved.
“It’s 32 months since the end of the recession and we’re still a little bit behind, and jobs are still a big driver for real estate,” DiRocco admits. Although 120,000 jobs added in March were fewer than expected and less than the pace in previous months, the unemployment rate is continuing to improve and fell to 8.2 percent.
The biggest concern for 2012, DiRocco says, is loss of regional and local government jobs, which diversified markets such as Austin, Texas, are better equipped to survive than government-driven markets like Sacramento, Calif., “which has really taken hits.”
Office demand has experienced a slight decline so far in 2012, says DiRocco, but the 2012 forecast is for the start of the recovery on a national level. DiRocco notes that national supply is good overall, driven less by lack of increase in hiring than by lack of development. He says the “seven consecutive good quarters since the second quarter of 2010” should continue through this year. “The big question is, what’s the rate of hiring going to be to fill this space?” he notes.
In 2011, only 0.2 percent of the entire commercial real estate stock was developed, and this trend should remain the same in 2012, says DiRocco. The 10-year average for commercial real estate stock is 1.3 percent and the 10-year average vacancy rate is about 15.1 percent, and PwC forecasts this sector to close 2012 with a 14.6 percent, and possibly move below the 10-year average by 2013.
Vacancy rates nationally should fall about 40 basis points this year and perhaps another 100 basis points in 2013, falling below the 10-year average. In 2015, there may be another 100-point drop in basis points as the recovery reaches its final stage.
Regionally, the Northeast is strongest in 2012 and 2013 and will see expansion in 2014 and 2015, and the South will move slowly to recovery in 2014. The Midwest will continue to struggle until 2014 to 2015.
Office markets to watch, says DiRocco, are Austin, Texas, and Phoenix. Austin has had high total employment over the past five years, and currently it is up 1.2 percent while the national average is down .7 percent. The vacancy rate for office space in Austin is 14.6 percent, which is down 300 basis points from 2011, “so that’s how quick this market is coming around,” says DiRocco. “It’s like another country, just trending in a different direction.”
Phoenix’s employment growth is 1.9 percent above the national average over the past four quarters. DiRocco expects positive absorption in 2012 and 2013. Vacancies in Phoenix are still a concern at 20 to 25 percent; however, he forecasts they will drop 250 basis points by the end of 2012.
“The big thing with Phoenix is there’s a large positive migration of individuals and companies and where are they coming from? California,” says DiRocco. “A lot of companies are just up and moving out of California so as not to have to deal with its tax issues and are moving into the Phoenix market. …Maybe it’s actually time to look at Phoenix again.”
Nationally, demographics for apartments “are just fantastic,” says DiRocco. He cites 80 million Generation Y members as currently in their prime renting years, and of the 72 million baby boomers, many are downsizing.
In 2012, rents have exceeded the 2008 peaks. In 2013 to 2016, PwC predicts a 3.6 percent average annual increase in rents. Absorption has been positive since the second quarter of 2009, and 2012 should see 128,000 units.
For new construction, 75,000 units are forecast for completion in 2012 and 137,000 for 2013, higher than the 10-year averages. Vacancy rates remain low. At the close of 2011, they were 5.2 percent and 50 basis points down from pre-recession levels, and are forecasted for 4.5 percent by the close of 2012.
The Pittsburgh market has reached its peak, DiRocco notes, and the apartment sector remains strong across the board, with the South showing the most signs of recovery.
According to the 2012 annual State of Global Trade Survey, conducted by international business research firm Panjiva and the Global Sourcing Council, 73 percent of buyers and suppliers said they source in China while 68 percent of buyers and suppliers said sourcing outside of China is important. “That shows people are actually starting to think outside of China,” says DiRocco. Of those surveyed, 24 percent named the U.S. as a sourcing alternative to China and 63 percent said the U.S. is a target for new business.
The top three concerns regarding manufacturing, according to the survey, are a slump in global demand, volatility in commodity prices as they continue to rise and rising labor prices, DiRocco notes.
Availability rates peaked in the second quarter of 2010 at 14.5 percent and have remained down 120 basis points since then, but are forecasted to reach around 12.5 by the end of 2012. Pre-recession levels were about 9.7 percent, says DiRocco, and the 10-year average is 11.7 percent. The past six consecutive quarters have shown positive growth and completions look to be limited through 2014. “Industrial is moving in the right direction but with a question mark behind it,” he says.
There are currently 47 industrial markets above the 10-year availability averages. Regionally, the industrial sector will continue to do best in the Northeast and the West through 2013, and the recovery period in 2014 will be expansionary, says DiRocco. The Midwest and the South are still in recession this year. A 100-basis-point drop in availability is expected to occur in 2013 and again in 2015, which he expects to be the “first real start of expansion.”
Denver and Salt Lake City are two industrial markets worth watching, says DiRocco. In the past 12 months, Denver has added 2.9 percent in distribution jobs and 2 percent in manufacturing employment and has limited completions with availability rates looking to drop by more than 200 basis points by the end of 2013. Salt Lake City has increased distribution jobs about 4 percent and manufacturing jobs more than 7.5 percent over the past year. DiRocco notes that Salt Lake City is expanding its carbon fiber production industry by $650 million and adding 600 new jobs.
“Consumer spending is our biggest concern over all,” says DiRocco. Of the 80 markets studied, 51 had positive absorption on the retail side. However, the bottom line on retail, he reports, “is there is still a little too much inventory and the economy is still too unsure to support all that retail out there.”
Retail vacancy rates at the close of 2011 remained approximately the same as they were a year earlier, at 11 percent. Annual drops of 50 basis points are forecasted for 2013, 2014 and 2015. However, says DiRocco, 2012 through 2015 is the last stage of the recessionary period for retail. Consumer confidence is expected to pick up in 2013 and 2014.
The healthiest retail market, according to DiRocco, is Houston, Texas, which has taken the lead in the energy industry and has positive migration and high average household incomes. Houston has higher rental rates and a 40 basis point decline in vacancies so far in 2012. “I call Texas ‘that other country,’” says DiRocco. “You’re not really seeing that kind of movement anywhere else.”