Investor Survey by ULI, PricewaterhouseCoopers Sees Moderate Returns Across Most Property Types
DENVER, October 18, 2006 – The global gateway metropolitan areas of New York, Washington, Los Angeles, Seattle and San Francisco and Seattle rank as the top major U.S. markets for real estate investment prospects next year, according to
Emerging Trends in Real Estate® 2007, released today by the Urban Land Institute (ULI) and PricewaterhouseCoopers LLP at ULI's fall meeting.
The annual report, now in its 28th year, provides an in-depth outlook on U.S. real estate investment and development trends, real estate finance and capital markets, property sectors and other real estate issues.
While the industry will likely experience a slowdown in the year ahead,
Emerging Trends points out that returns on most property types are expected to remain satisfactory, reverting to levels closer to historical averages. “Most respondents expect to sleep well at night, and are comfortable with high-single digit returns for core properties,” says ULI Senior Resident Fellow Stephen Blank. “There may be some who still want to believe that halcyon returns will last indefinitely, but most sense the boom is over.”
"Nothing lasts forever. The fact is that real estate has enjoyed a very healthy 'up' cycle for a longer period than normal," says William E. Croteau, U.S. Real Estate Practice Leader for PricewaterhouseCoopers. "Even so, real estate is still viewed favorably as an asset class and there is still a lot of money – especially from private funds and institutional investors – looking for the right opportunity. Although we don't expect any major downturn in the marketplace, it's likely that real estate's overall performance will be more modest in 2007."
The most promising opportunities are in the “investment meccas” on both coasts, the report says. Location becomes ever more important in real estate investing as the transforming global economy increasingly determines where companies and people need and want to be. The top markets are distinguished by several characteristics, including: locations along global pathways with major international airports and harbor ports; 24-hour features; attractive settings in reasonably comfortable climates; geographic barriers limiting sprawl; and brainpower jobs attracting an affluent, highly educated workforce.
The report notes that several cities in the South and Southwest, such as Dallas, Houston, Atlanta and Phoenix, remain development magnets, although their tendency toward oversupply compromises their standing with investors. “Sunbelt development havens consistently fall behind global gateways for investment prospects, even as their economies continue to grow. They remain relatively affordable, but these areas lack strong 24-hour cores and mass transit systems, while interior locations make them secondary destinations for international business,” the report says.
Denver is cited as a market with strong development prospects, due to its growing light-rail system, evolving 24-hour downtown district, natural beauty and international-scale airport.
As in previous years,
Emerging Trends singles out infill, mixed-use projects as a favored type of development, offering greater convenience for busy professionals. Such projects also appeal to both empty nesters and their young adult offspring by providing pedestrian-accessible retail, restaurants, parks, supermarkets and offices. Transit-oriented development at subway or light-rail stations "almost cannot miss," the report says. It lists senior housing, student housing and infrastructure as favored niche property types.
In terms of individual property sectors, the apartment sector – specifically the moderate-income category -- is ranked highest for investment return potential, replacing hotels, which captured the top rating last year.
Emerging Trends attributes the apartment market’s strength to rising mortgage rates and high housing costs, which have shut some entry-level buyers out of the home buying market. As the for-sale market softens, conversions of condominiums into apartments could cause some unwanted competition, the report cautions.
In the for-sale housing market, affordability problems -- especially in high-cost areas -- combined with an oversupply of units available for sale, is causing “housing angst,” the report says, adding that home prices could decline off the market highs of recent years. Still, only the most recent purchasers who are forced to sell quickly risk losing on their investments: “Most people are well ahead of the game and will stay there,” the report says. Among the cities offering the best prospects for owner-occupied home building are Austin, San Francisco, Washington, Los Angeles, San Antonio, New York, San Jose, Jacksonville, Seattle and Houston. Product categories offering the best development opportunities: infill and in-town housing, second and leisure homes, attached single-family homes, and detached, single-family moderate-income homes.
Other property sector highlights:
- Hotels – Strength: Lodging markets will continue to be boosted by a surge in business travel, and rising leisure travel by aging baby boomers. Weakness: New construction gets underway just as the economy retrenches, signaling an approaching peak in the hotel markets. Best bet: Selling sentiments should increase for limited-service hotels that are easy to complete. Hold full-service hotels in major global business markets. Outlook: Full-service hotels have legs as long as the economy holds up.
- Retail – Strength: Retail owners continue to celebrate Americans’ passion for buying. Decent job growth will continue to fuel the spending spree. Lifestyle centers in upscale suburban markets score well. Weakness: It’s within the realm of possibility that slowing retail sales could finally thump the consumer-dependent economy. New space is being delivered just as bullish sentiment may peter out. Best bet: Hold fortress malls and neighborhood centers with first-rank grocers. Sell weaker grocery-anchored retail and cash out of second- and third-tier power centers. Outlook: Odds grow that shoppers take a breather, if for no other reason than exhaustion. Expect returns to slip back to mid-to-high single digits.
- Industrial – Strength: Warehouse markets never supply enough for-sale products to satisfy investors, especially those that covet these properties’ solid income flows. Weakness: Buyers continue to have trouble assembling scale in portfolios, since not much sells relative to demand. Owners tend to hold for the long-term. Best bet: Intermodal locations that serve global shipping lanes are “all the rage.” But, contrarians focus on older warehouse properties in infill sites suitable for redevelopment as mixed-use. Outlook: If chip maker and software designer prospects continue to improve, research and development markets may be poised to move again. What they need is the new, new thing, which has not materialized yet.
- Office – Strength: Poised for strong absorption, burned-off concessions, real rent growth, and increased earnings. Downtown office catches job growth, and lease renewals start adding value. Weakness: Away from 24-hour cities and prime sub-cities, tenant demand is spotty outside of major markets. Best bet: Hold prime office space in 24-hour cities and tight southern California markets. These properties will benefit immediately from increasing revenues, as leases roll over into higher rates. Outlook: Expect greater bifurcation in pricing to appear between supply-constrained, low-vacancy markets on the coasts and higher-vacancy suburban-oriented markets. Investors also discriminate more between trophy and commodity properties.
Emerging Trends interviewees rank construction material costs, land costs, construction labor costs, high vacancy rates, growth controls and inadequate infrastructure as key industry-related issues that could pose problems for real estate investment and development next year. They cite insufficient job growth, interest rate increases, inflation, minimal income and wage growth, and energy prices as economic-related issues that could present obstacles. Social and political issues such as terrorism and immigration reform are of far less concern.
Despite an expected downturn in the nation’s economic growth, the consensus among respondents is that the economy “has enough steam to support demand growth in real estate markets, which seem well positioned to muddle through any mild distress associated with a slowdown,” the report says. “Expect enough economic growth for solid real estate absorption.” The naysayers, it notes, worry about harsh ramifications of a decline in the housing sector and any drop in consumer spending.
Green building is one trend worth watching that could cut across all property sectors,
Emerging Trends says. “Out of necessity, the impact of high energy costs has renewed industry interest in conservation programs and in increasing the efficiency of building systems…while green buildings cost up to 10 percent more to construct, energy savings can approach 35 percent, and tenant demand grows.” With residential and commercial buildings accounting for 40 percent of total U.S. energy consumption, the impact of a widespread shift to green building “could be huge,” it notes. Even if oil prices decline and interest in saving energy fades, the new technologies will still make economic sense, as “lower costs and more efficient, healthier environments win the day.”
Now published in separate versions for the United States, Europe and Asia Pacific,
Emerging Trends is one of the most widely respected and anticipated forecasts for the real estate and land use industry. The U.S. version reflects interviews with and surveys of more than 600 of the industry’s elite, including investors, developers, property company representatives, lenders, brokers and consultants. A copy of
Emerging Trends in Real Estate® 2007 is available at
www.uli.org.
About the Urban Land Institute
The Urban Land Institute (
www.uli.org) is a nonprofit education and research institute supported by its members. Its mission is to provide responsible leadership in the use of land in order to enhance the total environment. Established in 1936, the Institute has more than 32,500 members representing all aspects of land use and development disciplines.
About PricewaterhouseCoopers
PricewaterhouseCoopers (
www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
“PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
###
Additional Contact:
Trisha Riggs, Urban Land Institute:
Tel: +1 202 624 7086
