2012 Expectations and Realities
“Relatively stable” sounds pretty
good these days, and commercial real estate’s back-to-basics investment
approach is why, for generations, individuals, institutions, and funds have invested
in this asset class. There are few opportunities that involve little risk, but
commercial real estate generally offers relatively reasonable returns for the
amount of risk involved.
In addition, lowering one’s
expectations is often a good approach to investing, particularly in uncertain
times. If we lower our expectations to account for the uncertainty in the
investment environment, commercial real estate should continue to be an
attractive investment in 2012 as well as in the years to come. The following outlook
will help investors keep expectations in line in the year ahead:
Economy: Look for a
modest economic recovery versus the go-go years immediately preceding the
recession. Economic growth is forecast at 2.0 percent in 2012. Consumption is
forecast to grow 1.8 percent in 2012, while the National Association of Realtors
forecasts government spending growth at -0.5 percent in 2012. Use the slow pace
of economic growth in 2012 to build a strong foundation for slightly improved
growth in 2013.
office completions remaining at roughly half the pace of absorption, expect the
office sector vacancy rate to decline to approximately 16.6 percent by year-end,
according to Reis. However, with job creation remaining weak, rents are not
expected to increase significantly.
economic conditions deteriorate further, the national industrial property
market should continue to strengthen in 2012. Net effective rents have
stabilized and are increasing for large class A distribution buildings, but
broad-based rent growth is unlikely to commence for at least another year.
Retail: Look for
retail sales to bump along at modest levels in 2012, with retailers continuing
to reposition stores to take advantage of favorable rental rates or expansion plans.
Properties such as grocery-anchored centers will continue to outperform the
rest of the retail sector due to consumer spending habits.
overall outlook for the apartment sector indicates another robust year in 2012,
given strong fundamentals, a decreasing homeownership rate, lack of new supply,
and the availability of financing for apartment investments. Apartment
completions brought about by new starts won’t materialize until late 2012.
Hospitality: This year
will be challenging in terms of maintaining hotel demand from corporate and
leisure travel. Similar to retail, the hotel sector is closely aligned with ups
and downs in the economy and business and consumer confidence.
2012 is expected to remain lean, the commercial real estate investment market
has a strong foundation to remain a leading and well-respected investment
alternative for the next 10 years.
P. Riggs, CCIM, CRE, MAI, is chief
real estate economist for CCIM Institute and chairman and president of Real Estate
Research Corp. in Chicago. Contact him at email@example.com. Read “Shelter From
the Storm,” the complete 2012 commercial real estate forecast in the January/February