Market forecast

2012 Expectations and Realities

By Kenneth P. Riggs, CCIM, CRE, MAI |

“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: With 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.
• Industrial: Unless 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.
• Multifamily: The 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.

Although 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.

Kenneth 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 riggs@rerc.com. Read “Shelter From the Storm,” the complete 2012 commercial real estate forecast in the January/February 2012 CIRE.