Market forecast

2011 Forecast Preview

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

The Economy

While still struggling, the economy has some good associated with it, including positive growth, low interest rates, and increasing private-sector employment growth. Unfortunately, much is still quite bad, including the weakness in the residential real estate market, an increasing debt load, and an unemployment rate that is much too high. As for the unknown, there is plenty of that to go around: Will there be a double-dip recession? Will the U.S. lose its AAA credit rating? Will California or other states fall into bankruptcy? What is the condition of the regional banks?

Capital Markets

Capital is more available to small businesses, but, despite low interest rates, many small businesses do not wish to borrow due to low sales demand. According to the National Federation of Independent BusinessSmall Business Economic Trends report, 91 percent of survey respondents reported that all their credit needs were met or that they were not interested in borrowing. This is expected to continue until demand for goods and services increases. With respect to capital for commercial real estate, many of Real Estate Research Corp.’s survey respondents state that regional banks remain unwilling to lend for what they consider a risky investment, while other banks are still unwilling to write down bad loans and are delaying the foreclosure process.

Property Sectors

Among the major property types, the apartment sector is in most demand and offers the lowest amount of risk. The office and hotel sectors generally are the least attractive and the riskiest property types in which to invest. The industrial and retail property sectors present a mixed view overall for investors.

Investment

Real estate investment trusts and institutional properties, particularly on the East and West Coasts, are offering the best returns for the near term. In contrast, highly leveraged properties in low-growth areas continue to fall into distress as loans come due. But it is the second- and third-tier properties (particularly office properties) in the smaller markets in the flyover regions that are still unknown: How many of these will be able to wait things out until economic conditions improve, and how many eventually will default?

Kenneth P. Riggs Jr., CCIM, CRE, MAI, is president and chief executive officer of the Real Estate Research Corp. and chief economist of the CCIM Institute. Contact him at riggs@rerc.com.

For a more in-depth look at commercial real estate for the coming year, read “The Good, the Bad, and the Unknown” in the January/February 2011 issue of Commercial Investment Real Estate.

Also, listen to Ken Riggs’ updated forecast in this recent Ward Center Webinar, 2011 Moneymaking Trends and the State of Commercial Real Estate.