ULI Special Report: D.C. Falls in Investors’ Eyes
By Suzann D. Silverman, Editorial Director, Commercial Property Executive
Chicago—The 2014 Emerging Trends in Real Estate report contained few surprises, but traditionally durable Washington, D.C.’s drop to No. 22 in the ranking of cities with the best investment activity spoke volumes about the uncertainty the federal government has produced. In what Urban Land Institute chairman Patrick Phillips termed “guilt by association” during a press conference unveiling the new report at the Fall Meeting yesterday, office absorption declined last year and survey respondents termed development prospects bleak. At the same time, investors are not giving up on this longtime No. 1 investment market. Respondents to this year’s Emerging Trends survey found an influx of young people are producing strong prospects for retail and amenities, while an emerging startup and entrepreneurial culture offers further promise. In fact, the only property sector they want to sell is industrial/distribution space.
And with other markets remaining relatively stable, while real estate investment in the United States is not expected to boom, confidence in the economy is improving. “We believe it’s safe to say the recovery is durable beyond 2014,” said Phillips.
Indeed, the report’s red-yellow-green ratings turned up a significant amount of green this year and very little red around the country. The only markets rated solidly red (for investment, development and homebuilding prospects) were Cleveland, Providence and Detroit, and Providence’s performance may be more a lack of spillover from Boston investors, noted Andrew Warren of PricewaterhouseCoopers, a report author. Furthermore, investors responding to the survey listed more markets with good or better prospects for investment than ever. This year’s list added Dallas-Fort Worth, Miami, Orange County and Portland, and continued to include Austin, Boston, Houston, New York, San Francisco, San Jose and Seattle. Just three years ago, only New York and Washington, D.C., received a positive rating.
Those cities illustrate greater geographic and economic diversity, Warren added. But even more noteworthy than the number and range of well-perceived markets is the continued growth in interest in secondary markets. That attraction has been increasing over the past couple of years as investors have sought yield “with a vengeance” as prices in core markets have increased, observed report author Steven Blank of the Urban Land Institute. With prices still high and relatively few assets trading, finding yield continues to be a challenge.
Also noteworthy this year was the emergence of industrial at the top of the property sector list, replacing multifamily, Warren noted. That does not mean the bloom is off the apartment rose—in fact, apartments continue to be developed—but rather reflects investors’ expectation of growing demand for distribution centers to fulfill e-commerce needs.
And capital is increasingly available, although the sources are shifting. Among equity providers, foreign investors rank first now, and “the bloom is clearly off the rose for REITs after four good years,” Blank said. On the debt side, CMBS now tops the list and insurance companies have dropped to third place, but “with the exception of the GSEs, availability of capital looks very solid for 2014.” Debt capital, in fact, remains available and is even likely to increase across all capital sectors, although, given the large spread between still-low interest rates and the 10-year Treasury, yields will remain low for new investors.
Among the key drivers for 2014, listed Emerging Trends Chair Mitchell Roschelle of PricewaterhouseCoopers:
- Industry profitability is expected to improve;
- Interest rates are expected to increase;
- There is more emphasis on property management and less on financial engineering;
- More capital is expected to be available;
- Opportunities for development are emerging in sectors other than multifamily;
- The industrial is changing to meet general needs;
- The needs of end users continue to change;
- The single-family home market continues to improve.
Look for an upcoming video evaluation of the results with Roschelle, Blank and Warren on MHN TV.