By Stuart Eisenberg, Real Estate practice leader and partner at BDO USA
As we settle into the New Year, now is the time to look at what 2015 holds for commercial real estate.
Thanks to 2014 giving way to stronger market fundamentals, including better availability of equity and financing, the industry is expected to continue to flourish and sustain recent growth.
With a bright outlook forecasted for the commercial real estate industry as a whole, what are those specific REIT trends worth paying attention to in 2015? The following are five to put on your 2015 REIT radar.
1. Sovereign Funds and CMBS Loans Feel Ongoing Impact From Declining Oil Prices: While consumers are cheering for cheaper prices at the pump the current price per barrel may not bode well for commercial real estate and real estate financing. Why?
- Sovereign Funds: The countries that have profited from energy being their primary export are now feeling the pinch as the price per barrel falls and they are forced to draw on windfalls from their sovereign funds. With countries tapping into these funds that often hold real estate assets there could be a significant impact on the commercial real estate industry in 2015. For example in London a major sovereign wealth fund owns a number of iconic commercial buildings, and if it had to withdrawal as a result of oil revenues continuing to shrink it could impact the city’s real estate values.
- CMBS Loans: When refineries slow production to reverse the devaluation of oil, the need for a large workforce decreases. Boomtowns could then become ghost towns, and new assets – from hotels to multifamily complexes – funded by CMBS loans and developed to accommodate rising populations are no longer needed. This decreased demand could potentially place these assets in a position to default.
2. Gateway Cities, Safe Bet for Foreign Investors: The gateway cities, which include New York, Boston, San Francisco and Los Angeles among others, are where the money is, and real estate prices reflect that.
These markets are attracting foreign investors and will continue to this year since they are highly liquid markets and offer investments that investors feel comfortable in pursuing and allocating money towards. This is reinforced by the fact that more than 685 U.S. assets were sold to foreign buyers, with 21.3% of the investment taking place in New York City, by the end of the third quarter of 2014.
While this trend is set to continue throughout 2015, there will also be an increasing interest in secondary markets. With high demand and lower availability in gateway markets, investors will continue to seek out alternative options found in these secondary markets that feature a larger selection of well-positioned assets.
3. Single Family REITS are Poised To Succeed: Despite initial uncertainty surrounding the long-term viability of the single-family REIT sector, it has enjoyed strong momentum, and investors have shown an appetite, which will continue in 2015, for this asset class.
In fact, the S&P Case-Shiller 20-City Home Price Index shows that home prices are currently near post-recession highs. The U.S. Census Bureau underscores this trend, recently stating that homeownership rates in the second quarter continued to trend lower, to 64.7 percent, down from 65 percent at the same time last year and 69.2 percent in 2004.
As homeownership declines demonstrate consumers’ preference for rentals, the potential for growth and sustainability in this sector will bode well for the coming year and we will witness many industry players continue to be active in this space and seek to capitalize on the market opportunities it presents.
4. Demand Continues for Mixed-Use Real Estate: The dynamics of developing space in which retail, office and residential all feed off one another appeals to a wide range of market participants and makes work, live and play environments a nationwide trend that will live on this year.
Beyond the convenience they afford residents, these mixed-use developments are also beneficial to cities because they create jobs and opportunities.
In fact, many localities are offering favorable tax treatment for this kind of development. A notable example is the redevelopment of the former Alcatel Lucent corporate campus in Holmdel, N.J., which will be transformed into a destination community that includes a health and wellness center, skilled nursing facility and assisted living center, a hotel, restaurants and shopping, spa, office spaces and a 20,000-square-foot public library. There will also be recreation space and luxury homes.
A strong factor driving the ongoing demand for this type of community is ageing baby boomers and empty nesters find this convenient living desirable as they transition out of single family homes and into the next phase of their lives.
5. Despite E-commerce Boom, Brick-and-Mortar Retail Remains Relevant: While the brick-and-mortar retail sector continues to grapple with a slow recovery in sales and competition from e-commerce, it will remain relevant and continue the resurgence it started in 2014. Why? Brands are catering to customers’ shifting preferences and desire for convenience.
Many companies are maintaining their brick-and-mortar locations to offer shoppers the option to buy online, but pick up in stores, as well as for more traditional customers who favor in-store shopping.
Testament to the relevance of brick-and-mortar locations is the move by e-commerce giant, Amazon to open a store in the middle of Manhattan on 34 th St., near the Empire State Building. It would be the company’s first brick-and-mortar in its 20-year history and provide the type of face-to-face experience found at traditional retailers that customers still appreciate.
