Still, for many CRE sectors, 2013 will be another year of just trying to maintain their current status quo. However, it is generally felt that in 2014 the CRE industry will finally start to change for the better as overall job growth, the key driver behind the CRE sectors, will begin to consistently trend upward.
Multi-family residential is currently is the hottest segment in the CRE sectors. Millennials, the people born in the 1980s or 1990s, also known as Generation Y, are one of the main groups driving this multi-family housing boom. This group is typically characterized by: wanting to live in an urban center, especially close to their work; not wanting to have a mortgage; and seeking convenience and amenities with their chosen living environment. Their wants and needs, especially in terms of housing, are the exact opposite of their parents whose lives were focused on the American Dream of owning their own home.
Other populations who are contributing to the multi-family housing boom are people who are not able to get a mortgage due to stricter underwriting standards to buy a home, or people who went through foreclosure.
In addition, private equity and hedge funds are investing in multi-family housing because in many cases investing in the ‘hot’ multi-family housing market has become more attractive than investing in individual companies or other alternatives due to good returns and steady cash flow. Programs such as HUD, which refinance programs where debt can be restructured or refinanced at 1%-2%, are providing opportunities where many real estate investors who have held onto their capital during the last few years now view multi-family real estate as a good place to invest their money.
On the flip side of all this excitement in multi-family housing, there is some concern that there is too much demand for multi-family housing that can’t be maintained without real rent growth. While multi-family occupancy rates are at all-time highs, real rental growth and rate increases need job growth to generate increased cash flow in order for rents to rise, thereby increasing the value of a multi-family housing investment.
While more big box retailers are expected to struggle in 2013 with stagnant job growth and tax uncertainty for consumers, they are finding their stores are increasing becoming showrooms due to the rise of online retailers. Therefore industrial warehousing has reaped the benefit of this rise in online retailers’ need for warehousing, particularly in a good location, where distribution is convenient and efficient. For an online retailer to be successful, the logistics behind quick delivery to their customers is paramount. As the number of online retailers grow, so will the need for significant industrial warehousing space. For this reason, industrial warehousing will continue to see significant growth in 2013.
Demand for traditional corporate office space continues to be light compared to supply, especially when coupled with the trend by many companies to shift to a smaller office space footprint in order to decrease rental costs in a tight spending environment. The lack of demand is again due to slow job growth and still some oversupply from the pre-recession boom. When the economy picks up and consistent job growth is established, it is believed that the corporate office sector will improve.
Because more companies are basing their computer work in the “cloud” network for efficiency and to further reduce their office footprint as discussed above, 2013 is expected to see an increase in the number of data centers, warehouse facilities used to house computer systems and associated network and data components, such as telecommunications and storage systems. Greater Atlanta, Georgia seems to be a particularly good place to locate a data center due to its good fiber optic network, inexpensive reliable power, and good weather with minimal climatic issues.
Finally, housing will continue to struggle with slow job growth in 2013 even with low interest rates expected to continue throughout the year, and construction costs will continue to rise due to rising labor costs. With much of the source of cheap labor moving out of the United States due to the current weak economy, labor costs will continue to increase.
If you would like more information on any of the above commercial real estate sectors or if you wish to discuss any of the 2013 commercial real estate trends, please contact Frank Gudger, Partner-In-Charge of Habif, Arogeti & Wynne, LLP's Real Estate & Construction Group at firstname.lastname@example.org or Jason McPherson, Senior Audit Manager at email@example.com.