With the apartment industry starting to pick up on construction and rental prices slowly going up, it is apparent that the commercial real estate market is on its move to recovery. In 2011, things just might continue to perk up, according to a global professional services firm and a non-profit education and research institute.
The PricewaterhouseCoopers (PwC) and Urban Land Institute (ULI) report, entitled “Emerging Trends in Real Estate 2011″, yields that the three years of dislocation and unprecedented loss for the commercial real estate just might be changing course. The report reveals that commercial real professionals and industry investors are becoming more hopeful of moderate improvements. A lowering of performance indications and anticipation of high single-digit returns for core properties and mid-teen returns for higher risk investments were some of the things that the survey respondents revealed.
Helping values reset at 30-40% below 2007 peaks is the stepping up on foreclosures and dispositions of properties during 2011 and 2012 being done by lenders with strengthening balance sheets.
U.S. real estate advisory practice leader for PWC, Mitch Roschelle, says, “The market is predicting extreme bifurcation as the capital flight to quality creates a greater separation between the trophy and less desirable assets. Well-located and well-tenanted properties that can generate strong cash flow over the next several years are exactly what buyers and lenders want, according to survey respondents. As a result, prime apartments and office buildings in gateway cities are generating the most attention from the increasing pent-up sidelined capital.”
The trend, says ULI Senior Resident Fellow for Real Estate Finance Stephen Blank, is that more opportunities can be had by buying foreclosed assets or recapitalizing cash-starved owners. Nine strategies to earn from the emerging trends are as follows: (1) look for 6 to 7% cash flows after buying well-leased core assets; (2) leverage properties to ensure magnified future value gains; (3) provide debt and recap equity; (4) focus on global gateways by buying on the coast with good airports; (5) favor infill over fringe; (6) be patient for an increase in transaction activity and appearance of distressed deals; (7) buy or hold REIT; (8) buy land as now is as cheap as it can get but wait for the right development opportunity; and (9) be cautious of distressed loan pools.
The apartment market remains the strongest of all other sectors, with expectations of increased rental by 2012. The tip markets to watch out for are Washington DC, New York, San Francisco, Austin, and Boston.