"The wild card this year is the unresolved European debt crisis, which has the potential to send lenders and investors to the sidelines," said Robert Bach, chief economist for the noted real estate services and investment company based in Santa Ana, CA. "If they stay in the game, expect overall commercial real estate sales to rise 25 percent in 2012, generating marginally lower cap rates for non-distressed assets."
The gradual improvement in leasing markets and boost in investment sales volume is based upon an assumption of GDP growth in the range of 2 to 2.5 percent in 2012, noted Bach, "and an average of 125,000 net new payroll jobs per month."
What follows are cherry-picked commentary about industrial and office market data pulled from the complete 50-page report, found online at www.grubb-ellis.com/Forecast2012.
Industrial real estate: This market did "quite a bit better than expected, with absorption nearly double our forecast," said report authors. "Vacancy ended the year at 9.5 percent."
Demand for this type of property "accelerated significantly" in 2011. Moreover, total net absorption of 110 million sq. ft. "compares favorably to the 34 million sq. ft. absorbed in 2010 and especially to the 64 million sq. ft. absorbed two years into the recovery following the 2001 recession."
The greatest milestone achieved in 2011? The leasing of all space that "went vacant" due to the recession. During the six quarters of negative net absorption, 153 million sq. ft. was returned to the market compared with nearly 160 million sq. ft. re-absorbed between second quarter 2010 and fourth quarter 2011. "This strong performance is especially significant considering that economic growth slowed to less than 2 percent during 2011."
The recovery was not as widespread in terms of product type. Warehouse/
distribution space captured 75 percent of total demand while accounting for only 50 percent of total inventory. Class A logistics space (subset of warehouse/distribution)
comprised 20 percent of total industrial inventory but half of demand in 2011.
"Smaller, second-generation warehouse spaces struggled to attract tenants throughout the year despite aggressive concession packages and depressed rent levels." And although "new supply was constrained" throughout 2011, "signs of acceleration became
apparent" by year-end.
Some of the report's predictions include:
- Both demand and supply will accelerate in 2012, particularly supply as speculative development surges.
- The national vacancy rate will decline to 8.7 percent by year-end 2012.
- Large blocks of space will continue to outperform.
- Look for a 5 percent gain in rental rates for warehouse/distribution space.
- Biggest risk: Potential for spec construction to outpace demand.
- Near- and on-shoring has potential to accelerate demand for general industrial space.
- The requisite level of confidence is unlikely to emerge until the second half of 2012; November elections could delay it.
- Assuming a stronger economic recovery in 2013 and 2014, new deliveries will easily double again in 2013 and potentially in 2014, matching the 155 million sq. ft. completed in 2008.
Office real estate: This market performed "a bit better than the half-speed recovery we had expected-call it a two-thirds speed recovery," noted the report's authors. "The vacancy rate ended the year at 16.8 percent, 20 basis points below our forecast..Absorption, completions and rental rates all came in slightly better than expected."
The office market recovery accelerated in 2011 "but only to about 30 in a 45-mile per-hour zone, leaving motorists frustrated." The vacancy rate fell 90 basis points, ending the year at 16.8 percent-and falling short of the 200-basis-point decline that is the norm for a steady recovery.
Net absorption last year totaled 38 million sq. ft.; well ahead of the 9 million sq. ft. registered in 2010 but trailing the 62 million sq. ft. posted in 2007, the last year of the expansion. The only market firmly in the expansion cycle was Washington, D.C., where developers delivered 18 new buildings with a combined 2.9 million sq. ft. of space, nearly two-thirds of it pre-leased.
In many markets, tenants continued to choose shorter-term (sub-five year) leases in order to keep their options open.
Some of the report's predictions include:
- From the grassroots level, the outlook is for stronger activity in 2012, and recent U.S. economic indicators seem to bear that out. "The outlook is more opaque than usual this year given the ongoing turmoil in the Eurozone and its potential to create a financial market contagion along the lines of the Lehman Brothers-inspired crisis in 2008."
- A European recession "rolling across the continent" could crimp U.S. exporters selling into the region. In turn, this could "cool down" some of the hot technology markets in the U.S. (e.g., San Jose, the San Francisco Peninsula, Austin and Boston).
- Biggest risk: Uncertainty over taxes and regulations could restrain hiring.
- The national vacancy rate is expected to end the year at 15.7 percent. This assumes employers add 125,000 net new payroll jobs per month, 20 percent of which will be in office buildings at a ratio of 175 sq. ft. per new employee.
- The sluggish recovery will extend into 2012 with the vacancy rate falling 110 basis points to end the year below 16 percent, still above equilibrium. The forecast assumes shadow space created during the recession will accommodate 25 percent of the net new demand.
- Expect little movement in rents, with the exception of supply-constrained and/or technology-driven markets.
- The national rental rate indexes will firm up by the end of the year, but landlord-pleasing increases are unlikely to appear before 2013 or 2014.
- Sector activity: Technology companies will drive demand in the markets where they are located. The healthcare sector will continue its inevitable expansion, pushing vacancy lower in medical office buildings, clinics and related properties. And cities with energy companies well-represented in their tenant bases will continue to expand, including major markets in Texas and Oklahoma.
President/CEO Thomas D'Arcy noted in the report that "continued weakness in the overall economy, defensive lenders, an uncertain capital environment, bifurcated property values, high unemployment and low consumer and business confidence continue to plague the industry and have made it difficult to plan for the future."
However, he added that "in times like these, the bold turn opportunities into long-term value."