2013, Q2 Capital Real Estate Outlook

U.S. CRE Outlook: 2Q13

Pamela Hannigan, Featured Economist:
Slow and Steady, Real Estate Remains Solid with Good Fundamentals .......

Where is it going from here?

Nationally a mild housing rebound and sluggish employment gains continue to support moderate economic improvement. Despite continued improvements in the housing market, U.S. economic growth remains patchy with gaps in domestic and global demand. Last quarter, domestic GDP and manufacturing hit speed bumps, consumer sentiment has been volatile and mortgage applications for purchasing or refinancing have lost strength. Recession in the Eurozone means fewer exports and an aging population means a downward shift in overall spending.

Consumer deleveraging continues, incomes of new households will be lower and less evenly distributed than during the past generation, and baby boomers are shifting from a high-income, middle-aged generation with strong growth to one with less mobility, more permanent unemployment and deep concerns over health care and social security.

That said retail is showing signs of bottoming out. Absorption improved slightly, (up .3%), and sales volumes were maintained in1Q2013 as private investors and REITs continue to acquire properties in energy, technology and recovering housing markets. Industrial and office continue to do well as sublease space is declining and occupancy and rent growth are increasing in most major markets.

Market Spotlight: Rental Housing/Multi-Family

The age shift in the U.S. has already begun and is gaining momentum. At the same time, the Fed has engineered investors out of bond markets where returns are negligible. With more muted expectations going forward this year, the equity markets for the second half of the year can hardly match the performance exhibited during 1Q2013.

In response to these trends investors have turned to private equity and private equity has turned toward undervalued housing assets as income investments. As many investors continue to pay premiums for central urban core assets in 24-hour gateway cities, private equity firms are looking at the rental market for housing in affordable, secondary cities and hiring the local expertise to “buy it, fix it, and rent it.”

Going forward, seniors will be a fundamental driver of rental demand. Expected growth in the senior population over the next decade is so strong that, even with a traditionally high ownership rate, seniors are expected to increase rental demand more than any other age group. The Bureau of the Census expects the senior population to expand by approximately one and a half million annually, more than three times the growth expected for adults under 35. The impact would be even greater if seniors’ home ownership rate drops. Even small drops in home ownership rates can have a significant impact on rental demand growth. Seniors who have experienced foreclosure or unemployment are unlikely to re-enter the home ownership pipeline and some would like to free up their home equity if suitable housing were available.

Whereas the aging population would otherwise raise significant challenges for future real estate development, baby boomers present an unexpected opportunity in a number of markets where the bubble has left a supply overhang, cap rates are still favorable and investors are patient. With an expanding renter population, rental housing and multi- family fundamentals will continue to be strong.


About the Featured Economist:

Pamela Hannigan is currently a Clinical Assistant Professor of Real Estate and teaches graduate courses on real estate economics and market analysis at the New York University Schack Institute. As a business economist with extensive experience in investment strategy and empirical analysis, her background includes research and executive management in banking, investment banking, and public finance. Ms. Hannigan holds a Bachelor of Science in Economics from the Massachusetts Institute of Technology and a Master’s in Public Finance from the New York University Robert F. Wagner Graduate School of Public Service. She also studied at the Harvard Institute of Economic Research.

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