For a change, a report with less dramatic and pessimistic point of view. Perhaps after all, The sky is not falling.
No need to read if seeking 'short-can't-read-long-posts' one liners
Overall 2004 outlook:
Real Estate Fundamentals Catching up with Pricing?
The most unusual characteristic of the recent downturn has been that property values have risen in spite of deteriorating real estate fundamentals. Many investors have become concerned over this dynamic and the outlook for real estate investments. Over the next several years, real estate pricing will be supported by three major factors:
Strong Capital Flows. An improving stock market would normally shift capital flows away from real estate; however, real estate has gained strong favor throughout this cycle and will continue to attract domestic and foreign capital despite lower returns in the short term.
Orderly Transition. Interest rates are expected to rise gradually along with an improving economy; therefore, the increasing cost of capital will be accompanied by improving rents and occupancies, allowing fundamentals to catch up with pricing.
Expansion Cycle. The United States is entering a new expansion cycle with favorable projections for demographics and job growth. Taking advantage of still-favorable interest rates at the outset of an expansion cycle translates to a strong investment opportunity. As with any cycle, however, there will be exceptions, as risks and opportunities vary by geography and property type.
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Industrial Outlook
Industrial Overview: Market on the
Road to Recovery
Despite continued job losses in manufacturing and trade, the industrial market has stabilized and is poised for growth. Following the jobless economic recovery of 2003 and early 2004, the economy is expected to support accelerated employment growth through year end, with many
companies hiring more workers to accommodate the growing number of orders. Home improvement providers and discount retailers are rapidly expanding their distribution capabilities across the nation. Transportation and logistics firms are also in expansion mode, as trade activity and tonnage coming through the ports continues to rise. As a result of increased demand for space, absorption increased to 72 million square feet in 2003, up from 30 million square feet the previous year. 2004’s first quarter marked the first time in three years that demand exceeded new supply, which allowed vacancy to
decline by 10 basis points, to 10.3 percent. Areas that posted the largest drop in vacancy include the major distribution hubs of the Inland Empire and Indianapolis, where vacancy declined by 80 basis points, to 9.0 percent, and 60 basis points, to 10.4 percent, respectively.
Decreased development activity, coupled with improving economic conditions, will allow most U.S. markets to register a decline in vacancy. While older single-tenant properties that have failed to modernize and those catering
strictly to manufacturers will continue to experience difficulty in attracting tenants in 2004, multi-tenant and warehouse/distribution properties are in high demand. Among the major distribution markets, Dallas-Fort Worth,
Inland Empire and Chicago will post the highest absorption this year, though demand is forecast to rise in nearly all markets by year end.
Vacancy Declining. Most markets have turned the corner and will post improvement by year-end 2004. The overall vacancy rate is expected to decline by a total of 40 basis points this year, to 10 percent.
Asking Rents Level. Absorption of space is increasing and tenants are signing longer-term leases. Asking rents have stabilized but are not expected to rise, as filling space is a priority among owners. Last year, asking rents declined by 4 percent, to $5.15 per square foot.
Fundamentals Slipped, but Returns Increased. Low mortgage rates are allowing investors to achieve better returns. Total returns increased by 8.2 percent in 2003, up from a gain of 6.7 percent the previous year.
Low-Cost Capital Driving Deals. Many sellers have been
able to achieve aggressive prices for their properties over
the past few years due to the availability of investment
capital. The median sales price increased by 6 percent in
2003, to $55 per square foot. An additional 4.5 percent
increase has been posted since the beginning of 2004.
Sales Activity Starting to Slow. Industrial sales velocity hit a record high of 2,200 transactions in 2003. With interest rates set to rise, marketing times for high-vacancy deals are lengthening. A growing share of the owners of these properties are choosing to hold on until fundamentals improve, which will slow transaction velocity in 2004.
Cap Rates Continue to Fall. Over the last 18 months, cap
rates declined 100 basis points, to 8.3 percent. Rising interest rates are expected to limit further cap rate compression in 2004, however.
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Self Storage:
HIGH SELF-STORAGE RETURNS EXPAND
INVESTOR POOL
Investment activity in the self-storage market is anticipated to increase in 2004. The industry is attracting additional capital from investors new to self-storage, while at the same time, existing players continue to execute their investment strategies. Many self-storage investors are seeking returns above those that they
have been able to attain for alternative investment classes and other types of real estate. The improving economy will help to lift self-storage market fundamentals
as an increase in job growth spurs household formation and residential relocations.
The combination of these positive economic and demographic factors, coupled with decreased construction activity, will allow owners to push rents higher as occupancy rises. Prices for self-storage facilities are expected to increase as a result.
Who Will Be Buying Self-Storage Facilities in 2004?
General Electric’s purchase of Storage USA in 2002 put the investment spotlight on the self-storage industry, and the industry’s stature has continued to grow among investors ever since. Additional capital is forecast to flow into
the self-storage market as investors clamor to secure attractive returns. Many private investors are expected to increase their self-storage holdings with capital available through debt refinancing or from equity partners with resources committed to the purchase of self-storage assets. Additionally, the large public storage companies are expected to realign their portfolios, which will provide opportunities for mid-sized and regional players to expand.
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Other markets reports... (i.e. Apartments, Hospitality, Office, Retail, Senior Housing, National Single-Tenant)
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