Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/443516
30 January | February | 2015 Commercial Investment Real Estate ADDITIONAL CONSIDERATIONS As 2015 continues, commercial real estate investors are encouraged to keep in mind the following points: • The U.S. economy is resilient and will survive a looming short-term rate correction. In the long term (toward the end of the decade), the economy is positioned to demonstrate above-average growth. • Global pressures will continue to keep 10-year Treasury rates below 3.0 percent in 2015. • Commercial real estate will be a preferred asset class in 2015 relative to stocks, bonds, and cash, and this will continue to put upward pressure on prices and values throughout the U.S. • Commercial real estate space fundamentals will continue to improve slightly, except in the multi- family sector, where vacancy is increasing due to supply additions. • Required total returns and capitalization rates for the broad commercial real estate market will con- tinue to compress in 2015, as long-term interest rates stay low. • RERC's total return expectations based on our value forecast and income forecast refl ect a total return in the low teens for unleveraged commercial real estate assets, and a total return in the mid- teens on a leveraged basis for 2015. • An increasing number of alternate property types (beyond the core property types) will continue to attract investors, including storage facilities, single- family housing, student housing, seniors housing, and medical offi ce buildings. • There will be continued expansion of investment products and opportunities for retail investors through private real estate investment trusts, single property-REITs, club investing, and defi ned contribution options. • The market cycle is not different this time, but commercial real estate will see another strong year in 2015, only to be faced with another market down cycle looming out past 2015. Figure 4. Historical 10-Year Treasury Rates volume increased 6.2 percent YOY to $104 billion in 3Q14, as the price increased 21.5 percent to $128,259 per unit, a new high. RERC's required pre-tax yield rate declined to 7.0 percent, while the required going-in cap rate declined to 5.0 percent. Reis notes that due to expected completions of 444,000 units over the next two years, vacancy is likely to increase to 4.9 percent in 2015 and to 5.1 percent in 2016, although vacancy in some metros (San Diego, for example) is not expected to increase as much. Ef ective rental growth of 3.1 percent in 2015 and 2.6 percent in 2016 is expected. Retail. According to Reis, retail vacancy declined slightly to 10.3 percent in 3Q14, while ef ective rent increased 1.91 percent to $17.07 psf. Transaction volume increased 8.1 percent YOY, with pricing increasing 24.8 percent to $214 psf, as investors have been purchasing higher quality retail properties. RERC's required pre-tax yield rate decreased to 7.8 percent in 3Q14, while the required going-in cap rate declined to 6.1 percent, although this has had more to do with abundant capital and easier f nancing than improving fundamen- tals. However, Reis projects that vacancy will be 100 bps lower at 9.3 percent and rents will step up to 3.3 percent annual growth in 2016. Retail properties in some metros — especially Florida markets like Miami and Orlando — of er strong investment opportunities due to improving fundamentals. Hospitality. Smith Travel Research reports that U.S. hotel occu- pancy rose 3.9 percent YOY to 62.7 percent during the week of November 9-15, 2014. Revenue per available room and the average daily rate increased 8.6 percent to $72 and 4.6 percent to $115, respectively, according to PKF Hospitality Research. Hotel volume increased to $33 billion on a 12-month trailing basis in 3Q14, Source: Federal Reserve, 3Q 2014