Commercial Investment Real Estate

NOV-DEC 2017

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.

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COMMERCIAL INVESTMENT REAL ESTATE 26 November | December 2017 Expectations of slower near-term growth is a safe bet considering there are about 300,000 units teed up for completion this year, according to Reis. Nationally, vacancies are expected to inch higher as rent growth decelerates. According to the 2017 ULI Consensus Forecast, occupancies will increase 30 basis points this year to 5.2 percent by year-end, followed by slight increases to 5.3 percent in 2018 and 5.4 percent in 2019. The forecast also calls for slowing rent growth, with annual improvement expected to remain flat at 2 percent through 2019. Varying Market Dynamics Developers, investors, and lenders are keeping a close eye on those national forecasts and market trends, but market dynamics vary widely in differ- ent metros and various segments within the apart- ment sector. The surge in new supply has been heavily concentrated in high-end Class A prop- erties, especially high-rise, urban projects. That activity has started to slow down over the past year, notes Daun St. Amand, senior vice president at CallisonRTKL in Los Angeles. "Reading between the lines, the issue is that the price point has surpassed what the demand is or the ability of the demand to pay those rents," he says. Development is shifting to suburban markets where building costs are lower, which is providing more affordable options for renters. Downtowns have expensive land and higher costs to support type one, concrete and steel construction. "Those costs are skyrocketing, and, therefore, we are looking at a different kind of product," St. Amand says. Developers are shifting to a suburban, mixed-use product that feels urban and is close to rail or transit, but with low-rise design that can be built at a lower cost. These more affordable options are pulling mil- lennials out to the suburbs, but they seek the urban feel, according to St. Amand. That is fueling more mixed-use development, as well as an emergence of vibrant urban-like neighborhoods, in second tier or close-in suburbs. "We see more and more trends toward these mixed-use projects where you have this blend of uses," he says. That includes access to leisure and conveniences ranging from proximity to grocery stores and restaurants, as well as a mix of housing types that appeal to millennials, mid-career profes- sionals, and empty nesters that can fill the leasing pipeline. Full Steam Ahead Many metros are continuing to see development roll along at an ambitious pace. Downtown Los Angeles is one market that is experiencing explo- sive growth in residential development among both apartments and condos. At midyear, there were nearly 9,000 market-rate apartments and 1,700 condos under construction, according to the Downtown Center Business Improvement District. Although occupancies have dipped slightly due to new inventory, rental rates continue to rise and are now averaging $2.92 per square foot, according to the Downtown Center BID. "The new units being built in L.A., although generally considered expen- sive, still lease up extremely fast regardless of the price," says Sharon Carz, CCIM, a senior adviser at Sperry Van Ness | SVN Rich Investment Real Estate Partners in Los Angeles. A shortage of building sites has developers con- sidering alternatives to move projects forward. Currently, Carz is working with an investment group that wants to purchase an office building to reposition for another use, such as housing or a boutique hotel. "We are looking at different creative ways to reposition older buildings," Carz says. Another 21.2% 14.6% 11.4% 18.2% 15.5% 11.2% 10.4% 10.3% 12.0% 7.3% 5.7% 5.5% 5.5% -7.3% -17.5% 2005 2006 2007 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2008 2009 Actual Forecast 20-Year Avg. (10.0%) NCREIF Apartment Total Annual Returns Sources: 1997-2016, National Council of Real Estate Investment Fiduciaries 2017-2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 6.0%, 6.0%, and 5.5%, respectively, for 2017, 2018, and 2019.

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