Grubb & Ellis: 'Sluggish recovery' in 2012






Publication: Mortgage Banking
Author: Tucker, Michael
Date published: February 1, 2012

Grubb & Ellis Co., Santa Ana, California, predicts "slow but continued growth" for all commercial real estate property sectors.

The firm's 2012 National Real Estate Forecast predicts the multifamily sector will perform best this year, followed by hospitality, industrial, retail and office.

"Although a variety of economic and political factors, including continued high unemployment, an upcoming U.S. presidential election and the unresolved European sovereign debt crisis weigh on the minds of real estate owners, users and investors, we anticipate gradual improvement in leasing markets and a boost in investment sales volume," said Robert Bach, senior vice president and chief economist at Grubb & Ellis.

Multifamily

The multifamily sector was among 201 l's strongest performers and is "poised for repeat strong performance," said the report. Effective rental rates and occupancy rates increased, as the market grew by a mere 38,000 units. Tough qualifying standards for prospective homebuyers and the growth of the i8-to-34-year-old age group mean multifamily will be one of 201 2's most sought-after commercial real estate investments, Grubb & Ellis said.

Top multifamily markets have higher house prices and other barriers to entry, coupled with stronger prospects for job and population growth. The San Jose-Silicon Valley, California, region ranked No. 1, followed by New York City, Boston, San Francisco and Orange County, California.

Office

The office market recovery accelerated last year, but not to the speed of prior expansions. This year's outlook is stronger, with an expected national vacancy of 15.7 percent by yearend. Net absorption is projected to reach 52 million square feet; new deliveries will be minimal at 9 million square feet.

Rental rates are predicted to reach $31.38 per square foot for class-? space, up $0.24 from 201 1 ; and $22.86 per square foot for class-B space, up $0.04 from 201 1. Grubb & Ellis does not expect the office market to reach equilibrium until 2013 or 2014.

The report predicts that technology and/or biotech hubs will offer the strongest long-term opportunities for office investors. The top five markets on the list - San Francisco; Seattle; Austin, Texas; San Jose and San Diego, California - all fit this profile. Last year's runner-up, Washington, D.C, didn't make this year's list because of its strong construction pipeline and the uncertain outlook for federal spending.

Industrial

Demand for industrial real estate accelerated significantly in 201 1, with total net absorption of 1 10 million square feet, up from only 34 million square feet absorbed in 2010, the report said. This is expected to continue in 2012, but due to uncertainty overseas and a sluggish domestic economy, Grubb & Ellis expects an increase in total net absorption of only 15 percent to 130 million square feet.

Industrial vacancy fell 90 basis points last year to 9.5 percent and is projected to continue to decrease to 8.7 percent by year-end 2012. "The greatest milestone of 201 1 was the lease-up of all the space vacated during the recession," said Bach. "The lack of new deliveries funneled demand to existing properties, giving the market time to heal."

Warehouse/distribution space is expected to increase to $4.44 per square foot in 2012 from $4.23 per square foot in 201 1, while asking rental rates for research and development (R&D)/flex space are predicted to increase $0.02 to S9.25 per square foot. General industrial space rates are expected to remain flat at $4.94 per square foot.

The Forecast expects markets serving seaports or inland ports that benefit from growing international trade to be the best industrial investment opportunities. Los Angeles, the largest port complex in the United States, is No. 1. Houston is next, followed by California's Inland Empire, Dallas-Fort Worth and Chicago.

Retail

The retail market lagged other sectors last year. But very little retail construction is occurring, which, when combined with moderate job growth and rising retail sales, should help sustain a recovery in 2012.

Most investment activity has been in larger, primary markets; tertiary markets have seen little capital for deals. Grubb & Ellis expects this trend will continue. Los Angeles topped the list, followed by Washington, D.C, Boston, San Diego and Seattle.

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