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CRE Finance World, Winter 2013

A Modest Outlook for Commercial Real Estate do so through 2014. Apartments will absorb much of this renewed The West and the South will experience the largest increase in demand for housing. Recent history and the positive outlook for manufacturing payrolls during this period as a result of tech capabilities apartment demand can be seen in strong returns for real estate and manufacturing-friendly policies such as right to work restrictions investors. According to the National Council of Real Estate Investment on unionization. High-value-added and technology-producing Fiduciaries, apartments have led all other property types in rates of manufacturing output growth will rise further, driven by more return since the end of 2010. capital intensive processes and less labor. Thus there will be rising demand for modern manufacturing space that can accommodate Manufacturing increasingly complex and automated production processes. Manufacturing has posted the strongest recovery among major CRE components in terms of construction put in place (see Chart 7). Office Boosting demand for manufacturing CRE was manufacturing’s Office space has been the slowest major component of CRE to early and outsize recovery in 2009 ahead of the rest of the economy. recover from the Great Recession, particularly as it relates to new The falling value of the dollar from 2009 to mid-2011 made construction. Office construction put in place declined more than U.S.-manufactured goods more competitive worldwide. Further, a 60% peak to trough; only retail construction had a greater fall. And strong rebound in business investment spending helped to support its post-trough increase of 9% lags those of all other major CRE domestic demand for manufacturing. Through the middle of 2012, components. Slow gains in office-using employment keep office manufacturing construction put in place has recovered 60% of its vacancy rates above their prerecession lows in many metro areas. peak-to-trough loss during the recession. Among the weakest industries are wireless telecommunications, financial services, legal services and government. Chart 7 Manufacturing Leads Non-Res CRE the next few years. Weak office demand is evident in the recent rise of CMBS delinquencies as measured by the Moody’s Delinquency Tracker. A rise in CMBS delinquencies was triggered this year by a surge of renewals of five-year office leases that had been signed before the onset of the financial crisis and recession. Renewals are being negotiated in office markets that are much less favorable for lessors of office space than in 2007. Despite the broad weakness, there are some pockets of strength for office demand. Many tech-oriented office-using industries have already recovered all the jobs lost during the recession, pushing down office vacancies and spurring new office construction in a handful of metro areas with sizable technology clusters, such as San Francisco and San Jose. Physicians and other health practitioners Sources: Census Bureau, Moody’s Analytics have also recovered their recession peak-to-trough losses reflecting the strength of healthcare in recent years. The outlook for manufacturing CRE will remain positive for the next few years. Manufacturing output is expected to continue Measuring demand for new office-using space by total office-using outpacing the rest of the economy, supported by the increasingly employment, demand will surpass its prerecession peak by early favorable international profile of U.S. manufacturing. The weighted 2014, ahead of other major CRE related industries (see Chart 8). average exchange value of the U.S. dollar will help keep U.S. The industries contributing the most to office-using employment exports competitive. Further, labor costs will remain contained growth from the middle of 2012 through the end of 2014 will for U.S. manufacturers because of very slow wage growth and be those among the hardest hit during the recession that have little upside pressure resulting from the slack labor market. These registered modest recoveries to date such as temporary employment factors, combined with higher manufacturing costs in Asia and and financial services. Tech-oriented industries will continue to rising trans-Pacific shipping rates help to improve the comparative drive new office space, in particular management, scientific, and advantage of U.S. manufacturers. technical consulting and computer system design. Regionally, as A publication of Winter issue 2013 sponsored by CRE Finance World Winter 2013 57


CRE Finance World, Winter 2013
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