by Shane Henson — November 29, 2013—Growth in STEM (science, technology, engineering and mathematics) employment and the continuing recovery in the U.S. housing market are already impacting commercial real estate as total sector volumes in the first three quarters of 2013 have hit $208.82 billion, an increase of 30% over the levels at the same time period in 2012. The growth in those areas is fueling greater occupancy and rent increases while boosting investor demand. Meanwhile, as Millennials (adults below 34 years old) become a larger component of the workforce, that generation will dramatically impact the operations of the whole range of commercial real estate.
Those are some of the insights and conclusions contained in the Cross Sector Outlook, a report released earlier this month by Jones Lang LaSalle (JLL), a global financial and professional services firm. The report takes a comprehensive look at how the housing recovery influences all types of commercial real estate; the ways in which the Millennial generation will affect office workplace strategy, retail stores, hotels and apartments; institutional investment patterns; and the indirect impact of growing industries on local real estate.
“The U.S. housing market has experienced significant and welcome improvement in recent years, and the release of pent-up demand should continue to accelerate as Millennials form new households in an improving job market,” said Jay Koster, president of JLL’s Americas capital markets business. “This will, in turn, have a significant impact on commercial real estate, as local economies improve because of the resulting increase in jobs in the construction, real estate, lending, retail and manufacturing industries. Given these dynamics, we would also expect to see continued investor interest in the apartment sector.”
At the same time, the rise of the Millennial generation and its interest in technology and collaboration will have a major influence on the future of commercial real estate.
“Millennials have given rise to a ‘sharing economy’ in the United States, and this has changed and will continue to change how stores market to shoppers, how office space and lifestyle hotels are featured, how online purchases are shipped, and how new apartment communities are designed and laid out,” said Marisha Clinton, director of research for JLL capital markets.
As for investors, overall investment sales volume has increased in 2013, jumping 30% in the first three quarters when compared to the same period last year, JLL notes. However, the presence of institutions has softened somewhat over the past two years as the amount of core product available for purchase in primary markets has decreased. Accordingly, with the price of those assets rising, many non-institutional U.S. investors are buying core assets in secondary markets. A sizeable chunk of international investors continue to target Los Angeles and Manhattan, but they, too, are broadening their reach to buy properties in secondary markets such as Houston and Seattle, where the energy and technology sectors, respectively, are thriving.
Broadly speaking, property operating fundamentals are improving, largely because of the rise in STEM employment and limited new development. A summary of certain sectors follows:
Retail: Retail vacancy rates should continue to inch down over the next year, as construction remains limited. The lack of new supply also will extend the ongoing recovery in rents. Investor interest in the slowly recovering sector is perking up, as investment sales increased to $33.8 billion in the first three quarters of this year, a rise of 14% from the first three quarters of 2012.
Industrial: With small and mid-sized companies continuing to lease space, the industrial sector will experience additional rent recovery in the months and year ahead, and the overall national vacancy rate will settle at 7.9% at year’s end. The sector also stands to benefit from the growing e-commerce industry and the deepening logistical requirements in the East. Investment sales reached $26.2 billion in the first nine months of 2013, marking a 34% increase from the same period one year earlier.
Office: In the office sector, secondary markets in particular are benefitting from the job growth in the technology and energy markets. Markets with diversified economies should see increased tenant demand, and tightening conditions in CBDs should raise rents, particularly for large tenants. During the third quarter, positive net absorption was achieved nationally for the 14th consecutive quarter; approximately 9.6 million square feet was absorbed. Investment sales in the sector are robust and jumped 32%, to $62.9 billion, in the first three quarters when compared to the first three quarters of 2012.
Hotels/Hospitality: Overall, the hotel sector continues to boast strong operating fundamentals and growth in revenue per available room (revPAR), and the national occupancy rate in 2013 is set to come just one percentage point shy of the 2006 peak. Going forward, expect further improvement in resort and select-service hotels, the latter of which has garnered more interest from off-shore buyers. Hotel investment sales are soaring, adding up to $14.6 billion in the first nine months of 2013, a dramatic increase from the first three quarters of last year.
