by Shane Henson — December 2, 2013—The U.S. real estate recovery is set to continue into 2014, with investors increasingly looking beyond some of the traditionally popular markets to secondary markets in search of higher yields, according to Emerging Trends in Real Estate 2014, co-published by PricewaterhouseCoopers (PwC) U.S. and the Urban Land Institute (ULI).
Secondary markets
According to real estate market participants, the predicted growth in secondary markets is driven by investors searching for returns as opportunities in core markets become harder to find and the best assets become more expensive. As a result, the report anticipates that 2014 may be the year that many investors who have traditionally focused mainly on large established markets such as Boston, Chicago, Los Angeles, New York City, San Francisco and Washington will be expanding their focus to other cities in order to protect capital. This trend, first noted in last year’s report, is likely to build substantial momentum next year, given the steady pace of improvement in market fundamentals in secondary markets, and with more investments in those markets meeting investors’ risk/return metrics.
The movement into secondary markets is underpinned by the anticipated increase in both debt and equity capital during 2014. Respondents were particularly positive about the prospects for equity capital from foreign investors, institutional investors and private equity funds, as well as debt from insurance companies, mezzanine lenders, and issuers of commercial mortgage-backed securities.
Interest rates
The report notes that the key threat to market recovery is the timing and pace of any interest rate increases. The report forecasts a modest increase in the short term, but does not expect a small increase to cause a major disruption to the recovery. If higher interest rates are a function of the Federal Reserve Board’s response to an improving economy in 2014, the increased borrowing cost will be offset by greater demand and therefore higher rents. However, the report cautions that faster-than-anticipated rises or rates growing faster than the underlying economy could undermine the recovery.
Foreign capital
According to the report, a number of the markets anticipated to perform well in this year’s report are benefiting from the continued influx of foreign capital. Miami, which rose to number eight in the 2014 forecast from 12th and 17th place in 2013 and 2012, respectively, is benefiting from South American investment, with particularly favorable homebuilding prospects. Seattle, which ranked sixth in this year’s survey, is another top city with global connections, a high rate of educational attainment, and growth in the technology industry, making it a hub for international investment.
Other markets to watch:
- San Francisco is the top-ranked market for the second year in a row, driven by a thriving economy that is projected to add jobs at a rate of two percent next year. According to survey respondents, San Francisco is a solid “buy” for all property types.
- Houston improved from its number-five position in last year’s survey, due to its investment and homebuilding prospects. Housing, non-residential construction, and a revival in exploration industries could be the key economic drivers.
- San Jose is the third-ranked market for the second year in a row, with investors attracted to the prospects offered by the city’s technology industry. Respondents believe that the job and income growth generated by the sector will support rising real estate demand.
- New York slipped two places to number four in this year’s survey. The city’s investment and development components are still rated as “good;” however there is a growing concern that pricing is once again becoming too high. Rental apartments and hotels are the property sectors that respondents feel offer the best opportunities in 2014.
- Dallas/Fort Worth moved up four spots to number five in the 2014 survey. Respondents rated Dallas/Fort Worth highly for investment and development, but it was its strong homebuilding prospects that moved the market up in this year’s survey. Industrial/distribution is the property type that survey respondents most recommend as a “buy.”
Market sectors
In terms of market sector prospects, industrial tops the ranking in this year’s report, with warehousing standing out as a particularly strong subsector. Warehousing was a clear favorite among survey respondents, with 64 percent making a “buy” recommendation for the subsector and less than 10 percent advising selling. With retailers and manufacturers continuing to shorten their supply chains, the ongoing growth in e-commerce, especially in same or next-day delivery, is fueling the requirement for vast fulfillment centers close to major cities. Research and development industrial, self-storage and data centers are also expected to show further improvement.
As a sign of improving investor optimism, the report signals that in 2014 there may be an increase in new development activity in subsectors such as central business district (CBD) office and limited service hotels that have not seen new construction in several years.
Now in its 35th year, Emerging Trends in Real Estate is one of the most highly regarded annual industry outlooks for the real estate and land use industry, says PwC U.S.. It includes interviews and survey responses from more than 900 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.
