Emerging Trends® in Real Estate 20 15 12 12 9 6 3 0 -3 -6 -9 Emerging Trends in Real Estate® 2012 A publication from: Emerging 20 Trends ® in Real Estate Contents 1 Executive Summary 12 2 Chapter 1 Facing a Long Grind 4 Where Is Demand? 6 “Too Many Jobs Headwinds” 7 Low Interest Rate Medicine, Cap Rate Caution, Inflation Bailout 7 Ebbing Return Expectations 8 Transaction Markets Regear 9 (Multifamily) Development Resumes 9 Government Disarray 9 Improving Profitability 11 Best Bets 2012 14 Chapter 2 Real Estate Capital Flows 18 Banks 18 Insurers 19 CMBS 22 Mezzanine Debt and Preferred Equity 22 Wall Street Opportunity Funds 2 2 R EI Ts 23 Pension Funds 23 Nontraded REITs, High-Net-Worth Investors, Local Operators 24 Foreign Investors 2 6 Chapter 3 Markets to Watch 30 The Top 20 38 Other Major Markets 40 Other Market Prospects 4 2 Chapter 4 Property Types in Perspective 43 Slow Progress 46 Apartments 48 Industrial 5 0 H otels 52 Office 54 Retail 56 Housing 5 8 Chapter 5 Emerging Trends in Canada 59 Investment Trends 62 Capital Markets 64 Markets to Watch 68 Property Types in Perspective 73 Best Bets 74 Chapter 6 Emerging Trends in Latin America 75 Brazil Arrives 76 Mexico No Go 77 Other Markets: Colombia Draws Interest 78 Interviewees Emerging Trends in Real Estate® 2012 i Editorial Leadership Team Emerging Trends Chairs PwC Advisers and Researchers Mitchell M. Roschelle, PwC Adam E. Harvey Ken Griffin Patrick L. Phillips, Urban Land Institute Aleem F. Bandali Kevin Bennett Amanda Brown Lois McCarron-McGuire Author Ami J. Patel Lori-Ann Beausoleil Jonathan D. Miller Amy E. Olson Marc Normand Andrew Alperstein Maridel Gonzalez Gutierrez Principal Researchers and Advisers Andrew Popert Matt Lopez Stephen Blank, Urban Land Institute Arthur Chippin Michael Chung Charles J. DiRocco, Jr., PwC Brandon Bush Miriam Gurza Dean Schwanke, Urban Land Institute Brian Robertson Molly Caccamo Chris Vangou Nadja Ibrahim Senior Advisers Christine Lattanzio Natalie R. Cheng Christopher J. Potter, PwC, Canada Claude Gilbert Nelson P. Da Silva Susan M. Smith, PwC Daniel Cadoret Patricia Perruzza Daniel D’Archivio Paul F. Bradley Dave Chucko Paul Ryan David E. Khan Reginald Dean Barnett David M. Yee Richard Deslauriers David Swerling Rob Sciaudone David Voss Robin Madigan Dennis Johnson Ron J. Walsh Dominique Fortier Roxanna Bevilacqua Donald M. 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This document is for general information Jeffrey Nasser Susan Farina purposes only, and should not be used as a substitute for consultation John Gottfried Susan Smith with professional advisers. Jonathan Jacobs Tim Conlon Joshua J. Mowbray Tom Kirtland © October 2011 by PwC and the Urban Land Institute. Katherine M. Billings Warren Marr Printed in the United States of America. All rights reserved. No part of this book may be reproduced in any form or by any means, electronic ULI Editorial and Production Staff or mechanical, including photocopying and recording, or by any infor- James A. Mulligan, Managing Editor/Manuscript Editor mation storage and retrieval system, without written permission of the Betsy VanBuskirk, Creative Director publisher. Anne Morgan, Cover Design Deanna Pineda, Muse Advertising Design, Designer Recommended bibliographic listing: Craig Chapman, Senior Director of Publishing Operations PwC and the Urban Land Institute. Emerging Trends in Real Estate® Sarah Nemecek, Research Associate 2012. Washington, D.C.: PwC and the Urban Land Institute, 2011. ULI Catalog Number: E44 About the Author ISBN: 978-87420-165-9 Jonathan D. Miller is a real estate forecaster who has written the annual Emerging Trends in Real Estate report since 1992. ii Emerging Trends in Real Estate® 2012 Executive Summary or 2012, U.S. real estate players must resign sentiment declines as selling interest increases. related markets scoring well include San Jose, themselves to a slowing, grind-it-out recov- Investors who bought at or near market bottom in Denver, and Raleigh-Durham. Fery following a period of mostly sporadic 2009 and 2010 consider cashing in some gains. Among property sectors, everybody wants growth, confined largely to “wealth island” real Many players back off from bidding on trophy apartments. Living smaller, closer to work, and estate markets—the primary 24-hour gateways properties in better markets, fearing that pricing is preferably near mass transit holds increasingly located along global pathways. A handful of cities outpacing the potential for recovery in net operat- appeal as more people look to manage expenses also should continue to benefit from expansion ing incomes. Cap rate compression has ended; a wisely. Interest cools on offices, especially sub- in locally based technology- and energy-related leveling off is expected, with possible upticks for urban office parks: more companies concentrate industries. Otherwise, most commercial markets some property sectors in certain markets. in urban districts where sought-after generation-Y have stabilized, but will find marked improve- Most developers and homebuilders will talent wants to locate in 24-hour environments. ment in occupancies and rents relatively elusive. twiddle their thumbs in ongoing extended hiatus; Investors continue to place bets on high-ceiling Despite some stepped-up bargain hunting, without evident demand drivers, construction warehouses in the gateway ports and around capital generally will continue to avoid commodity lenders hold back funding on most projects, international hub airports. And East Coast and real estate in most secondary and tertiary cities. except for multifamily development. Expect a Gulf Coast ports vie to attract the most new ship- Among the property sectors, only apartments will ramp-up in apartment development across many ping traffic coming through a widened Panama score especially well: demographic trends and the markets justified by plunging vacancies and Canal in 2014. Winning cities could transform into aftermath of the housing bloodbath combine to continuing rent increases. When the odd new major distribution sites. Shopping center owners increase and sustain demand for multifamily units. office building goes forward, developers likely continue to face incursions from internet retailing: Enduring economic doldrums and the will employ green technologies and concepts; fortress malls and infill grocery-anchored centers absence of dynamic jobs generators hamstring tenants begin to insist on cost-saving, energy- consolidate business at the same time that older overall demand, weighing on real estate markets. efficient systems. regional malls and fringe strip centers appear to While the nation’s lackluster employment outlook Shaken by stock market declines and anemic lose ground. The hotel recovery begins to flag: delays filling office space, the related drag in bond yields, investors gravitate toward equity real good news concentrates in the prime business consumer spending compromises growth in estate, but grow somewhat unsettled in the face of traveler/tourist gateways and in middle-market retail and industrial occupancies and rents. limited property investment opportunities. “Face brands without food and beverage. Interviewees uniformly struggle to identify new it: real estate doesn’t offer enough growth poten- Canadian real estate markets remain the employment engines: competition from overseas tial to satisfy” the demand, says an interviewee. most stable in North America. Institutions hold markets, technology gains, government and Although debt capital remains undersupplied, on to the best properties and avoid boom/bust personal debt loads, an aging population, and lenders and government regulators work hard to frenzies over pricing, while conservative fiscal global financial breakdowns all combine to stanch avoid a refinancing crisis with hundreds of billions policies discourage lax underwriting and licen- wage growth and hiring. As a result, businesses in commercial mortgages maturing over the next tious lending. A resource-rich economy does not that are focused on squeezing profitability out three to four years. Well-capitalized borrowers and hurt either. Interviewees expect these markets to of productivity gains and families forced into solid, revenue-generating properties have no trou- weather world economic turmoil, particularly U.S. belt-tightening use less square footage. “The Era ble obtaining financing, while lenders and special contagion, but anticipate a slowdown in 2012 as of Less” forecast in last year’s Emerging Trends servicers will continue to extend and pretend as consumers and homebuyers back off a recent takes firm hold. Housing markets continue to long as borrowers