The U.S. real estate market improved in 2012, and there is good reason for optimism going forward as several industries are now contributing positively to the economy. Energy and technology markets are booming again, and the U.S. housing market recovery is gaining momentum. In fact, residential housing has been a positive contributor to GDP growth for four straight quarters. Even the automobile sector is up by nearly double-digit rates due to pent-up demand, providing positive momentum in hard-hit manufacturing cities in the Midwest and South. Employment is expected to return to peak numbers by 2015 in the U.S., and the unemployment rate is expected to reach an “acceptable” 6.5% level by 2016. Along the way, the U.S. economy will continue to shift towards service-oriented jobs, which tend to occupy commercial real estate space such as office, retail and the like.
Demand for real estate should continue to improve in 2013 at a similar moderate pace, particularly in the first half of the year. Confidence issues created by the U.S. debt and fiscal policy debates, uncertainty in Europe, and slower growth in China and in India will need to be worked out before executives feel confident about expansion plans. Furthermore, firms have run the course of improving profit margins through capital restructuring and labor productivity. Thus, profits are now more exposed to the low-growth global environment.
Regionally, economic growth will continue to be uneven within the U.S., as areas with strong growth in knowledge-based industries, such as technology, information, and healthcare, many of which are located in the South and West, will experience faster growth rates.
Secular trends are changing the demographic make-up of the country and its needs for real estate. We expect to see an increase in the migration of aging population bases towards coastal and southern states for warm weather and lower cost of living. The growing older population, with the oldest of the Baby Boomers now in their mid-60s, will benefit the healthcare segment, as strong demographic tail winds will overshadow the outcome of the current policy debate. Population growth in the U.S. will continue, with in-migration, rather than births, driving growth moving forward. Lastly, the growth of the Hispanic population accounts for the majority of total expected population growth in the U.S., which is likely to create niche opportunities-particularly in housing and retail.
There are risks out there. Chief among them are concerns about fiscal and related debt ceiling issues, slowing economies around the world, credit downgrades for the mounting national debt, and so on. Continued concerns about economic growth and the growing national sovereign debt burden contribute to uncertainty about the future and thus to continued volatility in the capital markets in the upcoming year. This could create periods of pricing mismatches between public and private markets-a possible benefit to investors who have both REIT and private market portfolios. While the current accommodative monetary policies are expected to keep interest rates low for the near-term, rates could rise faster than expected at some point. In the property markets, the good news is that cap rates for most property types remain at wider than average spreads to long-term treasuries, providing some cushion against interest rate increases (to a point, of course).
Property Markets Widely Improving
U.S. real estate markets are broadly improving. While Class A properties in prime locations continue to be priced at a premium, vacancy and rents are improving in several sectors and geographic areas. In fact, construction has already returned to multifamily and some prime hotel and office markets. Indeed, the for-sale housing segment is showing signs of solid recovery, even in hard-hit markets such as Phoenix, Orlando, and Las Vegas. We see continued recovery in the for-sale housing market through 2013 and beyond, with activity levels, home prices, and home sizes all rising and growing. Further, while we should keep a watchful eye for possible overbuilding in select multifamily markets, demand is still strong, and supply, even if at the current higher construction levels, is yet to reach the levels required to fully satisfy the need.
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