Happy New Year! I find myself, as I do every year at this time, preparing my forecast for the year for a round of presentations over the next few months to various professional and real estate organizations. Here are the highlights:
- The general outlook is good. I believe that we are “over the hump” in terms of transitioning from an economy in recession, to recovery and now entering the prosperity part of the cycle. It may not yet feel that way to everyone, but at least in the real estate sector the recovery is dynamic, a fact reflected in our own working portfolio which is substantially filled with new projects.
- It is the construction sector which has held back the recovery. As it recovers the economy will be back in full swing.
- Demand is up in virtually all sectors, although in the commercial sector, in particular, it has been timid.
- However, supply is behind in most sectors, particularly in residential.
- The strongest sector continues to be residential rental, and that has played out with higher rents, low vacancies, stable and low capitalization rates (and fewer investment sales as sellers hold back), and continued institutional and other capital investment in bringing previously distressed single family homes into the rental pool.
- Capital is available from many sources for real estate from both debt and equity. However, available debt capital is contingent on thorough due diligence.
- Interest rates will rise, but moderately this year. I don’t think we will see significant interest rate increases until 2015.
- Demographics matters: stay focused in particular on Gen Y, still mostly in their 20’s, but now maturing. Their housing, business and lifestyle choices will play a big part on the demand side.
- Technology has gained a stronger foothold across the board. The main global challenge is that computers, which used to supplement human activity, have now been replacing humans, an impact which has served to sustain high unemployment and especially underemployment. This is the key tension in the economy that will be with us for many years.
- Technology has obviously changed the face of retailing, where “bricks and mortar” retailing continues to be challenged as it re-positions against the cyber retailing attack. Look for changes that are more profound in the next five years than in the previous 15!
- The office market is recovering, but it is sluggish. The compression of office space needs, also a result of technology, is greatly impacting the occupancy and the eventual delivery of office space.
- The hotel market is recovering at a pace that is even surprising its own professionals. There are good rates, high occupancy and a considerable number of new projects.
- For-sale residential pricing is nearing the peak achieved in 2006. Some high end markets have already fully recovered. Expect new pricing peaks later this year.
- The emphasis on recovering older inventory continues as a focused business in the real estate sector, in some communities this is more important than new construction. The means respositioning, rehabilitation and repurposing.
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