The commercial real estate industry is heading toward what should be a tepid recovery, like the general economy. Also similar to the new economic reality, the industry most likely will settle into a period that distances itself from the super-sizing and excess that defined the mid-2000's boom years, one PricewaterhouseCoopers (PWC) analyst/consultant Jonathan Miller calls the "Era of Less."
Miller and Urban Land Institute (ULI) Resident Fellow Steve Blank, presiding over a panel at the 2010 ULI Fall Meeting in Washington, DC last week, admitted there were many problems still plaguing the commercial real estate business, noticeably high vacancy rates caused by a stunningly small appetite for new commercial space. Though optimism is rising for future prospects, for now, demand is "still in the tank," said Blank.
"In this era of less, we don't need anything new," he noted.
However, the duo was happy to report that ULI's annual report on the industry, the 2011 edition of "Emerging Trends in Real Estate," finds ratings improving in the apartment, industrial, hotel and retail segments of commercial real estate. Moreover, they expect the worst of the downturn in the industry has passed, and the value of new construction could return to a range between $75 billion and $100 billion by 2012. However, the new and renovated spaces will have to adhere to the new trend of tenants wanting more flexible and smaller spaces to accommodate for factors such as smaller staffs and energy efficiency. Moreover, the days of significant operations being conducted in far-off suburbs seem farther from returning than the rebound for city-located spaces.
"Companies are doing more to centralize their operations," said Miller. "That's not going to serve the suburban side. [Cities and close suburban] central business districts are way better off than the suburban office right now, and the divide is growing."
The study listed the following as the best markets for opportunity over the short- and medium- term in commercial real estate construction and, even more so, renovation/redesign:
- Washington, DC - Because of the vast array of jobs related to the federal government, "Washington doesn't do layoffs."
- New York, NY - Commercial real estate has improved there more than any other market in the last year, and the federal Troubled Asset Relief Program "helped undergird the financial market."
- San Francisco - A progressive city that is considered a "Gateway to the World" location because of its international travel proficiency and its industries are a key driver that places California, itself, on a level equal to the eighth largest economy in the world.
- Boston - Simply put, "It's the academic center of the world."
- Seattle - It's another "Gateway to the World" city with a diverse industry base and a large number of skilled and educated young people in the workforce.
Other cities with solid prospects, according to the ULI/PricewaterhouseCoopers report are Houston, Los Angeles, San Diego, Denver and Dallas.
Brian Shappell, NACM Staff Writer