COMMENT: Looking forward

With the holidays and the end of the year upon us, now is a good time for a little rest, a bit of reflection and some planning for the New Year. In the spirit of that last bit, PERE offers its readers forward-looking perspectives on several of the major markets and regions we cover. That series of articles kicks off with today’s Friday Letter and continues until PERE returns on January 2, so check out perenews.com each workday during the holiday break for the next installment.

First up in the series is the US, which overall has experienced a slow but steady recovery over the course of 2013. Unfortunately, that recovery has been an uneven one, limited to select markets rather than occurring nationwide. That, in turn, has made many investors cautious about moving beyond core gateway markets despite intense competition and compressed cap rates.

Although markets like New York, San Francisco and Washington DC are still attractive and will continue to appeal to investors with certain return targets, the desire to earn a higher return has investors more willing to explore opportunities in a wider assortment of markets, including tech- and energy-centric markets like Austin and Seattle. According to several industry reports, what makes this shift more likely to occur in 2014 is that the pace of improvement among underlying market fundamentals is now viewed as being sustainable, so the economics of investing in such markets are now meeting the risk-return parameters of more investors. Therefore, in 2014, expect to see more transactions in a wider array of markets, such as Denver, San Jose and Nashville.

Furthermore, market fundamentals have improved to a point where development – nearly unthinkable just a few short years ago – is underway in a greater number of US cities, primarily the top 20 investment markets. The increased level of development in these markets is not surprising, as strong competition for core assets and compressed cap rates have prompted a number of firms to explore ‘build-to-core’ strategies. In addition, fundamentals in these markets have improved or are expected to reach a level where they can support higher levels of new supply. Therefore, expect to see a noticeable uptick in development in major US markets, perhaps even a couple of secondary cities, next year.

Among the primary property types, the industrial sector looks set to lead the way for both investment and development prospects in 2014. The continued improvement of the US economy coupled with retailers and manufacturers making the shortening of the supply chain their top priority for the foreseeable future are the primary drivers, according to PwC’s Emerging Trends in Real Estate 2014 report. In particular, warehousing properties stand out, reflecting the influence of e-commerce distribution networks that seek vast fulfillment centers near major cities in order to compete for same-day delivery capacity, the report noted. Therefore, if your investment strategy is flexible, you may want to consider adding industrial to your mix in 2014.

While there undoubtedly are a number of other trends that the industry is tracking for 2014, these three – a wider array of markets, development and the industrial sector – represent the predictions with the broadest appeal to our readers. If you think, we missed something in the US or any of the other markets we plan to cover, email me at erik.k@peimedia.com and I will respond in the New Year. In the meantime, enjoy the holidays and enjoy our forward-looking series.

P.S. – Time is running out to vote in this year’s Global PERE Awards. Simply click here and select the people and organizations that you think mattered most in 2013. Don’t wait until after the holidays; make your opinion count and vote today!