CHICAGO — Growth in STEM (science, technology, engineering and mathematics) employment and the continuing recovery in the U.S. housing market are positively impacting commercial real estate, according to a newly released report by Jones Lang LaSalle (JLL). The “Cross Sector Outlook” focuses on the impact of this employment trend on the five main property types. JLL unveiled the report at the Urban Land Institute’s Fall Meeting in Chicago Wednesday.
Specifically, the report examines how the housing recovery influences all types of commercial real estate; the ways in which the millennial generation will affect office workplace strategy, retail stores, hotels and apartments; institutional investment patterns; and the indirect impact of growing industries on local real estate.
“The U.S. housing market has experienced significant and welcome improvement in recent years, and the release of pent-up demand should continue to accelerate as millennials form new households in an improving job market,” says Jay Koster, president of Americas capital markets business of JLL. “This will, in turn, have a significant impact on commercial real estate, as local economies improve because of the resulting increase in jobs in the construction, real estate, lending, retail and manufacturing industries.”
Broadly speaking, property operating fundamentals are improving, largely because of the rise in STEM employment and limited new development. What follows is JLL’s summary of the five main property sectors:
• Retail vacancy rates should continue to inch down over the next year as construction remains limited. The lack of new supply also will extend the ongoing recovery in rents. Investor interest in the slowly recovering sector is perking up, as investment sales increased to $33.8 billion in the first three quarters of this year, a rise of 14 percent from the first three quarters of 2012.
• With small and mid-sized companies continuing to lease space, the industrial sector will experience additional rent recovery in the months and year ahead, and the overall national vacancy rate will settle at 7.9 percent at year’s end. The sector also stands to benefit from the growing e-commerce industry. Investment sales reached $26.2 billion in the first nine months of 2013, marking a 34 percent increase from the same period a year ago.
• In the office sector, secondary markets in particular are benefitting from the job growth in the technology and energy markets. Markets with diversified economies should see increased tenant demand, and tightening conditions in CBDs should raise rents, particularly for large tenants. During the third quarter, positive net absorption was achieved nationally for the 14th consecutive quarter; approximately 9.6 million square feet was absorbed. Investment sales in the sector are robust and jumped 32 percent, to $62.9 billion, in the first three quarters when compared to the first three quarters of 2012.
• Overall, the hotel sector continues to boast strong operating fundamentals and growth in revenue per available room (RevPAR), and the national occupancy rate in 2013 is set to come just one percentage point shy of the 2006 peak. Going forward, expect further improvement in resort and select-service hotels, the latter of which has garnered more interest from off-shore buyers. Hotel investment sales are soaring, adding up to $14.6 billion in the first nine months of 2013, a dramatic increase from the first three quarters of last year.
• The multifamily sector has dramatically reduced its vacancies since the Great Recession, and both occupancy rates and rents have climbed well above their 10-year averages. The sector’s performance has been driven in large part by growth in STEM employment, which should continue to remain strong. Apartment investment sales totaled $71.5 billion in the first three quarters of 2013, up 29 percent from the same period in 2012.
Looking ahead to 2014, investment sales should continue to demonstrate positive momentum, according to JLL. Despite near-term headwinds related to domestic spending concerns, overall investment sales volume should increase approximately 15 percent in 2014 from its 2013 total. Furthermore, as the search for yield continues and the recovery broadens, expect to see growing interest from investors in core and value-add assets in secondary markets.
Additionally, the overall lending environment should remain healthy next year. While interest rates may increase modestly, which would signal an improving economy, the overall cost of capital will remain low from a historical perspective, and investors will have access to competitive product from the various lending categories.