A new year brings the inevitable macroeconomic predictions and conjecture about how those predictions will affect real estate and capital markets, in addition to real estate asset class and market forecasts. The CoStar Group summarized 14 predictions it likes for 2014, and other real estate firms, such as Colliers International and Jones Lang LaSalle, offered their own insight into the upcoming year. Many of these predictions are summarized below and we will revisit them in 2015 to assess the accuracy of 2014 real estate and market prognostications.
• Slowdown for housing recovery: Cassidy Turley predicts that the Federal Reserve will raise interest rates at the end of the second quarter of 2014, which will increase real estate pricing and borrowing costs. Rising rates could slow the housing recovery. If the rise in rates does not increase too far, too quickly, the economic impact should be minimal.
• Decline in unemployment rates, but uncertain long-term job growth: Jones Lang LaSalle and others predict that unemployment rates will continue to decline. The unemployment rate of those with a college degree is 3.4%, which positively impacts the office market recovery. Grant Thornton predicts that one-third of U.S. companies will bring overseas manufacturing, information technology and customer service functions back to the U.S. in 2014, which would likely increase job growth. Although the reported unemployment rates show a downward trend, there are threats to job growth, including the Affordable Care Act, which the Congressional Budget Office predicts will shed 2.5 million full-time jobs in the coming years, and the historically low labor participation rate, particularly among those without a college degree, which currently sits at 58% and is even lower for those without a high school diploma.
• Weak GDP: According to Colliers, U.S. GDP growth will struggle to average 2% in 2014.
Real Estate Asset Class and Market Conditions
• Office market vacancy rates to fall: According to CBRE, the office market recovery will continue with vacancy rates falling by as much as 80 basis points to 14.3% by the end of 2014.
• Retail investment to heat up: Jones Lang LaSalle predicts that retail demand will increase investment in retail property up to 20% in 2014, driven by power center popularity, unsatisfied 2013 demand and REITs putting retail portfolios onto the market.
• Strong hotel market: The hotel market will continue its resurgence in 2014, according to PKF Hospitality Research, with revenue per available room (RevPAR) increasing 6.6% and profits increasing 12.8% in 2014.
• Bright outlook for industrial: As noted above, industrial properties are poised to do well in 2014 as companies reshore manufacturing, IT and customer service functions and jobs. Colliers predicts that industrial property will be the best performing asset class in 2014.
• Migration to secondary market cities: Colliers sees secondary markets such as Indianapolis, Charlotte, Tampa, Memphis and others benefiting from capital migration from primary markets as investors look for investments in a competitive market.
• Increase in sale-leasebacks: Finally, Transwestern believes that the market for sale-leasebacks will increase because rising interest rates will cause owner occupants to look to sell real property assets to raise capital for operating expenses, expansion or retiring debt.
Many of the above experts predict good things for commercial real estate markets and asset classes, but much depends on how the economy continues its slow recovery. The January job creation numbers certainly don’t bode well, but it’s early. If the tax and regulatory environment, along with Washington dysfunction, don’t get in the way, 2014 could be a profitable year. Check back next January to see which, if any, of these predictions became a reality.