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| Jeanne Peck |
Chicago, IL, May 1, 2014 - Global market tensions help
maintain low yielding treasuries. At the same time, real estate investors are more optimistic about the income-property sector due to a slowly improving
economy.
Real estate pricing climbs to record levels as driven by
insatiable demand and low cost debt. Market highlights summarizing the first quarter of the year along with forward looking trends are as follows:
Development Trends:
* "You have to be dense not to understand density," indicating that high density and mixed-use vertical development is here to stay, no longer a
"smart growth" conversation.
* "Urbanization of Suburbs" shows that long-ignored, older, infill suburban areas near public transportation desirable, as pricing differential
becoming more attractive vs. urban deals.
* Increased construction and labor costs (e.g., 15% in many
markets) creating as much as 100 basis point lower development yields, but
are compensated by lower mortgage and capitalization rates.
* Land costs driving higher construction costs, peaking above
pre-recession levels keeping profits in check; however, financing sources
are also recognizing developer's marked up values during such holding
periods, creating more implied equity in construction budgets.
* Parking ratios continue declining giving way to pedestrian
lifestyles, bicycles, zip cars and convenient public transportation.
Municipalities showing more flexibility with this component, helping to
drive down overall construction costs.
* Development Yields: Return-on-cost range of 5.5% for major-market
apartments; otherwise 6%-7% for other types of commercial properties. More
retail and industrial deals in the pipeline, but office still very sparse.
* Apartments: New construction concerns mitigated by job growth and
return to urban areas - cap rates moving down to 3% in some major markets
along the coasts; otherwise 4.5-5.5% for other major markets with another 50
to 100 basis points for secondary markets.
* Retail: About 12% of all retail sales are now on line; nearly no
new development plans for department stores; larger grocers reconfiguring
stores for smaller urban footprints, responding to more independent and
local operators. The most fluid property type that's overbuilt (suburban),
yet in great demand (urban infill). Tech companies are "humanizing" their
products with stores (e.g., Apple, Tesla).
* Industrial: National vacancy levels well below ten percent,
encouraging more new construction especially given shorter development
cycles and in selective markets, spec projects are acceptable.
but longer-term ownership is a more cautious concern do to tenant's demand
for more efficient space.
* Hotel: Interest rate volatility and near peak pricing.
"Everyone seems to be scrambling for certain yield opportunities. Many
institutional investors are re-introducing themselves to new construction
funding strategies for capturing core and core plus investment plays. Pro
forma underwriting is commonplace again," according to Jeanne Peck of the
Real Estate Capital Institute.
For a complete copy of the company’s news release, please contact:
Jeanne Peck
Executive Director:
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