NEW YORK--(BUSINESS WIRE)--Real estate values are expected to rise over the next three years, according to Integra Realty Resources’ (IRR) Viewpoint 2014 report, the industry’s annual compendium of real estate valuation, investment, and leasing trends and forecasts. Improved property fundamentals will drive the upward trend in real estate values, and they are likely to offset any potential increases in cap rates during this period. The strong recovery of property fundamentals has already established the real estate sector as a safe harbor for investors in search of yield in the current low-interest-rate environment. These dynamics will add to favorable value appreciation during the next three years.
IRR Viewpoint 2014 provides data, analysis, and forecasts on local and national market conditions for eight industry sectors throughout the United States, including debt capital markets, office, multifamily, retail, industrial, lodging, self storage, and seniors housing. The 24th issue of Viewpoint is also the first to include an entire section, IRR Forecast, dedicated to forward-looking analysis and commentary on all commercial real estate markets and property types.
“Through its 23 previous editions, IRR Viewpoint has been recognized as an industry-leading publication and primary resource for research and analysis about past and current market conditions for institutional-quality commercial real estate assets in the United States,” said John Albrecht, CEO of Integra Realty Resources. “With Viewpoint 2014, we have expanded the report to include a forecasting section intended to help our clients prepare for potential opportunities and risks within the commercial real estate sector. We have also broadened the scope of our survey and research to include Class B property metrics.”
The past year was a landmark year for IRR, and 2014 should prove to be even better, predicts Raymond Cirz, MAI, CRE, FRICS, Chairman of the Board at Integra Realty Resources. “We now have 66 offices nationwide, including our new office in Jackson, Mississippi, making IRR the first national valuation firm with a local presence in the state. The MAI designation is considered by many to be the gold standard of expertise in our industry, and IRR now has more than 200 MAI-designated members of the Appraisal Institute in our ranks, more than any other firm. Through the efforts of this highly experienced team, we have compiled one of the most useful and comprehensive Viewpoint reports in IRR’s history.”
Key findings of this year’s IRR Viewpoint include:
- The office sector is exhibiting the most divergent performance compared to markets of any of the major property classes, with several markets areas still in the recessionary phase and others enjoying a period of expansion. This suggests a more localized office product demand, but supply might not be able to quickly react to changing market conditions.
- Average office transaction prices were materially higher in 2013 in Austin, Charlotte, Houston, and Nashville, while average prices slumped in Boston, Miami-Palm Beach, Orange County, and San Diego.
- The differential between Class A and Class B rates appeared to be materially tighter for suburban product compared to central business district (CBD) product. Class B capitalization rates demonstrate less variance from their expected reversion rates, indicating that the asset class might be less likely to experience value volatility in the long term.
- The western region continued to see moderately strong cap rate compression in 2013, resulting from pre-existing historic average lows in 2012. The south, on the other hand, might have reached a cap rate trough and is exhibiting some signs of softening, with reported urban and suburban Class A cap rates rising 17 and 18 basis points in 2013. The central region remains the only geographic area where Class A suburban assets are trading at cap rate premiums compared to urban assets, though this trend reverts to the norm for Class B assets.
- The apartment sector faces some uncertainty in the capital markets, as private investors have reportedly begun to acquire material-preferred equity stakes in Fannie Mae and Freddie Mac. A rise in interest rates or a contraction in the debt capital available to owners could place significant upward-trending pressure on historically low cap rates.
- 2013 reflected a notable uptick in the average sales price per unit compared to 2012 and the 10-year historical average price. The most active markets were Los Angeles, New York City, and Washington, D.C., with each of these markets nearly doubling their respective average 10-year sale volumes. Only South Florida and Las Vegas trailed their 10-year volumes.
- High-end sales, including the Apple Store and One Union Square, helped drive up the average retail sale price in San Francisco by more than 100% compared to historical averages. Other markets exhibiting major price increases above historical norms included Portland (48.1%), New York City (36.8%), South Florida (35.5%), and Denver (29.1%). Average transaction prices slumped most noticeably in Phoenix (-21.9%) and Philadelphia (-20.5%).
- Average (non-inventory weighted) reported market vacancy rates for retail assets decreased from 9.04% in 2012 to 8.42% in 2013. The reduction in year-over-year vacancy rates appears to be even stronger in the country’s largest retail markets, as the weighted average vacancy rate dropped even further from 8.06% to 7.65%. Looking forward, increased projected absorption activity is expected to drive further gains in occupancy and rental rates for the retail property sector over the next three years.
- The industrial sector is recovering even faster than previously anticipated, with the average estimated time to reach stabilized levels of market occupancy decreasing from four years to two years. However IRR cautions that average annual absorption is expected to fall in the coming years as new product comes online and the national economy struggles to create manufacturing jobs that would increase demand for industrial product.
- Of the six most active markets in 2013, five of the markets (Dallas, Houston, Los Angeles, Northern New Jersey, and Orange County) exhibited substantially more transaction volume than their respective 10-year historical average volume rates. Smaller markets exhibiting similar transaction volumes include Sacramento, Salt Lake City, and St. Louis.
- Average prices remained relatively unchanged in most markets from 2012 to 2013. However, Dallas and Houston had material year-over-year average upward price shifts. Average prices materially shifted downward in Detroit, Denver, and Washington, D.C.
- Transaction volumes in the past year were up significantly in Houston, Pittsburgh, and Portland while transaction volumes were well below 10-year historic average volumes in three of the four largest markets: Chicago, Los Angeles, and Washington, D.C.
- IRR predicts that the national lodging sector will remain strong in 2014. However, some areas that rely more heavily on lower-end group travel are likely to continue to lag the overall industry’s strong recovery for the foreseeable future.
- In 2014, operating metric gains are expected to maintain momentum but moderate slightly, with occupancy growth estimated at 1.29% and average daily rate (ADR) growth estimated at 4.6%. This could grow overall revenue per available room (RevPAR) rates by 6%.
- Cap rates have dropped to near record-lows during the past two years due to a reduction in for-sale inventory. Coupled with income growth and lower overall rates, self-storage values are increasing, and continued positive momentum is expected in 2014.
- The four major publicly-traded real estate investment trusts (REITs) – Public Storage, Extra Space, CubeSmart, and Sovran – exhibited materially positive absorption during the course of 2013. This has allowed the industry to decrease the amount of promotional discounts and concessions, further enhancing revenue potential within the sector. Occupancy is expected to stabilize as operators continue to push rental rates higher.
- The combination of near-record-low levels of cap rates, income growth, and lower overall rates is likely to result in an increase in self-storage values. Market conditions in many areas also indicate that new self-storage construction will increase in the coming years.
- IRR anticipates that the seniors housing acquisition market will remain hot, resulting in further cap rate compression relative to other property types. There is larger-than-average growth occurring in the 75+ and 85+ age range, so it is certain that demand for seniors housing will increase over the next few years, and the demand will only accelerate over time.
- Overbuilding is a concern, mostly confined to the memory care sector where the current inventory under construction is 8.22% of the existing inventory and average occupancy levels have already started to fall.
The full IRR Viewpoint report comprises additional resources, including methodology, forecasts, and 44 graphs and tables. A free download of the publication is available on IRR’s home page at www.irr.com.
About Integra Realty Resources
With corporate headquarters in New York City, Integra Realty Resources (IRR) is the largest independent commercial real estate valuation and consulting firm in North America, with 66 offices and more than 200 MAI-designated members of the Appraisal Institute who are among its more than 900 employees located throughout the United States and the Caribbean. Founded in 1999, the firm specializes in real estate appraisals, feasibility and market studies, expert testimony, and related property consulting services. Many of the nation’s largest and most prestigious financial institutions, developers, corporations, law firms, and government agencies are among its clients. For more information, visit www.irr.com or blog.irr.com.