Shaken by stock market declines and anemic bond yields, investors will continue to gravitate toward equity real estate in 2012, but will grow somewhat unsettled in the face of limited property investment opportunities. What is the real estate prediction of 2012?
To further the confusion, no markets or property sectors offer sure-shot opportunities for big gains in 2012. Canadian real estate markets will continue to remain the most stable in North America as they never really experienced a bubble.
It should be no surprise that the US markets that experience population and job growth will be the strongest economies over the near future and investors should focus on markets generating jobs—typically where health care, technology, and energy companies concentrate. In many markets, continued economic doldrums and the absence of dynamic jobs generators to stimulate overall demand will have ongoing negative impact on most every real estate class. Jobs will be the key to recovery.
The lackluster employment outlook in many areas will create delays in filling office space and the related drag in consumer spending compromises growth in retail and industrial occupancies and rents. As mortgages mature in many of these properties we will see continued defaults as the lenders will underwrite to current occupancies and rental rates, creating a lower valuation and putting stress on investors.
On a positive note, pockets of hiring will occur in certain industries which will be driven by ongoing trends and specific demographics. Pay attention to these emerging trends when investing.
The top US investment markets remain the usual suspects, led by the 24-hour global gateways— Washington, D.C., San Francisco, New York City, Boston, and Seattle. Austin, the moderately sized Texas capital, will continue to benefit from dynamics created by its large university, the local tech industry, government jobs, and regional energy-based economy.
The strong energy sector will continue to create jobs in many areas but be conscientious of the fluctuation of oil and gas prices, which can create variances in local employment. This will include Texas cities and some out-of-the-way places like North Dakota. Technology will continue to boost areas of California, the Seattle area, Boston, and smaller high-tech markets like Austin and Raleigh- Durham.
Health Care will be in the headlines for the next few decades, and it should be no surprise that now that in the US the baby boomers are turning 65 years old at a rate of 10,000 per day, that health care will expand everywhere.
The steadily graying population means more medical attention, medical services and facilities to accommodate. Senior housing of all types will lead the charge and this time the demand will be there. Jobs will continue to grow for lower-paid aides or highly skilled doctors, nurses, and technicians. Progressive cities like San Antonio, Texas will be impacted positively due to this future job growth potential.
Medical office space will also gain favor because of the future demand of this aging population. Some analysts believe this asset class may be recession proof as it relies on a very predictable future trend. Watch the health care act as it may help spur demand as more hospital procedures move into Doctors offices. Over the longer term, this bulging senior citizen population promises to expand needs for various outpatient facilities and clinics.
The flavor of the day is apartments among every real estate property sector, and everybody wants them.
Demand for apartments was created primarily from the aftermath of the single family housing bloodbath and from the emerging echo boomers, the kids of the baby boomers. These pesky kids are turning 18 years old at a rate of 4 million a year for the next 20 years, they want out of the house and they are moving to rentals…..if they can get work. There are currently over 22 million of these kids still living at home, the highest ever recorded. When jobs return, these kids will eventually move out and will create an additional spike on apartment demand.
On the supply side, the lack of new apartment construction over the last several years due to tight credit markets has not keep up with the renter demand and has created a huge shortage. Just to meet the year over year rental demand, the US needs over 250,000 units of supply annually. During this same period, less than 75,000 new apartments were delivered annually. As with all things in real estate, when demand exceeds supply the occupancy, income and values will rise.
Expect a ramp-up in apartment development across many markets justified by plunging vacancies and continuing rent increases. How much will depend upon the ability of the local developers to get financing.
Investment should continue to cool on commercial offices, especially suburban office parks where investors should focus on downtown urban districts and 24-hour environments. This is where jobs exist and echo boomers want to locate.
Many equity players continue to place bets on warehouses in the gateway ports and around international hub airports.
Pay attention to the ongoing battle of the East Coast, West Coast and Gulf Coast ports to attract the ship traffic coming through a widened Panama Canal in 2014. Winning cities could transform into major distribution sites.
Shopping center owners will continue to face increased demand from internet retailing as will the regional malls. Older undercapitalized regional malls and fringe strip centers will continue to lose ground. Outlet malls will make a comeback as the consumer looks for bargains.
The hotel industry will be strong primarily in the major 24-hour cities that attract consistent strong combinations of business and tourist travelers. Middle-market hotels without food and beverage service will target the budget conscious travelers.
On the single-family residential sector, the oversupply of existing stock deflates homebuilder hopes, and 25 percent of borrowers remain underwater. Housing for seniors and student housing remain demographic plays, and manufactured home sites could do well in the down economy: operators can earn income waiting for future land development opportunities.
In the near future, America will continue to thrive on borrowed money. The Governments will have no choice on future bailouts in 2012. Bailouts are highly inflationary, not deflationary. As a result, my partner and I are preparing personally for much higher inflation ahead. We are currently focused on locking in long-term fixed-rate financing on our new and current assets. We think we can borrow at less than the rate of current and future inflation and these borrowing rates will not be here much longer. We believe that interest rates will start to creep up after the upcoming election.
The majority of our investments are in existing cash flowing multifamily holdings with fixed rate debt. As we become a renter nation over the next several years these types of investments will grow in demand and in value.