Commercial Real Estate Poised to Gain from Positive Market Fundamentals in 2015

The commercial real estate industry is poised for broad-based growth in the coming year as performance and profitability continue to improve across most property types and markets, according to projections from consulting firm Deloitte.

The company’s 2015 outlook is supported by improving property fundamentals, a strengthening economy, easy financing, and increased domestic and international investment activity, according to Deloitte. Against that backdrop, U.S. REITs are expected to continue to outperform benchmark indices such as the S&P 500 and Russell 2000.

“What’s really going to be a driver in 2015 will be the strengthening real estate fundamentals first and then access to capital. We are seeing REITs increasingly finding opportunities to do development and leveraging their access to capital to get that done,” said Bob O’Brien, U.S. real estate services leader at Deloitte.

Bob O'Brien

O’Brien also said U.S. equity REITs are starting to diversify their portfolios by looking at international opportunities.

“Most REITs really pulled back from international (expansion) in the global financial crisis. We’re beginning to see some return to, or at least expressed interest in, investing globally,” O’Brien said.

Intensifying Competition for Quality Assets

The extensive availability of financing through domestic and international sources will likely support growth in transaction activity and asset pricing, with competition continuing to intensify for quality assets, according to Deloitte. Meanwhile, deals involving distressed assets are expected to continue to decline, Deloitte forecast.

Deloitte said in the report that it sees rents and vacancies continuing to improve across property types. However, Deloitte also said development activity coming online may impact this improvement in 2015, especially in the multifamily and office sectors. According to O’Brien, the pace of rental growth in the multifamily sector is likely to slow in 2015 as a result of development.

Deloitte’s report noted that it expects tenants’ focus on sustainability and use of technology will have a greater impact on space supply and demand in 2015 and beyond. Instead of new development, Deloitte said it anticipates more redevelopment of existing properties to make them more competitive.

“Tenants, more so than ever, are really incorporating technology demands and sustainability considerations in their leasing decisions,” O’Brien said. “Properties that can’t support the technology needs of their tenants, or aren’t sensitive to their sustainability goals, won’t perform as well.”