CRE Supply to Remain Low in 2012

The outlook for 2012 commercial real estate is positive despite the slow recovery, as analysts say that fundamentals are moving in the right direction in all property sectors.

"Commercial real estate fundamentals are improving, and we're in the second or third year of what we believe is a multi-year recovery," noted RJ Milligan, analyst with Raymond James in an interview with REIT.com.

Milligan said nothing new is being built. At the same time, he said that as a result, a steady demand for real estate in some sectors will allow property owners to charge higher rents.

"There is really very little new supply across the majority of property sectors, so that will help REITs do well," Milligan said.

The growth in supply is starting to pick up in the apartment and data center sectors, but Milligan said expects there will be very little new supply added overall in 2012.

Peter Rothemund, analyst with Green Street Advisors, said the lack of supply in commercial real estate may be a silver lining to the recovery offering a bit of good news during a slow time. He added that the lack of new supply makes up for slow demand growth

Supply growth is currently at its lowest point in more than a generation, according to Green Street's recent Commercial Property Outlook report.

"I don't think there will be much supply coming on line for 2012," Rothemund said. "Things won't get built if there's not a healthy demand for them."

Overall, analysts don't appear to expect an eventful 2012 in the commercial real estate market.

"It just kind of feels like we're plodding along. There's nothing to get excited about," Rothemond said.

Rothemund said that gateway markets will continue to enjoy the strongest demand this year. Milligan added that the disparity between the asset classes will also continue, with the class-A assets commanding higher rents, leading to better rent growth.

"But at some point, the B and C property types are going to have their day," Milligan said. "We think we're going to start to see some of that if the economy continues to work, but it is very sector specific.".

Milligan said he's projecting total returns for REITs between 8 percent and 12 percent, driven by 8 percent FFO growth and 4 percent dividend yields. He added that multiples should be unchanged or modestly contract in 2012, particularly for the large cap REITs.

"It's our belief that this is the third major REIT up cycle in the modern REIT era and we think that the' typically lasted seven year and we see this one is gong to last seven years if not longer, given this slow economic growth we're seeing." Milligan said.