Protracted economic growth, combined with uncertainty regarding pending regulations and fiscal policy issues, will likely moderate the pace of recovery in the commercial real estate industry in the near future, according to a report on the 2014 industry outlook from consulting firm Deloitte.
The anticipated moderation in 2014 would follow a year in which asset prices, transactions and capital availability all saw a continued recovery. So far in 2013, asset prices have moved close to their 2007 peaks in major metropolitan markets and transaction activity has improved in secondary markets, the Deloitte report stated.
“We expect that the recovery will continue, we just expect that the pace of it will slow down in 2014,” said Bob O’Brien, U.S. real estate services leader at Deloitte.
Private equity and international investors have shown increased interest in U.S. commercial real estate, according to the outlook. The region is considered to be the most stable globally and to offer the best returns relative to risk, Deloitte said.
Rents and occupancy levels have strengthened since the downturn across property types, the report noted. However, in historical terms, rents and occupancies are trending below their averages in most sectors, excluding multifamily and hotels, according to Deloitte. Furthermore, the report speculated that fundamentals in the multifamily sector are beginning to peak.
Development activity, meanwhile, remains subdued for most property types, Deloitte observed, again with the exception of multifamily and hotels. Lending standards for construction loans also remain stringent.
Turning to regulatory developments, Deloitte is forecasting that the uncertainty associated with measures such as the financial reforms of the Dodd-Frank Act and the Terrorism Risk Insurance Act (TRIA) will likely promote caution in the real estate industry. Deloitte noted, for example, that the “effects of a looming expiration would be felt long before TRIA’s actual demise.”
Meanwhile, the Deloitte report also highlighted that the commercial real estate industry is undergoing fundamental changes in business practices, including redesigning existing space to suit new tenant demands and the growing use of automation. Deloitte warned management teams and boards to factor in the influence of these new developments in order to achieve above-average growth and position themselves for the long term.
“We think real estate owners and investors would be well served to focus on operations and profitability and to look at making the necessary investments in their properties to respond to changes in the way tenants are using properties,” O’Brien said.