Positive CRE Fundamentals Projected Through 2014

Returns will remain strong, but trend slightly lower for REITs and institutional real estate assets in the next three years, according to a survey of economists and analysts.

Total returns for equity REITs are expected to be 10 percent in 2012, 9 percent in 2013 and 8 percent in 2014, according to the Urban Land Institute (ULI) survey. Dean Schwanke, executive director of the (ULI) Center for Capital Markets and Real Estate, said that while the projected returns represent a decrease from the REIT returns of 29 percent in 2009 and 2010, the new numbers are closer to the more sustainable levels witnessed in 2011, in which REIT returns were up 8.28 percent for the year, according to the FTSE NAREIT All Equity REITs Index.

As property transactions rise and the overall economy continues to show steady growth, respondents indicated that they expect commercial real estate fundamentals to improve through 2014.

"There are reasons for optimism," Schwanke said. "Commercial property transaction volume is expected to increase by nearly 50 percent, and commercial mortgage-backed securities (CMBS) issuance is expected to more than double."

CMBS issuance is expected to increase from $40 billion in 2012 to $75 billion in 2014, according to the survey. At the recession's low point in 2009, CMBS issuance was $3 billion.

When it comes to specific sectors, the ULI forecast projected that office, retail and industrial properties will see vacancy rates drop between 1.2 and 3.7 percent. Apartment vacancy rates will remain low, while hotel occupancies are expected to improve as well within the next three years. Additionally, the survey revealed that respondents expect rents to grow for all property types.

Change within the real estate sectors will also be noticeable, according to some of the survey participants.

"In San Francisco, we're using office space in a much different way. The traditional high-rise office tower is not evolving," said Kenneth Rosen, chairman of Rosen Consulting Group and a panelist on a webcast discussing ULI's survey. "There's a lot less space per person, but there's very little supply, and eventually there will be a demand, but it will be a very different type of office space."

Peter Linneman, principal of Linneman Associates and CEO of America Land Fund, added that there's a wide spread between the core and tertiary markets.

"Recovery depends on where your real estate is and where it's at in the submarket. With retail there are still a lot of challenges, but multifamily has recovered," he said.

Observers do expect a slight cooling in the apartment sector, according to the survey results, as supply catches up with demand.

"Right now, the demand side looks very good, and we see a lot of new starts," said David Lynn, managing director with Clarion Partners. "But a lot of the new supply we're looking at can very much be oversupply in the next three or four years."