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Saturday, June 27, 2015

NCREIF Summer Conference - Perceptions and Prognostications

by Erik Foster (Chicago)

I was asked to speak last week at the National Council of Real Estate Investment Fiduciaries (NCREIF) Summer Conference and discuss the current state of the US Capital Markets.  NCREIF is an association of real estate professionals who are involved with institutional real estate investments; the audience members were pension funds, fund managers, various fiduciaries, consultants, insurance companies and appraisers.  

The tone of the conference was optimistic, yet there was an air of frustration as many have a difficult time investing funds in today’s market given the peak pricing and dearth of offerings which appears to be the norm across the country.  I focused my comments on office, industrial and medical office property segments, below are the main trends that I spoke to:

Office
·       Office-oriented employment is accelerating and is expected to rise through 2015
·       Office vacancy has decreased year over year over the past three years in many of the major markets such as Chicago, Atlanta, Dallas and San Francisco.  Washington DC’s vacancy is moving the other way, since 2012 its vacancy has increased and now stands at 16.3%, and New York appears to be moving in a positive direction with vacancy at 8.7%, an improvement from last year, but still not down to the 2012 levels.
·       Office construction is moderate with many major markets such as Chicago, New York, Washington DC and Boston keeping their development in-check.  Yet some markets are building at a quick pace as compared to overall stock, Houston 4.5%, San Jose 3.4% and San Francisco 3.3%.
·       Medical office will continue to be a solid investment in the coming years.  The overall vacancy will continue to trend below 10% which was the peak in 2008 as the US population ages and hospital visits increase.

Industrial
·       Demand for industrial assets remains steady and sales volume should reach close to the 2007 peak of $62 billion by the end of 2015.
·       Several markets still remain below the peak pricing seen in 2007, including several in California – San Jose, San Francisco, San Diego, Sacramento, and Orange County. Among the markets that are performing above peak pricing are Los Angeles, Austin, Houston, Northern New Jersey, and Indianapolis.
·       Buyers of core buildings are bidding these assets into record levels as institutional buyers push into record pricing in the major distribution markets.

NCREIF asked to make some predictions of what we’re expecting as we move into the second half of the year.  I noted that sale-leasebacks will continue to grow in popularity as many companies take advantage of the aggressive market pricing.  Also, as companies are constrained by their internal lines of credit given the new regulatory environment that we live in post-recession, many are choosing to liquidate assets in order to fund growth of their businesses.  I also believe that overall deal volume will be similar to 2014, yet major platform, and company, deals will be prevalent.

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