BOSTON, Dec. 18 /PRNewswire/ -- Colliers International, the global real estate services provider, today released its 2007 Real Estate Forecast, providing an in-depth look at the nation's commercial real estate market with prognostications for the coming year -- specifically, the industrial, retail and office subsets. According to Colliers' research, the U.S. commercial real estate sector will surprise on the upside in 2007, even amid potential stumbling blocks such as the weakening housing market and still high energy costs.
GENERAL OVERVIEW
As anticipated, virtually all property types and all regions nationwide experienced a very buoyant and active 2006. Leasing activity was high, rents increased and investors' appetite wasn't nearly satiated. "Investors bet everything would go their way in 2006 -- and their gamble was absolutely correct," remarked Ross Moore, senior vice president and director of market and economic research for Colliers International. "Real estate's time in the sun looks sure to continue for at least another 12 months."
One of the key trends Colliers sees moving to the forefront in 2007 is the adoption of "green" and "sustainable" practices throughout the real estate industry. No one will be immune from this trend. For example, the vast majority of office development will be LEED certified (Leadership in Energy & Environmental Design) and tenants will continue to push for green leasing. The other key trend will be more and more developers gravitating toward mixed-use development, blending office, retail, residential and hotel formats. Infill development and conversions will eclipse greenfield development and adaptive reuse will surge.
Further, commercial real estate will feel the strains of corporations needing to be flexible, with tenants increasingly either occupying team-oriented space, or working from home or other remote locations. A growing labor shortage will also impact commercial real estate, and demographics will increasingly dictate the job market. Despite a tightening labor market, outsourcing will moderate in 2007, as justifying overseas investment will become ever more difficult to rationalize.
FORECASTS
A number of factors color Colliers' 2007 Forecast. First, the domestic economy is expected to operate below capacity for the first half of the year, with GDP growth at just 2.5 percent, but then it should accelerate to 3.25 percent. The job market will remain relatively strong next year, averaging 150,000 jobs per month (or a 1.3 percent increase in employment for the year). Consumer spending will moderate but not collapse, and interest rates, both short and long term, are projected to remain largely unchanged for the foreseeable future. The housing market is expected to stabilize by mid-year, and energy prices are anticipated to remain at or near current levels.
Investments in infrastructure such as roads, highways, bridges and inter-modal facilities was significant in 2006, and such investment is sure to grow and further blur the lines between traditional commercial real estate and transportation, utilities and logistics facilities.
"The greatest risks to our generally robust economy will be geopolitical, especially terrorism, or other low probability, high impact events -- while the domestic auto sector could also act as a laggard," according to Moore.
Investment Sales
According to Colliers' analysis of investment sales trends as we enter 2007, the market will experience another robust year, with a continuing surge in M&A activity among publicly-traded real estate stocks. Further, a wall of private capital will continue to scour the world, looking for a home. In fact, investors will increasingly be forced to think outside the box in terms of real estate transactions. The days of easy investing in traditional institutional-grade real estate will become increasingly rare.
Indeed, as long as REITs trade at a discount to net asset value, privatizations are likely to occur -- and as REITs begin trading in the UK and Germany, global investing is poised to grow exponentially. Going "global" will be the buzz word for 2007.
Interest in multi-family rental real estate will experience a boost as the owner-occupied residential market softens. That said, with interest rates staying low and fundamentals improving, 2007 will be another year of strong performance by virtually all property types. Coastal markets will again be the strongest performers but even traditionally weak markets will benefit from the abundance of capital seeking to invest in real estate. Property values will increase, more due to a spike in net operation income, rather than cap rate compression. Except for the very top tier, that dynamic is over.
Cross-border investment is expected to accelerate as domestic investors seek superior returns abroad, and foreign investors view the weakened dollar as an opportunity to enter or expand their U.S. portfolios. All six major buyer groups (institutions, REITs, equity funds, foreign investors, private investors and syndicators) will be active, with no one group accounting for more than 20 percent of the market.
"We should keep an eye on the pension funds, though," added Moore. "Many of these funds will continue to grow their real estate portfolio in 2007, and should be some of the most aggressive buyers in the coming year."
Office
Despite a softening economy, demand for office space this coming year will match the robust levels seen in 2006 -- again led by the financial, professional and business services sectors.
Rents will increase significantly in 2007, with central business district lease rates slated to jump 12 to 15 percent -- somewhat due to spikes in additional expenses such as insurance, maintenance and property taxes. In fact, four markets -- Midtown Manhattan, San Francisco, Chicago and Seattle -- are anticipated to post rent increases more than twice the national average. Suburban rents will rise, too, but more modestly at a rate of five to seven percent.
Office construction is expected to leap 25 percent over 2006 levels, and should ultimately total around 75 million square feet (msf). Absorption, which signifies the increase in occupied space, is anticipated to total 90 to 95 msf -- compared with 95 msf in 2006. The national vacancy rate will fall just half a percent to 12.5 percent by year-end 2007.
Industrial
The industrial sector will be mixed in the face of a weak housing sector and a cutback in production by the big three automakers. Conversely, in the face of rising imports, transportation and distribution should remain robust, and manufacturing is expected to strengthen as the year progresses.
Industrial rents are expected to track higher in 2007 -- an anticipated 10 percent or $0.50 per square foot -- with some of this increase due to a higher percentage of first generation space being listed. Construction, too, will increase by 15 percent over 2006 levels -- and should clock in around 205 msf.
"Absorption, however, is not expected to keep pace," noted Moore. "This will leave the year-end 2007 vacancy rate up just a quarter of a percent -- coming in at approximately 8.5 percent. This will be the first increase since 2003."
Retail
Many retailers will struggle in the coming year, as the housing market sags and consumer spending moderates, but wage gains and new jobs should somewhat neutralize this, and the retail real estate sector will remain surprisingly strong. Lifestyle retailers will likely bear the brunt of this slowdown in spending, although it's expected to be fleeting.
To an extent, we will see a two-tier market in which prime strips and high end centers will enjoy strong sales and healthy occupancies while more average properties will experience only modest growth. Tourism fueled retail markets such as; Midtown Manhattan, San Francisco, Los Angeles, Chicago, Las Vegas and Honolulu are expected to flourish with record rental rates achieved.
"The biggest success stories in the coming year are bound to be the high-end retailers and those with a strong brand image, as well as apparel retailers, who should also have a solid year," Moore added. "Overall, owners of retail real estate can expect another solid year, similar to 2006 -- with steady occupancies and a 3-4 percent increase in rents."
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