Uncertainty Still Impacting Commercial Development

Economic activity appeared to turn up a notch toward the end of 2011, and data for the early part of 2012 suggest that the new year has gotten off to a solid start. The apparent pickup in economic activity has done relatively little to boost the commercial real estate sector, however. Activity cooled off appreciably following last summer’s debt ceiling debacle and S&P’s credit rating downgrade, which were, in turn, followed by the intensification of the sovereign debt crisis in Europe. The dust up in the credit markets has whipped up a cloud of uncertainty that held back leasing activity and inhibited deal flow and new construction during the latter part of 2011. 

While glimmers of stronger economic growth are sporadically breaking through the clouds, the fog is still fairly thick, particularly when it comes to the risks associated with weakening economies in Europe, government spending cuts in the United States and a still-fragile financial system adjusting to colossal changes on the regulatory front.

 

Heightened uncertainty tends to increase the value of liquidity. Class A apartments are benefitting the most from this trend. Leasing has surged while younger workers shun homeownership, and a larger proportion of workers in general are willing to pay higher rents in order to preserve their mobility. Demand for apartments remains remarkably strong given the still-relatively modest employment gains posted over the past two years, particularly in the South, where the population tends to be younger and where labor markets have generally lagged behind the nation as a whole. Sales of apartment communities remain brisk, and prices are up in a number of markets.

 

Investors are also paying up for liquidity, driving cap rates lower for prime, well-located properties in large global gateway markets. Prices have also been driven higher in markets with outsized exposure to the energy boom, most notably Houston and Denver, as well as in areas benefitting from the growth in new mobile Internet technologies, such as San Jose and San Francisco—and, to a slightly lesser extent, Los Angeles, Austin and the Research Triangle region.

 

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