Emerging Trends in Real Estate 2012 - Urban Land Institute

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Exhibit 1-8 Firm Profitability Forecast 2012 Prospects for Profitability in 2012 by Percentage of Respondents 1.6% Abysmal 1.3% Very Poor 4.7% Poor 6.1% Modestly Poor 23.5% Fair 20.8% Modestly Good 26.0% Good 11.0% Very Good 4.9% Excellent Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only. Exhibit 1-9 Real Estate Business Prospects for 2012 Commercial/Multifamily Developers Real Estate Brokers Bank Real Estate Lenders Real Estate Consultants CMBS Lenders/Issuers Architects/Designers REITs 5.88 Insurance Company Real Estate Lenders Real Estate Investment Managers Private Local Real Estate Operators 5.79 5.66 5.43 5.31 5.11 4.97 4.80 4.39 3.76 promotes. Developers cannot make as much, even if they stay in business. For brokers, the buy-and-flip game is over, reducing transactions and attendant fees, “although they have been doing better.” Despite the angst, survey respondents hopefully expect their firms to record decent profits in 2012: 87 percent forecast fair or better results, and 42 percent expect to register good to excellent bottom lines by year end (exhibit 1-8). REITs, multifamily developers, and fund managers should have at least a “modestly good” year; while this is no surprise, homebuilders and architects gasp to hang on (exhibit 1-9). To keep profits up, “companies go through a lot of leadership change and try to do more with less, “pushing people as hard as they can.” CEOs and senior leaders require “different people skills.” It isn’t about deploying capital at all costs, but more about managing operations, assets, and expenses. “Top executives need to show prudent management abilities,” take care of investors, and “motivate teams in a slow-growth environment where you can’t make as much money or do as many deals.” Hiring is confined to companies that “have capital or access to capital”—primarily REITs and investment managers. The fund managers pare back on deal makers and bulk up on asset managers. They also need client-facing executives to play defense, do mea culpas over legacy portfolios, and, most important, raise new money. In line with keeping lean operations, businesses show more interest in lower-paid young talent with potential and jettison more experienced senior workers who are higher on the pay scale. Homebuilders/Residential Land Developers 2.98 1 abysmal 5 fair 9 excellent Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only. 10 Emerging Trends in Real Estate ® 2012
Chapter 1: Facing a Long Grind Best Bets 2012 Except for multifamily, no markets or property sectors offer sure-shot opportunities for big gains in 2012. Owners can feel relatively secure in leading gateway cities, and buyers should focus on the few markets generating jobs—typically where technology and energy companies concentrate. Market-timing buyers at the 2009 rock bottom can pocket modest upside, selling into what’s left of the capital wave. Commercial developers and construction lenders should best remain in hibernation outside of undertaking the odd project in a 24-hour bastion. The usual-suspect best-bet sector performers—fortress malls, infill neighborhood centers, gateway industrials, and business center hotels—should do relatively well. Investors can continue to capture attractive stakes by recapitalizing select assets in need of refinancing. But nobody should argue with anyone sitting on cash until the economy shows real signs of resuscitation. Investment Caution Still Rules. “It’s not the time to be all in; investors should maintain liquidity” and focus on demand trends. Stop following the lemmings on capital moves. Instead, concentrate on the few markets showing hiring and leasing gains; steer clear of places with compromised longer-term growth prospects; and don’t count on typical recovery tracks materializing the way they have after past recessions. “If you haven’t figured it out by now, this time is different.” Blue-Chip Gateways. These relatively safe harbors all have issues: a Wall Street slowdown could hurt New York City, Washington confronts possible government cuts, and San Francisco is always volatile—but over time, assets in 24-hour markets dependably outperform because they lie on important global commercial routes and attract money from all over the world. The value of their barriers to entry also should never be underestimated. “Prices may be outrageous in the bigger cities, but do you have confidence investing elsewhere” For 2012, holders and sellers may do better than buyers. Job Centers. If real estate is “all about jobs,” then head to the few cities where employment growth actually occurs. Besides the gateways, the current front-runners rely on energy, high tech, and health care–related industries, as well as universities and government offices. Austin becomes a current favorite because it claims all these attributes. Bigger Texas cities—Houston and Dallas—also sustain investor interest because of their energy backbones. High tech spurs Seattle and San Jose. Denver also offers a dose of energy and technology. But investors beware: the current high flyers tend to boom/bust, and some of these markets are susceptible to overbuilding. Don’t take your eye off the ball. Value-Add Plays. Instead of trying to justify “jaw-dropping” prices for core quality assets, look for class B properties in good infill markets “that haven’t been shown any love” over the past five years. Apartments usually fit the bill, but certain well-located offices and hotels could profit from renovations and repositioning in anticipation of eventual market recovery. The availability of low-cost debt can help fund improvements and buttress eventual returns. Fixed-Rate Debt. Owners should lock in long-term fixed-rate financing on assets while they can. Interest rates could easily track up again during expected holding periods without offsetting gains from fundamentals. Believe those crying “It’s just a matter of time.” If rates increase, floating-rate debt could dramatically cut into net operating revenues, while relatively lowinterest, fixed-rate debt would help cash flows and boost future investment returns. Recap Troubled Equity. The number of borrowers needing refinancing only grows as troubled loans from the market lending peak reach terms. Many decent assets remain structurally impaired and need cash infusions to remain competitive in bidding for tenants, who command pricey concession packages. More motivated borrowers, working with senior lenders, will strike favorable deals on mezzanine debt and preferred equity to stabilize assets and salvage something. At low interest rates, investors can achieve especially favorable risk/return spreads. Distressed Debt. Banks and special servicers will continue to dribble out loan pools with various embedded gems. The hard part is figuring out if the good assets in offerings are worth acquiring given all the accompanying dreck. Some buyers of similar Resolution Trust Corporation (RTC) debt made out well in the 1990s, but rode a sharp market upturn to riches. This time it may not be so easy. Land Holds. Cash buyers can fetch entitled single-family lots for cents on the dollar. “These are real steals.” But purchasers may sit a long time before the homebuilding market comes back. The farther out on the metropolitan fringe, the longer the wait. Development Apartment Boom. Existing apartment stock in many markets cannot meet demand for units from surging numbers of gen- Yers, housing-bust refugees, and immigrants. If the economy picks up, renter interest could intensify further from people doubling up or young adults living at home but looking for their own space. Developers have little trouble convincing construction lenders, given the demographic evidence, and they can negotiate favorable deals with builders and contractors, who need the work. Commercial sectors offer very few opportunities, like Emerging Trends in Real Estate ® 2012 11
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Page 42 and 43: caught fire, too: condos turned to
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y exports of oil from Alberta oil s
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markets to build synergistic reside
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Exhibit 5-9 Prospects for Capitaliz
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Exhibit 5-13 Canadian Office Buy/Ho
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and environmental regulations will
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conditioned by all the condo units
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esources business leads to new deve
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chapter 6 Emerging Trends in Latin
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Chapter 6: Latin America Exhibit 6-
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DLC Management Corp. Adam Ifshin DL
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The Sorbara Group Edward Sorbara Pa
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Emerging Trends in Real Estate ® 2
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