Emerging Trends in Real Estate 2012 - Urban Land Institute

Chapter 3: Markets to Watch
took some hits, and empty store sites
have been hard to fill. Suburbs fare less
well, too, especially farther away from the
Seattle core: “They’re off investor and tenant
radar screens.” Bellevue holds up, but
its velocity of recovery lags downtown. By
2016, a $2 billion tunnel under the city—
“the Big Dig West,” one of the nation’s
most ambitious infrastructure projects—
will replace a rusting harborside viaduct.
The project promises to transform the
downtown waterfront with parks and housing,
as well as new vistas of Puget Sound
and surrounding mountains from existing
office and apartment buildings. This city
gets better and better.
San Jose (7). Just south of the San
Francisco gateway, San Jose does not
skip a beat despite competition from the
City by the Bay’s downtown tech surge.
The elite of microchips and digital worlds
continues to congregate in and around
Silicon Valley’s research and development
bastion. “That’s one place in the
country where office parks still work.”
Houston (8). The U.S. energy capital
profits from lasting high oil prices and
expands off a Texas-sized service-sector
employment engine. It is one place
where work-starved Americans have
a better-than-decent chance to find a
job, and a modest cost of living, including
inexpensive housing, stretches what
8
7
6
5
4
3
2
1
Houston
0
'94 '96 '98 '00 '02 '04 '06 '08 '10 '12
6.46
wages can buy. Developers prepare to
restart after an unaccustomed hiatus in
an ever-expanding metropolis. After the
crash, local construction lenders doused
development. As a result, constrained
building activity and the influx of population
combine to tighten residential
markets. For 2012, single-family housing
“actually shows signs of life” thanks to low
interest rates, and apartment developers
will “vie to get projects out of the ground.”
Exxon Mobil shakes up the office market,
announcing plans to consolidate operations
in a new suburban campus. “They
will leave a void downtown, but in Texas
we can grow out of any problems.”
Panama Canal expansion should help
increase port traffic and buoy warehouse
demand. Houston’s Gulf Coast location
provides access to population centers to
the east, north, and west, but the harbor
will require dredging and new dock facilities
to accommodate deep-hulled ships.
Los Angeles (9). Despite fashionable,
“in-high-gear” California bashing—dysfunctional
state government, broken tax
structure, overblown business regulation,
and outrageous cost of living—can
you bet against a huge self-sustaining
economy that has high-paying industries
like entertainment, aerospace,
and financial services, as well as the
nation’s largest port Do you ignore the
attractive quality of life and embedded
8
7
6
5
4
3
2
1
0
'94
Los Angeles
'96
'98
'00
'02
'04
'06
'08
'10
6.30
'12
affluence that supports service industries
and the retail sector Should investors
shy away from southern California and
Los Angeles Most Emerging Trends
respondents firmly reject the critics. “It will
come back,” one says, and, notably, the
metropolitan area ranks as the nation’s
number-two apartment and industrial
investment market in this year’s survey.
Relatively sky-high housing costs (even
after major declines) keep apartments full
and rents up: regional multifamily investments
rate perennial best-bet status.
L.A.–Long Beach industrial spaces,
which handle one-third of U.S. container
traffic, “have recovered nicely”; cap
rates return to 2006–2007 levels. Inland
Empire warehouses should continue to
rebound, too—as long as new construction
remains tamped down. Even if Asian
shippers divert more goods through
the Panama Canal—eating into West
Coast market shares—port volumes
should continue to increase because
of overall anticipated growth in import/
export activity. Business center hotels
also do well, and housing prices start to
climb back after precipitous declines: the
closer to the coast, the better for value
upticks. The bad news is concentrated in
the office sector, where markets remain
exceedingly soft. Vacancies range from
the mid- to high teens in a tenant’s market
featuring rich concession packages.
Companies show no signs of stepping up
hiring enough to improve occupancies
significantly during 2012, although lack
of new construction will help absorption
trends. Devastated by the mortgage
industry breakdown, Orange County (14)
regroups, buttressed by its position just
south of the L.A.–Long Beach gateway.
San Diego (10). The increasingly
suburbia-oriented office market goes off
many investors’ radar screens. Mid-teens
vacancy rates across most submarkets
and soft rents favor tenants, who actively
engage in trading up to better space at
cheaper lease terms. The city’s hard-toget-to,
off-global-pathway status deters
Emerging Trends in Real Estate ® 2012
35