Emerging Trends in Real Estate 2012 - Urban Land Institute

caught fire, too: condos turned to rentals
lease briskly, and a “mini-development
boom” in apartment towers is well
underway. “We will be overbuilt in apartments
by 2013, but developers enjoy a
great spread since existing buildings are
priced at sub-5 cap rates. People who
get in early will do okay, but the window
is closing.” The industrial sector is “the
hottest part of the marketplace.” Miami
joins the list of East and Gulf Coast ports
angling to attract Panamax ship traffic.
New tunnel and rail projects create links
to the airport and routes out of town,
but the city’s extreme southerly location
increases shipping distances to northern
population centers. The office market
lags badly: new projects underwritten by
offshore capital worsen a 20 percent–
plus vacancy rate. Public sector job
shedding offsets any recent leasing gains
from private companies.
Portland (18). Portland rates as
the nation’s top smaller 24-hour city.
Developers have gnashed their teeth
for years over its growth boundary
restrictions, but residents treasure cozy
neighborhoods and the ease of riding a
bike to work. Without a major international
airport hub, the city stands in Seattle’s
long shadow and will continue in a slow
growth mode.
Charlotte (20). The city “depends too
much on its banking sector.” Will companies
move out to a gateway financial
center or just retrench But temperate
climes and affordability make the region
attractive for relocating businesses and
retirees.
Other Major Markets
Chicago (21). Still a prominent 24-hour
gateway, Chicago has fallen into a
persistent funk—an outgrowth of the
Midwest’s general economic decline.
“No longer a must place to have assets;
investors lose interest; the whole market
feels slow,” one interviewee says. “Don’t
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expect much upside.” Suburban office
space suffers from “huge oversupply”;
high vacancies and low rents “won’t move
much,” so investors can forget about
appreciation potential. Buyers overpay for
trophy downtown office space: when new
class A space inevitably gets built, existing
buildings lose out in tenant musical
chairs. An overhang of downtown condominium
construction hurts sales prices
and slows growth in apartment rents.
Developers managed to over anticipate
evident move-back-in trends, fed by
vibrant urban attractions—Michigan
Avenue stores, sports events, expansive
parks, and world-class entertainment
venues. “We also have top universities
and O’Hare.” The big airport buttresses a
leading distribution center—warehouses,
which “look like a bargain compared to
L.A.–Long Beach.”
Phoenix (23). Some interviewees tout
the city’s rising-from-the-ashes potential.
“Continuing population growth could
make for a comeback story,” and the
tortured housing market finally stabilizes
after values dropped more than any
other large market (56 percent) except
Las Vegas (59 percent). Office vacancies
start to dip into the low (but still
uncomfortably high) 20 percent range,
helped by a development shutdown, and
job growth helps promising absorption
resume. Doom-and-gloomers point to the
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region’s dependence on constructionrelated
employment, back-office work,
and retiree-based growth. “Don’t rush
back”: the city “lacks big companies
and brainpower jobs,” while the wideopen
desert environs provide no barriers
to entry, and inevitable overbuilding
subdues investment returns. Bottombasement
pricing arguably provides
acquisition opportunities, although cautious
buyers wonder whether the nation’s
economic drag will temper any typical
hot-growth cyclical boom. For the future,
the prospect of dwindling water supplies
could restrict development and curtail the
golf-based resort industry.
Philadephia (24). “Neither high risk
nor high return,” Philadelphia flatlines
in “steady as she goes” cruise control.
“Rents haven’t increased in 20 years.”
Developers find little opportunity amid
sleepy-state growth, and investors never
muster much enthusiasm, although
apartments and select suburban retail—
both grocery-anchored centers and
malls—can perform very well, especially
around prime Main Line neighborhoods
and other upscale communities.
The Center City struggles to break out
despite 24-hour attractions—worldclass
museums and arts institutions, fine
restaurants, and a mass transit hub with
direct connections to New York City and
Washington. Unfortunately, these two