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News release

CHICAGO, IL

CRE Investors Set Sights on Secondary and Sunbelt Markets

JLL report reveals strong fundamentals and investor interest will propel all sectors in 2015


CHICAGO, Oct. 22, 2014 – Secondary markets are getting their day in the sun, as booming job growth and economic improvement expands from the major cities across the United States.  Fundamentals and investment activity have picked up significantly in the past 12 months, which is driving transaction volume and leasing activity in cities with hot economic sectors, like Austin, where technology growth is booming, and in more diversified economies like Minneapolis. Regionally, the Sunbelt has seen some of the most significant improvement in key market indicators, including sales activity. 

 “One of the biggest shifts we have seen is the amount of capital flooding into the secondary markets and even tertiary markets, and we expect investor interest in those markets to remain high in the year ahead—in all asset types,” explained Steve Collins, President of JLL’s Americas Capital Markets business. “It’s the result of the enormous level of investor interest in primary market real estate, with a swell of new foreign buyers pulling out all the stops to acquire assets.”

JLL’s latest report, the Cross Sector Outlook, released at this week’s Urban Land Institute (ULI) Fall Meeting, reveals that the biggest winners are office and multifamily. Tight vacancy rates and rising rental and absorption rates have led the sector to steadily outperform, with annual effective rental growth rising, despite surging new supply levels. On the office side, while new supply is anticipated to be actively exerting pressure on the pace of improvements in occupancy for all other sectors by 2016, over this time horizon office is expected to enjoy the sharpest downward trajectory in its vacancy rate.

“The multifamily and office sectors have been greatly affected by low home-ownership levels and business expansion respectively. Changing urban-suburban demographic trends are also making their mark, however. New professionals and retirees alike are flocking to urban centers of every size, swapping large homes and long commutes for live-work-play communities,” observed Marisha Clinton, Director of Research for JLL’s Capital Markets.

Multifamily
With changing demographics and homeownership close to a 15-year low, multifamily absorption has outpaced supply in most national markets in the past 12 months. The Sunbelt has seen the especially high absorption rates, exceeding three percent in Raleigh-Durham, Austin, Jacksonville and San Antonio. Rental rate growth, on the other hand, has been the strongest in the country’s tech hubs. In Seattle and San Francisco, rates have risen over 6 percent over the last year. Looking ahead, cap rate compression is expected to slow in the multifamily sector, though, with a sub-6 percent average rate nationally, this is not likely to greatly impact yield-seeking investors’ appetite for the product.  Watch for condo conversions to continue across a broader scope of geographies as developers seek viable exits from projects, either pre- or post-development.

Hotels
Hotel occupancy has grown substantially over the last 12 months, as economic heat has put both business and leisure travelers back to the road (and air). By 2016, we expect national hotel occupancy rates to reach their highest level in 30 years, at just under 65 percent.  With this, average daily rates have been rising - a trend that is expected to continue well into next year – and new development is ramping up. Most new hotel construction - 60 percent - is concentrated in the premium-branded select service part of the sector, where construction costs substantially are lower than full service properties.  On the capital markets end of the hospitality sector, 2014 has been the third most active year on record, with $25 billion in transactions expected by year end. The recently announced $1.95 billion sale of New York’s iconic Waldorf Astoria marked a new record for a single hotel asset. 

Office
In the office markets, Class A sales in primary cities are rivaling multifamily cap rates, where some recent sales have traded at rates below four percent. Such frothy pricing and intense competition in San Francisco, New York, and Boston has driven many investors into the secondary markets. In several markets, like Minneapolis and Raleigh-Durham, between eight and 10 percent of total CBD office stock traded hands in the third quarter alone. Meanwhile secondary suburban sales outpaced primary suburban sales for the first time in six years, with the Sunbelt markets attracting the most investor attention. In 2015, cap rates will continue to compress for office buildings in primary markets.  New development set to come online in the next two years will gradually shift the sector from under-supplied to over-supplied.

Industrial
After three years of very little new industrial supply hitting the market, occupancy has more than caught up to supply. In the third quarter, vacancy rates fell below the pre-recession low in early 2008, finishing the quarter at 7.2 percent and expected to fall further before year end. There is a host of new product under construction, though the new space is unlikely to significantly impact rent growth because speculative development is still very measured. Buyers are focusing on Southeast and Mid-Atlantic markets like Nashville, Atlanta and Richmond where above-average vacancies mean that higher yields are still attainable. The Port of New York/New Jersey will experience increased cargo volumes in the years ahead, benefitting the Northern New Jersey industrial market.

Retail
Retail remains furthest behind in the cycle, with performance in the sector still highly bifurcated across geographic markets and asset classes. Unsurprisingly, Class A properties in primary markets are attracting heavy investor interest whereas many Class C strip malls are being repurposed rather than rehabilitated. Furthermore, the rise of e-commerce and mobile commerce is pushing traditional brick and mortar establishments into one of two camps: value centers and luxury retail; many middle market shops, on the other hand, are being squeezed out of the space. Transaction volume has shown a 12.8 percent increase from the third quarter of last year, however, so investor interest in retail is improving.  In 2015, expect mobile payment technology to become even more prevalent, allowing consumers to leave their wallets at home and stores to get rid of their cash registers.

For more news, please visit The Investor, an online and mobile app news source providing real-time commercial real estate news to asset buyers and sellers around the world.

About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4.0 billion and gross revenue of $4.5 billion, JLL has more than 200 corporate offices, operates in 75 countries and has a global workforce of approximately 53,000.  On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.0 billion square feet, or 280.0 million square meters, and completed $99.0 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $50.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com .