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News release

Chicago

Commercial Comeback? Private Sector to Take the Lead in the Commercial  Real Estate Recovery in 2011 According to Jones Lang LaSalle’s National Outlook

Only 31 percent of occupier markets will be tenant favorable by 2012; Window for large lease up is now


CHICAGO, Nov. 16, 2010— A commercial comeback is poised for the majority of the commercial real estate industry in 2011, according to Jones Lang LaSalle’s 2011 National Commercial Real Estate Outlook. The findings of Jones Lang LaSalle’s outlook are presented by the firm’s top research experts in a yearly media Webcast event.

“The economic recovery has come through the public sector with government stimulus and monetary policy, but with gross domestic product growth at just 1.6 percent in the third quarter, that is well below a typical public-sector recovery,” said Ben Breslau, Jones Lang LaSalle’s Americas Research Managing Director. “We believe 2011 will be the year that the private sector takes the baton and starts to drive growth. Corporations are flush with cash and will continue to spend and start to hire, bank credit is improving and consumers are spending again, and these moves in the private sector will contribute to improving commercial real estate fundamentals next year.”
 
2011 commercial real estate outlook highlights
  • Total investment transaction volume to increase by 36 percent to $125 billion in 2011

  • Tenant leverage remains strong but time is running out. Ninety-four percent of markets are tenant favorable now, but only 31 percent will be by 2012

  • “Rightsizing the portfolio” is a mandate for corporate real estate executives in 2011

  • Apartments top the “hot list” for investors in 2011

  • Hotel sector rebounding more quickly than expected

  • Distribution hubs and ports to lead the industrial recovery in 2011

Real estate sector forecast

Capital markets

The level of liquidity in the U.S. capital markets has improved dramatically over the course of 2010, as investors have regained confidence, particularly in stable, well-leased and located properties in the traditionally best-performing markets. Activity will continue to trend upward throughout 2011 as investor interest grows amid a very favorable monetary environment and an improving macroeconomic picture.

“Total investment transaction volume in apartments, office, retail and industrial will increase by a projected 36 percent over the 2010 figure, which at an estimated $92 billion would represent an 80 percent increase over the low reached in 2009,” added Josh Gelormini, Vice President of Capital Markets Research for Jones Lang LaSalle.

In 2011, Gelormini expects pricing trends that occurred in 2010 to look somewhat different.  While pricing for core, top-quality properties will remain strong, there is less scope for continued significant declines in cap rates in this segment during 2011. 

“Growth in property rental income will need to take over as a catalyst for value increases in prime property.  We also expect that given the large amount of capital on the sidelines relative to the amount of available core property on the market, that investors will begin to take on increasing risk by targeting more value-add opportunities,” said Gelormini.

Corporate occupier markets

Over the last two years, companies have seen their internal vacancy rates grow by nine percent as they reduced headcounts. As a result “rightsizing the portfolio” is a mandate for corporate real estate executives and will be for the next 12 months.

“When we asked tenants to rank the key factors shaping their real estate strategy, rightsizing the portfolio was number one, closely followed by streamlining and efficiency,” said Lauren Picariello, Director of Occupier Research for Jones Lang LaSalle. “Companies today are disposing of space in non-core locations as well as renewing leases in more expensive CBD locations for client facing teams, then relocating backroom functions to less expensive suburban locations.”

While tenant leverage remains strong, time is running out. Ninety-four percent of markets are tenant favorable now, but only 31 percent will be in 2012. Tenants seeking large blocks of space should move to lease in the next nine months.

Jones Lang LaSalle expects risk management, cash conservation and cost management will strongly influence 2011 business plans and the corporate demand for space in 2011.

Industry sector movers in 2011

Several sectors are entering a commercial comeback in 2011. Some of the largest expected movers include:

  • Office: The office recovery will continue to be led by core CBDs based on tighter supply and demand fundamentals. Lack of large blocks of space in most of these CBDs will deliver rental growth in 2011, expected in: Midtown Manhattan, Washington, DC, the Financial District in San Francisco, the Financial District and Back Bay in Boston, Uptown in Dallas and the west side of Los Angeles.

    “We expect technology and biotech markets to see largest growth drivers in 2011, like Silicon Valley, Austin, Texas; Denver, Boston, San Francisco and Raleigh,” said John Sikaitis, Director of Office Research for Jones Lang LaSalle. “We expect service firms to start growing in the middle of 2011 and beyond. Overall vacancy levels will essentially peak out at the end of the year due to several speculative construction projects finally delivering, and vacancy levels will fall in 2011 with occupancy levels increase due to continued office employment and growth from industries like healthcare, education, tech and the service industries.”

  • Multifamily: Apartments lead the list of “hot properties” for investors now and in 2011. Traditionally in the capital markets, multifamily has placed second in investment trading volume to the office sector.  While that has been the case in 2010, apartments have measurably closed the gap and now just slightly trail office in year-to-date investment sales as the product type has really jumped to the top of investors’ target list.

    “We expect more positive trends to impact the apartment sector in 2011.  With the job market expected to improve over the course of the year, and the housing market continuing to muddle toward stabilization, demand for apartments will continue to strengthen.  New construction levels, while higher than that seen in the other property sectors will remain modest as a percentage of inventory and will not exert a major negative influence.  All of these trends will contribute to multifamily remaining top of mind for investors throughout 2011,” said Gelormini.

  • Hotels: The hotel real estate sector is regaining vigor across the United States and is rebounding more quickly than expected—both from a fundamentals and investment transactions perspective.  Hotels inherently have the shortest leases of any real estate asset class and that is a major factor in their quick response to changing economic conditions. The hotel transactions market is heating up and investors are signaling a strong interest in pursuing acquisitions at the bottom of the cycle.

    “To date in 2010, U.S. hotel transaction volume has reached $5.5 billion, a staggering 250 percent increase on the prior-year period. We expect full-year figures to total $6.5 billion,” said Lauro Ferroni, Research Associate for Jones Lang LaSalle Hotels. “To date this year, there have been 11 single-asset deals over $100 million, compared to just three in 2009. REITs have dominated the acquisition landscape, accounting for 52 percent of acquisitions by volume because players who have typically relied on leverage cannot compete with them. The three most liquid hotel investment markets in the U.S. this year have been New York, Boston, and Washington, D.C.”

    Ferroni expects deal velocity to gain further momentum. Rebounding fundamentals, a jump in transactions activity and slowly easing debt markets will lead to further optimism for the hotel sector in 2011.

  • Industrial: The industrial market is not expected to dramatically correct in 2011, but will flatten and begin a slow growth trajectory. Distribution hubs and gateway port markets are expected to lead the move to recovery in 2011.

    “Demand is being driven by larger industrial occupiers that are either consolidating distribution centers, trading up in value optimizing functionality or capturing critically low rents,” said Aaron Ahlburn, Director of Industrial Research for Jones Lang LaSalle. “Several markets will see the demand continuing to increase in 2011 including the Inland Empire, Dallas, Chicago, Memphis and Harrisburg – all markets offering the infrastructure and efficiency of ‘big-box’ warehouse and logistics product.”

  • Retail: The retail sector continues to lag the other industry groups as consumer confidence remains depressed and employment growth is stagnant. Retail real estate owners and operators are getting creative with their leasing strategies, using a bit of “creative destruction” and are filling vacancies with pop-up and temporary stores now as a permanent fixture. Atypical uses like health centers are expanding rapidly to fill the gap. In 2011, grocery-anchored centers and Class A malls will lead with power centers and B and C class malls lagging the recovery.
For greater detail on Jones Lang LaSalle’s research forecasts, visit the firm’s research reports at: www.us.joneslanglasalle.com.
 
About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $37 billion of assets under management. For further information, please visit our Web site, www.joneslanglasalle.com.