US property market set for 'tepid' growth led by apartments

GLOBAL - Economists remain guardedly optimistic about the state of the US property market in 2012, as the economy stages a slow but steady recovery.

However, the real estate sector will grow "even with a modest recovery in demand", according to Pramerica Real Estate Investors' 'US Quarterly Outlook'.

It added: "Projections for a strong recovery in commercial real estate have been scaled back, with near-term demand growth expected to be tepid at best."

It said weak job and income growth, ongoing household deleveraging and the "tight fiscal posture" of many state and local governments had conspired to keep the growth rate below par.

It also said the risk of "event-driven shocks" had put pressure on real estate fundamentals, forcing investors to seek "secure, stable cash flows"

Given the risk-averse nature of investors, a flight to quality to "gateway property markets" continues, keeping core assets relatively expensive, while opportunities continue to exist in secondary markets, where no evidence of "meaningful capital flows" has yet been detected.

Pramerica said: "Investors had begun migrating to secondary and tertiary markets to capture higher yields. However, the weaker economic outlook and recent capital markets turmoil may curtail these capital flows."

In terms of strategy, Pramerica recommends investors "focus on value" and acquire assets in places where income growth is strong and sell where prices are "overly aggressive relative to income growth expectations".

Non-trophy assets in cities such as Seattle, San Francisco, Austin and Portland may offer better-adjusted returns, it said.

Pramerica said the apartment segment was most attractive given the strong recovery in demand and "rich pricing" for existing apartments, which augurs well for future development. 

The report also suggests investors focus on apartment transactions in well-located areas rather than seek "cheapest-to-build suburban products".

Although retail has been resilient, demand is "sluggish", as retailers nationwide are unwilling to expand.

Pramerica said the office market had been characterised by a weak recovery, and that demand in industrial had been "slowly improving", due to the pick-up in economic activity, as well as demand for industrial warehouses.

"Rising global trade volume will enable rents in coastal markets to rebound faster than the overall market," it said.

CBRE head of Americas research Asieh Mansour told IP Real Estate last week that, as the economy works through the imbalances of the past few years, the US economy is on a path of recovery, but the growth rate will be "subpar".

Mansour said that while challenges abound, the good news is that, since the bursting of the housing bubble, the "private sector debt as a share of nominal GDP" has fallen to "more normalised rates".

The housing market has also gone through a correction, she said, with home values down 40-60% by market.

In addition, the relative lack of new supply of commercial real estate will continue to improve property market fundamentals in 2012.

"Net absorption activity should pick up across all property sectors," said Mansour.

In terms of job creation, the best performers are high-tech and energy sectors, which will account for much of the office leasing activity, she said.

Multi-housing continues to outperform other sectors due to the increasing number of renters from people who have lost their homes and the "echo-boom generation".
 
"Gateway" markets - such as New York, Boston, San Francisco, Washington DC and Houston - with heavy exposure to the technology, finance and energy industries, are doing best.