SOURCE: Integra Realty Resources

Integra Realty Resources

July 30, 2015 14:12 ET

Commercial Real Estate Forecasts Revealed in Integra Realty Resources' Mid-Year Viewpoint

Signature Mid-Year Report Forecasts Commercial Real Estate Trends; Includes National Summary and 300+ Reports for 65 Local Markets Across Five Key Property Types

NEW YORK, NY--(Marketwired - Jul 30, 2015) - Commercial real estate markets nationally will increase in value, according to Integra Realty Resources' (IRR) Mid-Year Viewpoint 2015, an update of the industry's annual compendium of real estate valuation, investment, and leasing trends and forecasts. This year's edition includes a new national overview and forecast, commentary on how international events are affecting U.S. real estate, infrastructure and energy trends, as well as millennials' predicted impact on economic growth. The publication released today cautions investors that a yield reset owing to interest rate policy could affect property valuations into the third quarter. However, absent a major financial markets upset, the yield reset is predicted to be subtle, and affect values gradually in the coming 12 months. 

Cap rates will remain relatively stable in the second half of the year and 2015 will yield positive value appreciation across all property sectors nationally, especially for suburban multifamily, Class A industrial, and full service lodging. Supply and demand dynamics are now a close second to property income growth as the most important factors to affect cap rates of institutional properties in the coming 12 months as more markets are experiencing a rise in new construction. Additionally, more than 30% of IRR's national markets predict going-in cap rate compression in suburban office and flex industrial properties for the next 12 months. In addition to demand-side rent growth, this will lift values in these property sectors. 80% of IRR's national markets call for stability in cap rates for regional malls.

"IRR's Mid-Year Viewpoint offers in-depth commentary and data that our clients find most valuable when making their decisions," said Raymond Cirz, MAI, CRE, FRICS, Chairman of the Board at Integra Realty Resources. "Our forecast is largely positive, with an attempt to highlight larger trends affecting the use, value, and productivity of real estate into the future."

Key findings of IRR Mid-Year Viewpoint 2015 include:

Capitalization Rates

  • Going-in cap rates continued to compress nationally across all product types and classes in 2015. This trend was strongest in Class A industrial product, as well as Class A Central Business District (CBD) office assets.
  • Cap rate compression has picked up in the last six months across all property types except for flex industrial properties, where compression has eased measurably.
  • The top four factors likely to impact institutional real estate investment metrics in the next 12 months include property income growth, supply and demand, the local economy, and interest rates.

Office

  • 93% of IRR's CBD office markets are experiencing late-stage recovery or expansionary market conditions.
  • CBD cap rates remained steady or contracted in almost every market nationally year-over-year with the exception of Jacksonville and Tampa. While CBD cap rates are at an all-time low, suburban Class A cap rates have just surpassed their all-time low from 2007.
  • The Southern CBD market had a strong cap rate contraction of 31 bps, and the average vacancy rates for the region dropped from 15.14% to 13.56%. 
  • Declining vacancy rates highlight the continued improvement of the Suburban office market nationally.
  • IRR predicts current year to date value appreciation, with increasing rents, decreasing vacancy, and cap rate declines.

Multifamily

  • 95% of all IRR markets have reported that they are experiencing material expansionary activity, rapid rent appreciation, and continued institutional demand for new product.
  • The risk of sliding into hypersupply is greatest within the multifamily sector in the next one- to two-year period.
  • Class A multifamily product experienced cap rate compressions in both urban and suburban markets. IRR warrants caution in the second half of 2015, as investor forecasts indicate stagnant or marginal cap rate compressions and slowing rent growth as new supply enters the market
  • Multifamily urban asking rents increased across all regions, led by the South ($78/unit), followed by the West ($68/unit), Central ($55/unit), and the East region ($11/unit).

Retail

  • Improved property fundaments helped push more markets to the expansion phase of the product life cycle, including Baltimore, Boise, Columbia, Dallas, Denver, Detroit, Fort Worth, Minneapolis, Naples, and Oakland.
  • The southern markets that were recently in the recessionary phase (Greensboro, Atlanta, and Memphis), are now in the recovery phase.
  • Cap rates continued to contract across the neighborhood, community, and regional mall sectors. The pace of the national average contraction fell off considerably for neighborhood and community retail centers, driven by marginal compression in nearly all regions except the south. 

Industrial

  • There is a material increase in the number of markets reporting expanding market fundamentals and activity. Notably, San Jose and Kansas City lead the national markets with their rate of growth and Wilmington, Coastal New Jersey, and Jacksonville are kicking off their recovery phases after being negatively impacted by previous recessionary conditions.
  • Cap rates for traditional industrial product continued to compress at a much faster rate than cap rates for flex industrial product.
  • Compression in the national average cap rate for the traditional industrial sector resulted in cap rates reaching a new all-time low. 

Lodging

  • Properties which incorporate the use of technology (e.g. visual media, mobile bookings) are luring leisure travelers who seek a quality stay inside the room as well as a higher quality experience across the property and its environs. Such properties are experiencing occupancy rates above the national average of 68.9%.
  • Based on IRR research, the national average occupancy rate for full service lodging properties is 71.9%, and 68.9% for limited service product. The West Region reported the highest occupancy levels at 78.3% for full service and 72.9% for limited service, with the Central Region reporting the lowest occupancy rates of the four regions. A harsh winter had negative impacts on hotel performance in the Northeast, including New York City, Boston, and Chicago.
  • As market conditions continue to improve, new construction is occurring, resulting in an increase in inventory of approximately 1.0% as of year-to-date 2015. This represents the highest level of inventory added to the market since 2010.
  • Hotel performance in the Caribbean continues to improve for the third straight year, nearly reaching pre-recessionary levels. Data from the Caribbean Tourism Organization (CTO) has reported that growth in stayover arrivals to the top 13 Caribbean reporting markets rose over 7% for the first part of the year; with significant growth occurring in Cuba (14.3%) and Aruba (18.3%).
  • While there is continued growth in rates, the rate of growth for ADR and RevPAR appears to have slowed to a more manageable level in the last year for the Caribbean. Occupancies, which leveled somewhat in 2014, are rising again so far this year.

IRR Mid-Year Viewpoint 2015 comprises a National Overview report and 300+ two-page Local Market Reports for all key property types as well as additional resources, including metrics methodology, graphs, and tables; these free reports may be downloaded from IRR's site here.

About Integra Realty Resources
With corporate headquarters in New York City, Integra Realty Resources (IRR) is the largest independent commercial real estate market research, valuation, and counseling firm in North America, with 65 offices and approximately 865 employees located throughout the United States and the Caribbean. Founded in 1999, the firm specializes in real estate appraisals, feasibility and market studies, expert testimony, and related property consulting services. Many of the nation's largest and most prestigious financial institutions, developers, corporations, law firms, and government agencies are among its clients. For more information, visit www.irr.com or blog.irr.com.

Contact Information

  • Press contact:
    Leigh Minnier
    Associate Vice President
    Gregory FCA
    Direct: 610-228-2108
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    Company contact:
    Raymond Cirz
    Senior Managing Director
    Integra Realty Resources
    Main: 212-255-7858
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