CRE execs are "bullish" on 2014 even as they expect the growth of e-tailing, the movement towards collaborative office space and other disruptive forces to reshape the industry
With the US economy steadily recovering from the Great Recession, and a flood of capital pouring into property markets, an overwhelming majority of commercial real estate executives report feeling optimistic about the sector’s prospects for 2014, according to DLA Piper’s 2014 State of the Market Survey.
The survey, measuring the attitudes and perspectives of 158 top commercial real estate executives, represents the most enthusiastic appraisal of the domestic market since DLA Piper first started measuring the outlook in 2005. A full 89 percent of executives feel “bullish” about the next 12 months, according to the survey. This is a big improvement over 2011, during the early days of the recovery, when only 30 percent were bullish.
Real estate executives cite abundant supplies of debt and capital and the steady strengthening of the US economy as the top reasons they are optimistic about the year ahead. Adding to the anticipation of free-flowing capital is the near-unanimous expectation that interest rates will either remain where they are or increase only slightly. Eighty-three percent of respondents say they expect interest rates to increase, and 73 percent of that group believe there will be no corresponding change to cap rates.
While executives express growing confidence, the survey also reveals widespread conviction that disruptive trends such as crowdfunding, re-urbanization and the rapid growth of e-tailing will alter the marketplace. Respondents displayed a powerful consensus that the rise of flexible and collaborative office spaces will significantly shake up property markets, with 89 percent agreeing that the movement toward these types of spaces will impact the industry in myriad ways, from the design and development of office buildings to the leasing market.
“While respondents to our survey gave serious credence to the emergence of the open office, it’s important to note that this trend isn’t exactly new. What is new is the powerful consensus that open floor plans are here to stay,” said Jay Epstien, chair of DLA Piper's US Real Estate practice and co-chair of the firm’s Global Real Estate practice. “Our survey provides tremendous insight into where the real estate world is today and how its leaders view where they’re going in the foreseeable future.”
Other highlights of DLA Piper’s 2014 Survey include:
- Although most executives said they believed the open office was here to stay, only 37 percent of respondents believe that these providers (e.g., WeWork, Rocket Space, LiquidSpace, etc.) will control this segment of the office market.
- 24 percent of executives believe that crowdfunding will become a significant source of commercial real estate investment in the next three to five years, and 30 percent, are neutral. This could indicate that they’re simply unsure – but it would also appear to signal that they’re not ready to write off this innovative form of financing just yet.
- More than 80 percent of executives surveyed expect the rise in e-tailing and e-commerce to affect the real estate markets in the retail sector.
- Healthcare assets, such as hospitals, medical office buildings and assisted-living facilities, represent the most attractive investment class this year, and multifamily and industrial space sectors round out the top three.
- 89 percent of respondents believe Janet Yellen’s position as chair of the Federal Reserve will have some type of an impact on the direction of interest rates.
- For the first time since the survey began in 2005, Germany has been named the most attractive market for international investment. This likely reflects that nation’s economic strength – and its stability relative to the surrounding region.
- Foreign investors continue to see the US commercial real estate market as a safe haven for investment as well as diversification, and CRE executives believe that group will be the most active.
In addition to the raw data captured, survey respondents shared some interesting perspectives on the impact that abundant Chinese capital will have on the US commercial real estate market.
One respondent said: “It will continue to provide downward pressure on cap rates.” Another respondent thought it may impact real estate development: “more new high-end properties will be developed.”
The survey coincides with DLA Piper’s 2014 Global Real Estate Summit [hyperlink to the microsite] to be held in Chicago on September 9 and attended by many of the executives included in the survey.
The complete State of the Market Survey report can also be found at www.dlapiperresummit.com.