Smart Business spoke with John M. Leonard, first vice president and
regional manager of the Atlanta office of Marcus & Millichap Real Estate
Investment Services, about what real estate investors can
expect for 2011.
What must occur in the U.S. economy to spur a
strong recovery in the commercial real estate market?
Fears of another recession, global debt levels,
uncertainty regarding taxes and regulation are confidence-killers among U.S.
companies that must drive a fundamentals-based recovery to heal the consumer
sector. The recovery may be lacking momentum, but evidence suggests contraction
is unlikely, barring an unexpected shock. Companies have wrung maximum
productivity and need more help, leading to improved, if below-average, job
growth in 2011. Election results should contribute to reducing uncertainty and
move the political agenda more to the center, with likely compromises on key
issues. The impact of the Fed’s bond purchases may be questionable, but the
message of readiness to shore up near-term conditions is clear.
What sector will be most sought-after by investors?
In other words, which sector do you anticipate staging the strongest recovery?
Well-located U.S. multifamily assets will be the most
sought-after among investors. But industrial and the once-troubled retail
sector are also staging an impressive comeback, since property fundamentals in
the retail sector seem to have bottomed. The apartment recovery rallied above
expectations in 2010 thanks to the release of pent-up renter demand, lower
tenant rollover and job growth. Occupancies in other property sectors are at or
close to a bottom, and gradual recovery will begin in 2011, led by industrial
and retail, then office properties. Concentration of sales in the upper end of
the market reflects an intense flight to safety. In 2011, investors will likely
move down the quality spectrum as premium property returns dip and the cap
rate/ interest rate gap, along with locking in cheap debt ahead of rent growth,
provide a safety net. Financing will ease further, but tight underwriting is
here to stay, even as the commercial mortgage-backed securities market expands
and banks become more willing to lend.
