United States Real Estate Report Q4 2010
For at least a decade prior to 2008, the growth of the US economy has
been driven by consumption spending which, in turn, has grown faster
than household incomes. This had been possible only because consumers
had been taking advantage of actual or expected rises in residential
real estate prices to fund their spending.
The end of this phase in US economic history is well understood. Because of a lack of discipline on the part of the US financial services industry, the country found itself with a glut of residential real estate (concentrated in particular states). Even if labour market conditions improve markedly, it will be a while before consumer spending to return to the growth rates which prevailed prior to 2008. Over the medium term, the overall growth of the US economy will likely be anaemic.
This very uninspiring prospect for the economy was incorporated into the commercial Real Estate sector in 2009. Commercial rents fell sharply over the course of 2010. Nevertheless, the second round of interviews with our in-country sources, which was conducted in July 2010, indicates that rents are finally stabilising. Further, they are expected to rise by 5-10% next year.
BMI surveys the real estate sectors of 44 countries, out of these, the USA is unusual in that its yields have risen – in most cities and sub-sectors – over the last year or so. Increased yields were reported by our sources in each of the five cities from which we collect data – New York, Los Angeles, Chicago, Dallas and Philadelphia. The liquidity and efficiency of the US commercial real estate sector is such that not only have property prices and capital values dropped, they have fallen further than rental rates.
Although some of our sources indicated that, in their cities, there are substantial amounts of vacant space in at least one of the major sub-sectors, overall vacancy rates are quite low. In general, there has been far less overbuilding in the commercial real estate sector as a whole than in the residential real estate sector. The fundamental problem is that many tenants (including some that are owners/investors in their own right) are unwilling or unable to pay rent at the rates which had been prevailing prior to 2008.
We believe that the process of adjustment still has some way to run. Although the hard numbers vary from city to city, rental rates need to fall further until existing tenants become inclined to upgrade their accommodation or to increase the space they are occupying. Prices and capital values need to adjust downwards faster than rental rates and this scenario will continue until owners and investors consider that yields are sufficiently high and that they compensate adequately for the new – and rather dismal – environment. Philadelphia appears to be the only one of the five cities from which we collected data where rental rates are near a trough.
Therefore, in projecting yields, BMI assumes they will stabilise in Philadelphia from 2010 but continue to rise to the end of 2012 in the other four cities. Thereafter, yields should remain reasonably stable in all three sub-sectors. Given the constraints on US consumers, we assume that there will be minimal growth in rents in the retail sector through the forecast period. However, it is possible that office rents and industrial rents will be rising gently by 2013 and 2014.
Key Features Of This Report
This is the latest edition of a new series of industry reports published by BMI that seeks to identify the key dynamics of the real estate sectors of 44 countries around the world, some of which are developed and some of which are, in every sense, emerging markets. Once again, the questions that we seek to answer for each country remain as follows: What are the main issues that will matter to actors in and around real estate development in the country concerned, both over the long and the short term? What are the main constraints that they face? What are the key insights that one garners when one compares the real estate sector of the country concerned with its peers in other countries?
In Q3 we have introduced a very substantial new improvement to the reports. We have incorporated data and qualitative observations provided to us by commercial real estate agents operating in the countries we survey. As a result we have gained a much clearer picture of the balance between demand and supply in each of three main sub-sectors – office, retail and industrial. We have also introduced a new approach to the forecasting of rental yields, which is discussed in the methodology sector of this report.
The forecasting of rental yields, which is discussed in the methodology sector of this report. In Q4, we have incorporated a lot of new data in relation to rents and yields in 2010. We gained this data by way of a new round of interviews with our in-country sources in mid-2010. In some cases, the latest information from our sources has caused us to make significant revisions to our forecasts for 2011-2014.
We asked our sources to indicate what growth in rents is likely for 2011. We explain their answers in the Forecast Scenarios.
The end of this phase in US economic history is well understood. Because of a lack of discipline on the part of the US financial services industry, the country found itself with a glut of residential real estate (concentrated in particular states). Even if labour market conditions improve markedly, it will be a while before consumer spending to return to the growth rates which prevailed prior to 2008. Over the medium term, the overall growth of the US economy will likely be anaemic.
This very uninspiring prospect for the economy was incorporated into the commercial Real Estate sector in 2009. Commercial rents fell sharply over the course of 2010. Nevertheless, the second round of interviews with our in-country sources, which was conducted in July 2010, indicates that rents are finally stabilising. Further, they are expected to rise by 5-10% next year.
BMI surveys the real estate sectors of 44 countries, out of these, the USA is unusual in that its yields have risen – in most cities and sub-sectors – over the last year or so. Increased yields were reported by our sources in each of the five cities from which we collect data – New York, Los Angeles, Chicago, Dallas and Philadelphia. The liquidity and efficiency of the US commercial real estate sector is such that not only have property prices and capital values dropped, they have fallen further than rental rates.
Although some of our sources indicated that, in their cities, there are substantial amounts of vacant space in at least one of the major sub-sectors, overall vacancy rates are quite low. In general, there has been far less overbuilding in the commercial real estate sector as a whole than in the residential real estate sector. The fundamental problem is that many tenants (including some that are owners/investors in their own right) are unwilling or unable to pay rent at the rates which had been prevailing prior to 2008.
We believe that the process of adjustment still has some way to run. Although the hard numbers vary from city to city, rental rates need to fall further until existing tenants become inclined to upgrade their accommodation or to increase the space they are occupying. Prices and capital values need to adjust downwards faster than rental rates and this scenario will continue until owners and investors consider that yields are sufficiently high and that they compensate adequately for the new – and rather dismal – environment. Philadelphia appears to be the only one of the five cities from which we collected data where rental rates are near a trough.
Therefore, in projecting yields, BMI assumes they will stabilise in Philadelphia from 2010 but continue to rise to the end of 2012 in the other four cities. Thereafter, yields should remain reasonably stable in all three sub-sectors. Given the constraints on US consumers, we assume that there will be minimal growth in rents in the retail sector through the forecast period. However, it is possible that office rents and industrial rents will be rising gently by 2013 and 2014.
Key Features Of This Report
This is the latest edition of a new series of industry reports published by BMI that seeks to identify the key dynamics of the real estate sectors of 44 countries around the world, some of which are developed and some of which are, in every sense, emerging markets. Once again, the questions that we seek to answer for each country remain as follows: What are the main issues that will matter to actors in and around real estate development in the country concerned, both over the long and the short term? What are the main constraints that they face? What are the key insights that one garners when one compares the real estate sector of the country concerned with its peers in other countries?
In Q3 we have introduced a very substantial new improvement to the reports. We have incorporated data and qualitative observations provided to us by commercial real estate agents operating in the countries we survey. As a result we have gained a much clearer picture of the balance between demand and supply in each of three main sub-sectors – office, retail and industrial. We have also introduced a new approach to the forecasting of rental yields, which is discussed in the methodology sector of this report.
The forecasting of rental yields, which is discussed in the methodology sector of this report. In Q4, we have incorporated a lot of new data in relation to rents and yields in 2010. We gained this data by way of a new round of interviews with our in-country sources in mid-2010. In some cases, the latest information from our sources has caused us to make significant revisions to our forecasts for 2011-2014.
We asked our sources to indicate what growth in rents is likely for 2011. We explain their answers in the Forecast Scenarios.
