Accelerating Economy Expected to Drive Growth in Commercial Real Estate

Investor Confidence Prompts Increasing Acquisitions of Vacant Buildings

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Mar 18, 2015, 03:27 ET

HOUSTON, March 18, 2015 /PRNewswire/ -- The national economy is expected to not only continue growing in 2015, but it will do so at an accelerated pace, according to the first-quarter edition of "Insights + Trends + Opportunities" publication by Transwestern and Delta Associates. Each edition of "Insights + Trends + Opportunities" features valuable information for commercial property owners, investors, tenants and developers and a review of how the economy is impacting commercial real estate.

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HEALTHY ENVIRONMENTS
As healthcare costs continue to rise, it is becoming increasingly important for companies to address the health of their employees. Prolonged sitting has been linked to higher risk for heart disease, disability and other ailments. Forward-thinking businesses are focusing on what's "outside the box" in addition to what's "inside the box," such as walking paths or nearby parks. Walkability to restaurants and retail now factors into the real estate decision-making process. Employees not only value the convenience of these amenities, but they reap the health benefits of walking to them.

INVESTING IN VACANT BUILDINGS
Facing premium pricing on core, core-plus and value-add assets, investors are willing to accept more risk and pay higher prices for vacant, nearly vacant or soon-to-be vacant buildings. This trend is propelled by lower returns on stabilized assets due to competition, as well as an increase in debt sources willing to finance opportunistic acquisitions. Some investors are targeting these buildings to repurpose them into other uses, such as multifamily, hotel and retail space.

TILTWALL APPLICATION
A new application of tiltwall has produced a novel class of office building that is becoming increasingly popular with owners and tenants. While prior generations of tiltwall were used primarily for industrial or basic office space, today's projects are designed to compete with high-end, Class A suburban developments. Once limited to three levels, tiltwall buildings can now reach as high as six stories, creating far more flexibility in terms of scale. These buildings are also much quicker to deliver, taking almost half the time.

THE ECONOMY AND COMMERCIAL REAL ESTATE
Delta Associates has identified six trends impacting the national commercial real estate industry.

Wage growth is flat, but disposable income is up.
Unemployment has improved since the Great Recession, but employees are not receiving wage increases typical of past recoveries. However, consumer credit is 30 percent higher than July 2010, and consumer confidence is spiking. This could be due to the decline in the price of gasoline: a one-cent-per-gallon reduction in price of gas is equivalent to approximately $1 billion in consumer savings – money that can be spent elsewhere.
The national economy has recovered.
The labor market surpassed pre-recession levels, and the gross domestic product growth exceeded expectations. This growth is expected to continue through 2015, barring a geopolitical jolt. Despite these positive signs, the stagnant wage growth is a cause for concern. With the improving economy, wage growth should be more meaningful in the period ahead.
Consumer behavior is changing.
Immediately following the Great Recession, consumers opted to pay off debt rather than spend money. More recently, consumers have begun taking on more debt – total consumer debt has risen 5.0 percent since bottoming out in second-quarter 2013. This indicates growing confidence in household budgets and job security, so consumers are willing to spend more. Student debt has risen 84 percent since 2008 and totals nearly $1.2 trillion. As these students enter the work force carrying so much debt, they put off homeownership to rent instead. They also put off owning a car, partially prompting the need for companies to seek out transit-served locations.
Tenant behavior is changing.
Densification among office tenants remains strong, with companies taking approximately 10 percent less space per worker, according to a survey conducted by Delta Associates. For some industries, this reduction would likely be substantially greater. Similarly, advancements in technology are prompting retail tenants to lease less space.
Real estate is now an experience, not just a location.
The average consumer is now younger and more informed, forcing developers to adapt. Mixed-use projects are becoming more prevalent as they bring walkability, vibrancy and community together into a unique environment that appeals to the modern urban consumer.
Real estate is a preferred investment vehicle.
Annual office sales volume has risen 528 percent since the market bottomed out in 2009. Commercial real estate in the U.S. continues to be a safe haven for investors seeking higher yields with relatively low risk.

Download the full publication at http://twurls.com/insights1q15.

ABOUT TRANSWESTERN
Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 38 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit transwestern.com and follow us on Twitter: @Transwestern.

Media Contact:
Stefanie Lewis
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SOURCE Transwestern