Business Transformation to Drive US Commercial Real Estate in 2014

Deloitte's commercial property outlook identifies top trends to watch

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Oct 30, 2013, 01:00 ET

NEW YORK, Oct. 30, 2013 /PRNewswire/-- The U.S. commercial real estate (CRE) sector has continued its remarkable recovery this year but the pace of recovery faces headwinds in 2014, according to Deloitte's annual Commercial Real Estate Outlook, which was presented today at the organization's annual real estate industry conference in New York City.

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"The commercial real estate sector has rebounded, thanks to an improving economy, strong investor demand for quality properties and limited new supply, and it is looking to build on this momentum," said Bob O'Brien, partner, Deloitte Services LP and head of Deloitte's real estate practice. "As 2014 approaches, the industry will face challenges stemming from government regulations, the limited availability of capital for certain properties and the impact of technology, which is becoming a driving force in every market segment--from retail centers to office space."

The Deloitte New York real estate conference drew more than 200 participants, including real estate developers, property managers, investors and construction and financing professionals. Similar events are planned for Chicago (Nov. 20), San Francisco (Nov. 21), Houston (Dec. 3), Dallas (Dec. 5), Washington, DC (Dec. 10), Atlanta (Dec. 12), Orange County (Dec. 17) and Los Angeles (Dec. 18).

Now in its 15^th year, the Commercial Real Estate Outlook identifies the top trends that will shape the market in the year ahead, and is based on original research combined with the insights and first-hand experience of many of Deloitte's leading real estate practitioners.

The Outlook presents Deloitte's views on these topics:

Macroeconomic fundamentals – The global economy continues to grow at a modest pace, while financial markets have experienced considerable volatility worldwide. Although CRE parameters--fundamentals, transactions and lending-- continue to improve, there are longer-term risks to the industry from government fiscal policy.
Globalization – Cross-border investing continues to gain more traction as opportunistic investors chase yields and risk-averse investors seek security in stable regions. Increased international interest in U.S. CRE has helped revive the transaction market following the financial crisis, and this trend is expected to continue through 2014.
CRE fundamentals – Stronger leasing activity has led to an improvement in CRE fundamentals across all property types, as both rent growth and occupancy levels have stabilized. However, tenants' technology use and a changing workforce are now influencing leasing decisions to a point that may require property owners to determine the need for property redesigns in the near-to-medium term future in order to maintain growth.
The single-family housing market –Institutional investors have invested $17 billion in single-family homes, which has provided much needed support to the housing market. Single-family homes have emerged as a separate asset class, which may lead to an increase in development activity. This trend should continue to support the ongoing housing market recovery next year.
Regulatory uncertainty – Regulatory changes such as Dodd-Frank, the impending expiry of the Terrorism Risk Insurance Act (TRIA), and changes in tax policies under the proposed Foreign Investment in Real Estate Property Tax Act (FIRPTA) and the Foreign Account Tax Compliance Act (FACTA) have promoted caution within the CRE industry.
CRE lending – The CRE lending landscape is more stable compared to a year ago, with lenders increasing commercial mortgage issuances due to the improving economy and rising property prices. Banks are expected to continue their gradual easing of lending standards, although construction loans will remain difficult to obtain. Conduits and private lenders, often referred to as "shadow lenders," may fill the void created by the banks, especially in non-prime markets.
REITs and private equity funds – U.S. REITs and private equity real estate funds have continued to raise significant levels of capital, reflecting improved investor confidence in the U.S. recovery in commercial real estate. However, REIT stocks have underperformed the broader market in 2013, largely due to interest rate increases.
CRE deal flow – Transaction activity continues to be the sweet spot for the CRE sector, driven by easier access to low-cost capital and a strengthening economy, and this increased transaction activity continues to have a positive impact on overall property values. Deal flow likely will continue to increase in 2014, as investors look for higher-yield real estate investments in secondary and tertiary markets.
The talent conundrum – Is the older, experienced CRE talent pool equipped to drive future profitability for the industry? There is a talent shortage across functions responsible for innovation and growth, exacerbated by the expected retirement of over 65 percent of senior leaders by 2020. CRE companies may want to develop a comprehensive and well-designed talent strategy to address and mitigate any organizational risk.
Finance transformation – Finance transformation is a hot topic for the CRE industry as technology and analytics continue to deliver strategic insights. The role of the CFO is becoming increasingly valuable and complex, and CFOs are being asked to focus on improving cost efficiency and competitiveness, as well as using enhanced technology and analytics to deliver strategic insights.

The 2014 Commercial Real Estate Outlook is available for download here.

About Deloitte's Real Estate Services Group

The Deloitte Global Real Estate Services group offers leading audit, tax, consulting and financial advisory services through a fully-integrated multidisciplinary global professional services network of Deloitte Touche Tohmatsu Limited member firms. With more than 4,800 professionals dedicated to the industry in over forty countries, our member firms are recognized for bringing together teams with deep industry experience and knowledge to provide clients an integrated set of expert solutions.

As used in this document, "Deloitte" means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

SOURCE Deloitte