
January 4, 2010
2010 Real Estate Trends Exposed in IRR-Viewpoint
20th edition of the report forecasts national and local commercial real estate trends
NEW YORK— January 4, 2010— Integra Realty Resources, Inc. (Integra) just released its 2010 IRR-Viewpoint, the industry’s annual compendium of real estate valuation, trends and forecasts. This year’s report provides thorough data on local, national and international market conditions for nine industry sectors, including multifamily, office, retail and industrial properties throughout the United States, Mexico and Canada. “We expect that 2010 will continue to provide mixed signals with regard to the recovering economy and real estate markets,” says Jeffrey Rogers, FRICS, JD, MBA, COO and President of Integra. “Values are down 43% from their peak in October 2007, and the Integra Commercial Property Index predicts a further decline of 5% in the next six months. Transactions volumes should recover somewhat from their lows in 2008 and 2009 due to the return of some liquidity in the credit markets; however, volumes will be significantly less than their 2006-2007 highs. Two economic pitfalls to watch will be consumer credit and oil prices. There is significant danger that consumer credit delinquencies and defaults could rise drastically in 2010.” 2010 IRR-Viewpoint focuses mainly on the national commercial real estate market, however, Integra reports some predictions for the housing market in 2010. Residential real estate values continued to fall in 2009, even as the stock and bond markets rebounded. The good news is that inventory levels have begun to decline, and existing-home sales growth has returned. Yet Integra’s Viewpoint states that most experts predict that national home values will not begin to rise materially until late 2011 or even 2012. “This year’s edition presents our perspective of how real estate markets have changed in these turbulent times as our Federal government struggles to stabilize capital markets,” said Anthony S. Graziano, MAI, CRE, FRICS, Chairman of the Board and Director of the Coastal New Jersey office. “We present these perspectives with caution. 2009 will likely be remembered and studied for some time to come as one of the most challenging economic periods in modern history. Capital markets, the life blood of real estate, remain stressed. Deal flow has dwindled to a crawl due to limitations on new financing and requirements for larger equity positions. Refinancing has become difficult as credit markets continue to tighten with strict lending standards and real estate lending competes with the government’s liquidation of local and regional banks. Yet this year’s report does contain signs of life in each sector.” Key findings of his year’s IRR-Viewpoint include: • Retail vacancy increased from 7.56% last year to 8.69% at the end of 2009. The market fundamentals indicate that vacancy rates are likely to continue increasing in 2010, especially in shopping centers, strip malls and one-off retail buildings for all but the best of Class A properties and in-fill urban streets. There is simply too much unoccupied anchor and shop space with too few legitimate retailers to occupy it. These are the areas where the current housing crisis has taken its worst toll. Higher density suburban villages, with many urban-like amenities, are proving to be a successful model. • Medical office buildings continue to be the strongest sector of the real estate industry, and any healthcare reform should be positive for the sector. The sale-leaseback activity among hospitals should continue to increase, reflecting the continued monetization of non-core real estate by hospital systems. Overall the medical office market should continue to lead the real estate investment market and be favored with lenders and investors due to healthcare job growth, increased demand for medical office space through healthcare reform and monetization of hospital real estate assets. • The apartment sector was impacted just as much as other commercial real estate sectors. However, in the Northeast, market participants cite that apartment fundamentals have remained relatively stable. Limited by high barriers to entry, vacancies in the Northeastern apartment markets stayed near 5%. Yet many Class B properties are struggling to compete. As single-family residences are added to the market, Integra expects further pressure to be placed on lower-end multifamily properties. Apartment vacancy averages increased from 6.32% to 7.63%. At 14.1%, Providence, RI posted the highest apartment vacancy, while San Francisco reported a vacancy of 3.59%, the lowest of all surveyed markets. The estimated years required to balance current supply and demand rose from 1.55 to 2.74 years. Construction forecasts, which were down 17.7% in 2008, are down an additional 18.6% this year. Integra anticipates that multifamily development will be limited, particularly in non-urban settings. • Integra notes that consumer demand remains a primary concern for the industrial sectors. Despite the fact that supply and demand is not substantially imbalanced, markets will require an average of over four and a half years to balance. The completion of the Panama Canal expansion, which is estimated for 2014, is expected to drive new development of intermodal facilities and surrounding industrial space, particularly in eastern U.S. markets. Industrial vacancy rates jumped from 8.57% to 10.17%. Notably, projected annual absorption for 2010-2012 decreased 41% from 86 million square feet per year to 51 million square feet per year. Also, development in the pipeline has seen a decrease. Last year, 325 million square feet were in the pipeline, as compared to this year’s 197 million square feet. • Despite the economic downturn, interest in green building remains robust. However, unless the project is pre-leased, an owner-user asset or a government building, the focus has shifted from new construction (LEED-NC) to retrofitting existing buildings (LEED-EB). • The self-storage sector continues to outperform other types of real estate. While performance is still below previous year levels, based upon more than 6,000 facilities in the Q3 2009, there are signs that self-storage may be at the bottom of its cycle and ready for recovery. Self-storage demand is unique in that it is not totally dependent upon a full economic recovery. Demand for storage comes in part from the very forces that cause economic turmoil. Owners were able to increase the asking rental rates in Q3 2009 for the first time since June 2008. The median asking rental rate went up nearly 4.5% over Q2 2009 and was up over 1% compared to Q3 2008. • The “echo boomer” generation is the most populous generation to date, and as they make up 1/3 of the population, their influence dramatically affects the country’s demographic and housing trends. However, thanks to the recession and unemployment rates at a 26-year high, newly-formed households will likely have lower real incomes than previous decades. As a result, Integra anticipates apartments and lower cost entry-level homes will likely appeal to a larger portion of the market than in prior years. The full 2010 IRR-Viewpoint report, including 59 market breakdowns, 16 charts and 20 graphs, as well as documented methodology, is available for free download on Integra’s home page: www.irr.com.
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