Small Business Job Growth Altering CRE
Commercial real estate increasingly focuses on the needs of firms employing fewer than 50 people because their job growth outpaces larger firms nearly five to one, a new CRE trends report said.
“The real estate industry’s traditional focus on big cities and large employers is shifting significantly as small businesses emerge as the growth engine for the U.S. economy,” said Mitch Roschelle, partner and U.S. real estate advisory practice leader with PwC, which co-authored the report, Emerging Trends in Real Estate 2016, with the Urban Land Institute.
Roschelle said this will especially disrupt the office sector “as it finds ways to create new space models to accommodate these employers.”
ULI CEO Patrick Phillips said cities other than the largest coastal markets now draw more investment then they used to. “More and more of these cities are gaining a competitive edge by positioning themselves as vibrant, more affordable places to live and work, with amenities that appeal to different generations,” he said.
The report said the industrial sector ranked highest among property types for investment and development prospects. “Investors like the value-for-price relationship in a property type where the average cap rate is 6.9 percent, the downside protection afforded by the triple-net leases that are typical in this sector and the cash-in-hand quality of industrials,” the report said.
While survey participants rated apartments the second-best investment, high property prices and low cap rates in many locations gave some respondents pause. “There may be a shift in investment and development outlook in 2016 and beyond,” the report said.
The breadth of the U.S. office market remains one of its greatest strengths because having options provides value, the report said. “Secondary office markets are experiencing higher levels of investment for this reason, somewhat greater volatility priced by higher yields and the ability to accommodate fast-growing companies with a volume of new construction at costs much lower than that available in the primary downtowns,” one respondent said.
A rising U.S. dollar makes international travel to the U.S. more costly for tourists and business visitors, leading survey respondents to deem 2016 a likely inflection point for the hotel sector. The percentage of respondents favoring a “sell” posture rose since last October’s survey for both limited-service and full-service hotels.
For the retail sector, survey respondents expect “good” investment prospects for smaller shopping centers in 2016, giving them the best outlook score in the past dozen years. With malls, institutional returns on the top-tier significantly surpass of smaller shopping centers’ performance measures.
Top markets to watch include:
–Dallas/Fort Worth: “Impressive employment growth is the story behind this area’s rise to the top of this year’s survey, which is supported by a business-friendly environment along with an attractive cost of doing business and cost of living,” the survey said.
–Austin: Fueled by another year of diverse job creation, Austin remains an attractive place to live, but one participant said the market is growing faster than the local infrastructure.
–Charlotte: Good job and population growth along with the development of urban centers makes Charlotte attractive, survey respondents said.
–Seattle: Popular with both domestic and global investors, Seattle offers a diverse industry base and benefits from growing technology, advertising, media and information industries.
–Atlanta also enjoys strong growth in key sectors of the economy without the typical oversupply concerns. “The lower cost of doing business is attracting corporate relocations, which contribute to market growth,” the report said.
