Relevant news, ideas, articles and perspectives on Austin's unique real estate market and its dynamic lifestyle, culture, economic and business climate.

Back to Previous

Despite Availability of Capital, Commercial Real Estate Industry Facing Long Grind to Recovery, According to Emerging Trends in Real Estate 2012 Forecast from PwC US and the Urban Land Institute

By Trisha Riggs & Robert Krueger | October 26, 2011

LOS ANGELES (October 26, 2011) – For 2012, U.S. real estate players must resign themselves to a slowing, grind-it-out economic recovery following a period of mostly sporadic growth, confined largely to a few real estate markets that offer the primary 24-hour transportation hubs with global access, according to respondents of the Emerging Trends in Real Estate® 2012 report, released today by PwC US and the Urban Land Institute (ULI).

According to survey respondents, enduring economic doldrums and the absence of dynamic jobs generators are weighing on real estate markets. The hard reality is businesses have learned they can increase profits with less space – while people can’t afford bigger living spaces. While the nation’s lackluster employment outlook delays filling office space, the related drag in consumer spending compromises growth in retail and industrial occupancies and rents.

“Job creation is clearly the critical ingredient for a sustained recovery in commercial real estate and the market participants we surveyed uniformly struggled to identify new employment engines. As a result, businesses are focused on squeezing profitability out of productivity gains, and families forced into belt-tightening are using less square footage, which follows ‘The Era of Less’ sentiment we forecast last year,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “In 2012, investors expect pricing to level off in the top markets – and overall ‘buy’ sentiment will subside, selling appetites will increase, and more owners will hold until the economy untracks. This is part of 'the new normal' as investors are coming to grips that they may not be selling for more than they paid.”

Survey participants predict that 2012 will see an increased supply of properties for sale; however, due to economic uncertainty, interest among buyers may diminish.

Return Expectations Continue to Recalibrate
Although return expectations will further recede, well-leased core real estate in leading markets will continue to produce solid single-digit, income-oriented returns. According to the report, more opportunistic investors will ratchet down forecasts – even projections of returns in the mid-teens appear to be a stretch as risk increases from questionable supply/demand fundamentals.

“The return landscape for 2012 presents a mixed bag, and all depends on where and when investors bought, the amount of leverage employed, and asset quality,” said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank. “Many players will back off from bidding on trophy properties in top-tier markets, fearing that pricing is outpacing the potential for recovery in net operating incomes. Additionally, investors believe that cap rate compression has ended and a leveling off is expected with possible upticks in cap rates for some property sectors in certain markets.”

Respondents to the Emerging Trends cite the best investor bets for 2012, which include:

  • Caution Still Rules – Investors should concentrate on the few markets showing hiring and leasing gains.
  • Blue-chip gateways – These relatively safe harbors all have issues, but over time, assets in 24-hour markets dependably outperform because they lie along important global commercial routes and attract money from all over the world.
  • Job Centers – Head to the few cities where employment growth actually occurs, including gateways and those that rely on energy, high-tech and health care-related industries, as well as universities and government offices.
  • Value-add plays – Look for class B properties in good infill markets that have been neglected over the past five years.
  • Fixed-rate debt – Owners should lock in long-term fixed-rate financing on assets while they can.
  • Recap troubled equity – More motivated borrowers, working with senior lenders, will strike favorable deals on mezzanine debt and preferred equity to stabilize; at low interest rates, investors can achieve especially favorable risk/return spreads.
  • Distressed debt – Banks and special servicers will continue to dribble out loan pools with various embedded gems.
  • Land holds – Cash buyers can claim single-family lots for cents on the dollar.

Markets to Watch
Survey participants believe capital will search for yields beyond the overbought gateways and the few jobs growth markets, taking on considerably more risk. And despite “tenuous” economic outlooks, only one of the 51 U.S. cities surveyed for Emerging Trends failed to improve its investment score over last year’s report. More than 60 percent now rate as fair or better prospects, compared with only 40 percent in 2011.

Highlighting investor angst, Washington, D.C., the number one city for the third consecutive year, suffered a slight downtick on the Emerging Trends ratings scale as interviewees wonder if the market has become too "frothy" in light of all the political talk about Federal cutbacks. Just behind Washington, Austin, the moderately-sized Texas capital, sneaks into the number-two spot on the survey, benefiting from dynamics created by its large university, the local tech industry, government jobs, and the regional energy-based economy. San Francisco leapfrogs New York City to number three, buoyed by high-tech-hiring; Boston holds onto the fifth position; and Seattle, also a software and Internet hotbed, stays at number six.

A snapshot of the top five markets ranked by survey respondents and their outlook for each of the markets:

Washington, D.C. The rock-solid D.C. market may cool down if the government ever shrinks. Development activity will rev up and torrid cap rate compression will force buyers to swallow awfully hard. Over the 32 years of Emerging Trends, it is clear that no other market performs better during a recession, and the area’s jobs base has diversified well beyond just government and lobbying into technology, communications, and biomedical industries. Office vacancies will level off in the high single digits, and a shortage of large blocks should force rents up in class A space. More national retail tenants will want a presence in the market. Apartments and infill housing may do better here too; home prices should recover ahead of other cities.

Austin. The interest in Austin proves that investors are looking way beyond the global pathways. This moderately-sized city features all the other ingredients needed for a local economy to deal successfully with the nation’s early 21st century realities. State government provides an economic buffer, while the giant University of Texas campus attracts both energetic young brainpower and top professional talent. The rich academic environment helps incubate and support burgeoning tech companies and other higher-paying jobs. The size issue limits investor opportunities, but the diversity of educational, medical and government jobs, backed by high tech, insulates the market from boom/bust scenarios.

San Francisco. It’s back near the top and rates as the survey’s best buy for offices and apartments. Bullish market investors are betting on office rent increases, pushing purchase pricing way ahead of fundamentals. Empty buildings counter-intuitively look most attractive to some buyers. Overall market vacancies still register in the mid- to low teens, and demand can fall suddenly. Cap rates on “bulletproof” apartments cannot drop much lower, and house prices show the biggest nationwide gains after some precipitous declines. Hotel occupancies will recover smartly. Institutional investor ardor never wanes, and surveyed investors believe it won’t going forward, for the expensive warehouse market serving one of the country’s largest ports.

New York City. Manhattan, which features a diverse employment base, will see its resurgence face headwinds from economizing at less profitable investment banks and other financial institutions – the backbone of the city’s economy. Vacancies will actually drop to among the lowest levels in the country and rents will increase ahead of other markets, helped by a lack of new supply. Given enduring stability, office investors can be content with four to five percent cap rates. The nation’s best hotel market will flourish in a sea of offshore tourist traffic. Highest-in-the-country apartment occupancies could vault rental rates to record levels as co-op/condominium values edge up again after generally holding their own in the downturn. Investors will lose perspective if they spend too much time here; it’s hardly a proxy for other parts of the country.

Boston. Despite relatively high office vacancy rates, Boston retains plenty of adherents who value an exceptionally well-educated workforce drawn from local colleges and universities. Subdued outlooks for mutual fund firms and other asset managers will spark concern in the Financial District, whereas the Back Bay outperforms. Most office projects will stay on drawing boards without greater leasing velocity, and development will prove difficult because of barriers to entry. The apartment market should perform exceptionally well, and condo prices will remain surprisingly buoyant. Housing prices will increase again after suffering only modest declines in the downturn.

It is no coincidence that these top markets rank the highest in the survey’s “City Walkability Scores” – a measure of walkability among the nation’s cities. Increasingly, convenience counts as more people shy away from car-dependent places.

Rounding out the top ten markets to watch:

  • Seattle bounces back thanks to its diversified new age corporate base.
  • San Jose does not skip a beat despite competition from the City by the Bay’s downturn tech surge.
  • Houston profits from lasting high oil prices and expands off a Texas-sized service-sector employment engine.
  • Los Angeles will come back – and the metropolitan area ranks as the nation’s number two apartment and industrial investment market.
  • San Diego benefits from the near-perfect year-round weather, which helps attract talent pools to local biotech companies, as well as a steady stream of upscale retirees.

Property Types
Among property sectors for 2012, the survey finds that investment and development prospects continue to advance across all major property sectors, led by apartments. Besides apartments, interviewees prefer downtown office buildings in 24-hour cities, warehouse properties producing cash flow in prominent port and airport gateways; full-service hotels in the major markets; limited-service hotels without food and beverage; and neighborhood shopping centers serving stable infill suburban communities. Sentiment diminishes for power centers and malls: owners will not sell the best fortress, and most other regional centers face a shaky future. Suburban offices score the lowest investment marks; commodity buildings in campus settings isolated from urban amenities receive a big thumbs down.

Now in its 33rd year, Emerging Trends is the oldest, most highly regarded annual industry outlook for the real estate and land use industry and includes interviews and survey responses from more than 950 leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants.

A copy of Emerging Trends in Real Estate® 2012 is available at or

About the Urban Land Institute
The Urban Land Institute ( is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 33,000 members representing all aspects of land use and development disciplines.

About the PwC Network
PwC firms help organizations and individuals create the value they’re looking for. We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at


Back to Previous