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US Commercial Property

US Commercial Property Outlook

US Commercial Property Outlook

Major Apartment Markets Outlook (Q3 2021)

The apartment market is set for a stellar year. The reopening of cities is bringing vacancy rates down and pushing rents up, and strong investor demand has led to a sharp fall in yields. We expect national total returns of around 19% in 2021. The six major cities in this Outlook, which saw relatively large falls in capital values in 2020, will not quite match that this year. But most will catch-up in 2022 and beyond. Total returns in D.C. and Boston will outperform the national average of 7% p.a. from 2021-25, and L.A., NYC and Chicago will broadly match that return. The exception is San Francisco, where an exodus of footloose tech workers and high rents have cut demand. Even so, we still expect some recovery in demand, with rent growth turning positive and total returns of close to 5% p.a. from 2021-25. In view of the wider interest, we are also sending this US Commercial Property Outlook to clients of our US Housing service.

1 October 2021

US Commercial Property Outlook

Major Office Markets Outlook (Q3 2021)

With absorption of landlord-held office stock set to remain negative for the foreseeable future, we continue to expect vacancy rates to climb and rents to fall in all six major office markets over the next few years. That will be particularly pronounced in New York City and San Francisco, owing to more expensive rents and high shares of tech workers in both metros, as well as a large development pipeline in NYC. Boston will perform a little better thanks to its life sciences exposure, with average annual total returns of around 3% in the 2021-25 period. All three of those metros will underperform the national office average, whereas Chicago, LA and Washington D.C. are forecast to outperform. And there will be little to separate LA and D.C. over the next five years, with the former supported by a recovering film and TV sector and the latter helped by its large public sector exposure.

27 September 2021

US Commercial Property Outlook

Retail on the cusp of a recovery

This quarter there are short-term upgrades to all four major sector forecasts for 2021 on the back of strong investor demand for assets, which is driving up prices. Those upgrades mean that returns in the industrial and apartments sectors will be exceptionally strong in 2021-2022 at around 15% p.a. and 13% p.a. respectively. But perhaps the bigger and more surprising story is that the retail sector is showing signs of turning a corner. As a result of the improved outlook, across the 2022-25 period, retail is our best-performing sector, led by the power centre and neighbourhood and community centre sub-sectors, with average returns in that period of 6.5%-7% p.a. Offices remain the weakest performers at a sector level, although we continue to think that Grade A stock will outperform the average.

10 September 2021
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US Commercial Property Outlook

Major Apartment Markets Outlook (Q2 2021)

With cities reopening apartment demand will see a substantial rise this year, boosted by the arrival of households who delayed a move last year. Vacancy rates will fall back in all six major cities covered in this Outlook with those hit hardest during the pandemic, NYC and D.C., enjoying the most vigorous recovery in demand as tenants return. Strong prospects for NOI growth mean yields will either edge back or hold steady this year, driving substantial capital growth in all the cities. Beyond that, a gradual rise in yields and shift to larger apartments will weigh on returns. But even San Francisco, which will suffer from its high concentration of tech workers, should see total average returns of around 5.0% p.a. from 2021-25. At the other end of the spectrum, D.C. will outperform with average total returns of 8.5% p.a.

US Commercial Property Outlook

Major Office Markets Outlook (Q2 2021)

The start to the year has been in line with our expectations, meaning that falls in absorption and rents have generally accelerated in the six major metros. Owing to their relatively low rents and smaller shares of tech workers, we expect Washington D.C., Los Angeles and Chicago to be the top performers in our forecast period, registering average total returns of around 3.5%-4% p.a. On the other hand, New York City and San Francisco are set to be the worst performers, with rents falling by 13%-15% peak-to-trough and capital values ending the period 15%-17% lower than at the end of 2019. Total returns for those two metros will therefore be sub-2% p.a. in 2021-25. Boston will outperform those two hard-hit metros, but not by a great deal, producing returns of 2%-2.5% p.a., only a little below the US average.

US Commercial Property Outlook

Substantial upgrades to industrial and apartments this year

The economic recovery continues in earnest, but this is raising questions about quite how transitory the current high rates of inflation are. We think that core inflation will stay elevated, which will force the Fed to push up rates in late 2023, with bond yields climbing to 2.5% in the meantime. Nevertheless, given the strong prospects for NOI growth in the industrial and apartments sectors, we think these still look fair value. Returns there should average 7% p.a. and 6% p.a. respectively in 2021-25. But the reverse is true for retail and offices. Although yields remain elevated in those sectors, we see occupancy and rents falling further in the next two years, leaving them looking expensive at current pricing. We therefore think yields need to climb further and capital values fall further before they look attractive. As a result, we are forecasting average annual returns of just 4.5% p.a. for retail and 2.5% p.a. for offices.  

Drop-In: US Commercial Property (Tuesday 15th June, 1200 EST) Andrew Burrell and Kiran Raichura will be discussing the upgrades to our industrial sector forecasts and taking your questions on any other issues arising from our latest US Commercial Property Outlook. Register here.

10 June 2021

US Commercial Property Outlook

NYC and D.C. to benefit from COVID bounce-back

All major city apartment markets will benefit from the reopening of the economy and reduction in remote work, with rental demand also supported by record low numbers of homes for sale. New York City and D.C., which both saw large falls in asking rents in 2020, stand to benefit most from the return to normal. With less exposure to tech, most jobs in those cities will require workers to come into the office at least part of the time. We expect average total returns in both cities from 2021-25 will outperform the national average of 4.9%. At the opposite end of the spectrum, San Francisco will underperform as tech workers stay away. We expect it will be the only city to see falling capital values in each year from 2021-25, which will push total returns over that period down to around zero.

1 April 2021

US Commercial Property Outlook

Major Office Markets Outlook (Q1 2021)

There are forecast downgrades across the board this quarter, owing to the changes to our occupier demand expectations at the sector level. The markets broadly split into three pairs. New York City and San Francisco could see capital values fall by another 25%, meaning that total returns average around 0% p.a. over the five-year horizon. Boston and Chicago will fare better but will still see above-average occupancy falls, which will hit rents and push capital values down by 15%, close to the US office average. But we think that Los Angeles and D.C. will outperform the other markets and the national average, with total returns of 3%-3.5% p.a. in 2021-25, thanks to cumulative rent falls of under 5%. It is hard to classify those markets as winners per se, given the low level of returns that we are forecasting, but given the very weak outlook for the sector, that level of returns could look very good versus most other markets.

31 March 2021
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