Substantial upgrades to industrial and apartments this year
US Commercial Property
...

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.
Kiran Raichura Senior Property Economist
Continue reading

More from US Commercial Property

US Commercial Property Update

Fair value analysis points to one more year of yield falls

Against both our proprietary in-house valuations and a more traditional fair value analysis, real estate looks cheap despite recent yield falls. Indeed, our analysis suggests yields could fall by 30bps by end-2023 and still be fair value. But as this would leave property looking overvalued by 2024, we think the all-property yield is likely to fall by more like 15bps in the next 12-18 months. As apartment valuations will come under pressure first, yield rises in that sector are likely to start by early 2023.

1 December 2021

US Commercial Property Valuation Monitor

Industrial overvalued, but supported by rental outlook

Rising equity earnings yields and government bond yields squeezed property valuations in Q3. While pricing still looks reasonable at the all-property level, the industrial sector is starting to look overvalued on a historical basis, with yield falls showing no sign of slowing. At this stage, we think that industrial valuations are justified by the sector’s solid prospects for rental growth. But we expect 10-Year Treasury yields will rise to 1.6% by end-2021 and 2.25% by end-2022, which will squeeze property valuations further.

24 November 2021

US Commercial Property Update

Are migration trends also driving industrial?

Data show a vast divergence in performance across the industrial sector over the last year. While some of the strength is consistent with that in the apartment and office sectors, driven by migration to the South, others have been supported by sector-specific factors.

23 November 2021

More from Kiran Raichura

US Commercial Property Update

Offices set for a prolonged performance divide

The pandemic has heightened occupiers’ focus on the quality and green credentials of the space they occupy. This trend is set to impact on demand, with modern, well-configured buildings with green building certifications set to attract tenants at the expense of older stock. We expect investors to increasingly differentiate between these assets in the next few years.

23 June 2021

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.

18 June 2021

US Commercial Property Data Response

Commercial Property Lending (May.)

Commercial real estate debt held by banks grew again in May. But while we expect growth to accelerate as the year progresses and confidence returns, investor caution toward the office and retail sectors will ultimately limit the pace of the recovery.

11 June 2021
↑ Back to top