Hope for Commercial Real Estate | Commercial Property Management

Posted on May 16, 2012

As the deepest U.S. recession since the Great Depression grinds on, there are some hopeful signs for a turn around in the much diminished commercial real estate arena.

One factor helping to drive commercial building starts is the aging of America. As the Baby Boomer generation pushes the age demographic ever upward, more senior housing and nursing care facilities are needed. The result is an increase in construction starts for these two areas over last year, according to the Seniors Housing Construction Trends Report 2011.

According to David Schless, president of the American Seniors Housing Association (ASHA), it is an important but modest amount of new construction. "Until the capital markets change and the economy improves, we expect to see relatively muted levels of construction of market-rate seniors housing."

Senior apartments are responsible for 49 percent of the new units currently under way, of which, only 8 percent fall under the category of market-rate properties. Another 20 percent of the new projects are independent living properties, with assisted living properties accounting for 16 percent and nursing care buildings 15 percent.

Another area of recent activity is commercial building investments in secondary markets across the country. This trend may be led by spiking valuations for office properties in a number of gateway cities.

Canadian firms recently purchased nearly a half million square feet office building space in Bethesda, Maryland and Overland Park, Kansas. In Minnesota, Hempel Properties bought a 393,902 square foot property in Minneapolis, close to their home base in Maple Grove.

In California DIRECTV Inc. recently made the largest leasing deal in years by expanding its corporate headquarters into roughly 630,000 square feet of office space at Kilroy Airport Center, in El Segundo.

Office sales transactions in Columbia, S.C., Asheville, N.C. and Detroit over the last month also added to significant commercial real estate activity in secondary city markets. In Pittsburgh, Highwoods Properties bought the 1.54 million square foot complex of office buildings known as PPG Place.

Investor desires for better returns is likely what's driving large commercial purchases in second tier cities across the country. Properties in the largest markets, such as New York, San Francisco and Washington, D.C. may be burdened with fewer risks; however cap rates in those markets are nearing pre-recession levels.

"There are cities at the top end of the market where the pricing is very robust, but the gains [in valuation] have been more limited in places like Houston," notes Sam Chandan, president and chief economist with Chandan Economics. "These are markets where individual core assets will trade at high valuation, but it's still not comparable to D.C., New York or San Francisco."

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