Propelled by increasing economic optimism, commercial real estate industry executives say geographic expansion will be a key focus over the coming year, according to a recent survey conducted by KPMG LLP, the audit, tax and advisory firm.
In the 2013 KPMG Commercial Real Estate Outlook Survey, 58% of executives said they expect their company to increase spending most on geographic expansion, up from 21% in last year’s survey and 11% from KPMG’s 2011 survey.
In the U.S., executives most frequently cited the Southwest (45%) and the Northeast (36%) regions as the best commercial real estate investment opportunities. Latin America (32%) and Asia Pacific (21%) were identified as the top real estate investment opportunities outside of the U.S.
“Market expansion is an important focus for commercial real estate executives as they strive to grow the top line,” said Greg Williams, national leader of KPMG LLP’s Real Estate practice. “Domestically, the Southwest and Northeast are attractive markets because they are experiencing higher job and economic growth and thus have experienced a faster recovery, with property prices in select sub-markets within these regions at or above pre-recession levels.”
>> Development Trends
When asked how much new development is expected to commence in the U.S. in 2014, multi-family was identified as the top sector with 43% of respondents expecting “a significant amount” to launch, down from 51% in last year’s survey which significantly outpaced other asset classes. Nineteen percent expect a significant amount of development in retail in 2014, up from 5% in last year’s survey, while 18% expect a significant amount of development in hospitality, up from seven percent in last year’s survey.
“Multi-family is still the darling, but all sectors are expected to see an increase in new development as access to financing has improved for these projects, and executives are more optimistic about the economy’s growth prospects,” Williams said.
Seventy-two percent of respondents expect the U.S. economy to either moderately or significantly improve over the next year, up from 58% in last year’s survey. Additionally, 84% said their companies’ revenue increased over the past year, while the same percentage expects it to increase next year as well.
>> Revenue Drivers
Acquisitions (53%), improving real estate fundamentals (44%), and geographic expansion (38%) were selected as the top three drivers for revenue growth of the respondents’ companies over the next three years.
Class A assets in primary markets (48%) and development opportunities (25%) were identified by commercial real estate executives as the top assets they would be in the market to acquire in the next year.
“While some markets are still stabilizing post-recession, there’s a flight to safety and security, and class A assets in primary markets continue to be the surest bets,” said Phil Marra, Northeast leader of KPMG’s Real Estate practice. “In some cases, however, we are seeing fresh approaches, such as new REITs forming to address opportunities in the single-family-home rental market.”
Twenty-five percent of those surveyed said their organization is finding an ample supply of quality properties that can deliver a sufficient return at reasonable prices, with another 60 percent saying their organization is not able to find quality properties at reasonable prices.
“Given that pricing is critical to producing sufficient yields, executives are being very selective as the availability of distressed assets has slowed,” he added.
Pricing pressures (32%), lack of customer demand (30%), and regulatory and legislative pressure (24%) were cited as the most significant growth barriers over the next year.
>> Political and Regulatory Uncertainty
When asked to identify the issues posing the biggest threat to business models, 40% of executives indicated political and regulatory uncertainty as their top concern. Thirty-three percent of respondents said they did not know how evolving Federal tax policy would impact their organization’s business strategy, while 27% said it would decrease their capital investment. Additionally, 67% said that their company was only somewhat prepared to proactively manage the impact of public policy and regulatory changes.
“The political and regulatory environment continues to pose challenges and uncertainty,” Williams said. “To maximize their success, organizations should assess how potential regulations and tax policy changes will impact their businesses, and proactively manage those impacts.”
>> The KPMG Commercial Real Estate Outlook Survey
The KPMG survey was completed in spring of 2013 and reflects the responses of 100 senior executives in the commercial real estate industry. Based on revenue in the most recent fiscal year, 8% of respondents work for companies with annual revenues exceeding $10B, 36% with annual revenues in the $1B to $10B range, and 56% with revenues in the $100M to $1B range.