Forbes is predicting that the commercial property market will improve slightly in 2013. While numbers will not be substantially better for investors, operating income will be up slightly, and property values will level off.
If investors can be patient until 2014 or 2015, they will be rewarded with higher operating incomes and prices. Both of these conditions will result in more new construction projects being launched.
The recession has had a tremendous impact on occupancy rates for retail, industrial, and office space, which has resulted in lower commercial rental rates. Landlords are feeling the pinch from lower income levels, and new construction rates have dwindled to practically zero.
Demand for additional square footage was negligible and developers who were interested in building projects based on projected future demand were running up against difficulties from lenders who did not want to take on a high level of risk.
Currently, the amount of occupied square footage is increasing slowly. The pace of construction is not only lower than during the last boom, but is well below historic averages. High vacancy rates will serve to put a damper on new construction projects to the year 2013.
Property values have risen in spite of low tenant growth due to low interest rates. Commercial property investors have been able to arrange for good mortgage rates on excellent properties. Investors seeking financing for lower-quality buildings have a much narrower range of options available to them.
High-quality commercial properties have increased in value by 6 per cent over the past year. Other buildings have delivered lower yields during the same period.
Occupancy rates are expected to increase slightly in 2013. Some markets will even see rents increase, which will boost earnings.
New construction will be slightly better in 2013. The major boost in activity is not likely to occur until 2014 or 2015, depending on the particular market. Most of the gain will occur in 2015.
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