2015 CMBS Outlook

The economy, coupled with low interest rates, contributed to continued growth in the commercial real estate and securitization markets. Property fundamentals for most CRE segments improved, fueling the appetite for CMBS investment. As demand increased, credit standards continued to ease as competition among loan originators progressed through the year. Credit metrics continued to weaken as leverage climbed to new post crisis highs and debt service trended downward despite lower interest rates and the prevalent use of interest-only loan structures.

Despite the slowdown at the start of the year, the economy posted meaningful growth through the remainder of the year, ending the Q3 at 3.9%. In addition to the economic expansion, employment figures scored solid gains throughout the year, as approximately 241,000 jobs were added in each of the last 11 months, lowering the unemployment rate to 5.8% from 7.0% a year earlier. The increase in payrolls is no longer contained in the technology and energy sectors but has broadened over the past year to include health care and leisure & hospitality, which contributed to economic growth in many regions of the country. This bodes well for commercial real estate (CRE) fundamentals across the U.S.

As the economy continues to expand, KBRA believes that real estate fundamentals will remain stable across all of the property type segments, many of which will experience flat to modest growth. However, the multifamily and lodging sectors are standouts, having experienced marked gains over the past few years. The performance of these two sectors in many markets is at or above that experienced during the height of the last real estate cycle. About Kroll Bond Rating Agency KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Tech Industry Driving Chicago Real Estate Market

After years of struggles that followed the financial crash of 2008, Chicago’s economy is finally starting to get into gear. According to a report issued by the Illinois Department of Employment Security in September, the Illinois unemployment rate fell from 9.2 to 6.7 percent in just one year, marking the largest year-over-year decline since 1984. Preliminary data released by the IDES and the Bureau of Labor Statistics show there are also 40,600 more jobs this year than in 2013, most of them in leisure and hospitality, trade, transportation and utilities, and professional and business services.

 

In the context of this economic resurgence, Chicago’s real estate industry is also experiencing a revival, as office vacancy has now dropped to pre-recession levels, according to most recent data collected by Marcus and Millichap. The demand for office space is primarily driven by tech companies seeking downtown locations, mostly in the River North and River West submarkets. California-based Google, Inc. is one of many tech companies set to move to downtown Chicago. The company will occupy about 360,000 square feet in a 10-story building at 1000 W. Fulton Market by early 2016.

 

Job growth in the tech sector helped boost the office market this year, while strong rental demand in suburban office space brought rents higher. Marcus and Millichap reports that a total job growth of 1.6 percent is expected in 2014, with 70,000 new jobs added to the market. More than 2 million square feet of office space is currently underway in Chicago, with another 8 million square feet still in the planning stages. The largest project currently under development is the 1 million-square-foot River Point tower in the West Loop, a 52-story building slated for completion in 2017. According to Marcus and Millichap, developers are expected to add roughly 400,000 square feet of office space in 2014, after no new office space was completed during the last four quarters.

 

Chicago is also performing well when it comes to the retail industry, as the jump in employment and rising incomes are driving consumers to spend more. The retail market encountered a significant halt with the closing of 72 Dominick’s grocery stores in December 2013, but as of now all but one of the former stores have been purchased and are in the process of re-opening. Marcus and Millichap reports that more than half of the space vacated during 2013’s final quarter has been absorbed, as the market is attracting buyers from Canada, Europe and South America, and demand for retail properties surpasses the supply. The boost in employment is another factor in the rise of retail sales, and builders have nearly 500,000 square feet of space under construction to be delivered throughout 2015.

 

The drop in unemployment and the rising number of tech jobs in the region are also contributing to a growing demand in apartments in the downtown area. Roughly 6,000 rental units are currently underway, most of them located in the West Loop, the city’s tech core. Developers are expected to bring 3,100 multifamily units online in 2014, including 130 units of student housing, 80 senior apartments and 96 affordable rentals. The largest project finalized in the first quarter of 2014 was the 450-unit Hubbard Place apartment community at 360 W. Hubbard in the Streeterville/River North submarket.

Atlanta office market: more momentum, but vacancy still high

Summary:  Though total vacancies are high (19.8% downtown, 20.9% in the burbs), with the drive, according to Jones Lang LaSalle attributing the improvement to an increase in employment (up 57,100 since last year, unemployment claims down almost 26%).  Improvements are expected through 2014.

Atlanta --(Atlanta Business Chronicle)--
Atlanta’s building owners are seeing better leasing volumes and more tours from corporate tenants, according to a new report from Jones Lang LaSalle Inc.

“Atlanta’s economy continues to recover and since this time last year, the metro has gained 57,100 jobs,” the commercial real estate services company said in its third-quarter report on the office market.

“Layoffs have abated and unemployment claims are down [almost 26 percent] since July.

This year, State Farm announced at least 800 new jobs for the Perimeter and PulteGroup relocated its headquarters from Detroit to Buckhead, one of the city’s most affluent districts.

Total vacancy remains high, at 19.8 percent in urban office markets and 20.9 percent in suburban areas. The Perimeter, Atlanta’s largest office market at than 17 million square feet, saw vacancy fall to 14.6 percent among its class A towers. Older buildings farther away from amenities fared much worse, as vacancy stood at roughly 37 percent.

Trophy buildings in Buckhead are largely filled, according to Jones Lang LaSalle. Leasing activity in Midtown, the Perimeter and along the northwest side of the city in the Cumberland Galleria remain strong.

Employers are focused on intown or Perimeter office markets with access to transit and major transportation corridors like Ga. 400 and Interstate 285.

“We expect momentum through 2014, with Atlanta demand firmly back in growth mode,” the report said.

Total office vacancy:

Intown

Buckhead — 18.5 percent

Downtown — 23.5 percent

Midtown — 17.5 percent

Suburbs

Perimeter — 19.5 percent

North Fulton — 18.4 percent

Northlake — 19.1 percent

Northeast — 27 percent

Northwest — 20 percent

South Atlanta — 19.9 percent

Source: Jones Lang LaSalle