Delta: Property trends, opportunities for 2012

In 2011, the Washington commercial real estate market sent mixed signals. Office rents generally declined, while apartment rents rose. Investors experienced great returns, even as the federal government — one of the market’s key drivers — was curtailing its demand for office space.

What will 2012 bring? We have identified several megatrends and opportunities in the local economy and commercial markets.

2012 megatrends

1: Uncertainty. A sense of uncertainty has increased of late, driven largely by the debate surrounding the federal budget. This uncertainty is affecting consumer spending, business investment, decision-making in general, tenant leasing, and commitments of all types — thus slowing economic growth.

2: Drive to efficiency. With consumers and businesses uncertain about future economic conditions, many are taking steps to become more efficient — doing more with less. Companies are taking less office space per employee, shedding unneeded office space or right-sizing, and using profits to invest in software and other productivity measures. Consumers are downsizing into smaller homes, and increasingly cohabitating. Welcome to the “Era of Less.”

3: Flight to quality. Tenants with cash and demand for office space are taking the opportunity while rental rates remain compressed to upgrade to Class A space. High-end apartments are also outperforming those of lesser quality. The number of Class B units undergoing renovation in the Washington area has increased by several thousand units over the past year, as investment conditions have improved.

4: Increasing flexibility. At the national level, during the run-up to the housing market bubble of 2004-05, homeownership rates reached a cyclical high of 69.2 percent. As the bubble burst in 2006-07, people increasingly turned back to rentals. One reason was that owning a home, once seen as a safe investment, had instantly become a financial risk. Another was that some homeowners were forced into short sales or foreclosures, and could not afford to buy again. But a third — which gained momentum as the recession hit with full force in 2008 — was that a flexible lifestyle is an asset. Whether because of the reduced financial commitment involved in renting vs. owning, or the increased ability to move to where the jobs are, renting has become more attractive. By 2011, the rate of homeownership in the United States had declined to 66.0 percent.

In the Washington area, we believe that this shift away from homeownership is moderating, at least locally.

5: Preparing for federal budget cuts. Historically, 30 percent or more of the region’s gross regional product has been due to federal spending. This share jumped to around 40 percent in 2010. Given current austerity measures, we expect this share to decline to around 36.3 percent by 2015.

These “cuts” to projected spending — really just a decelerating rate of growth — are not likely to derail economic growth in the region. But they will certainly slow it well below our experience of prior recovery cycles.