It’s time to look ahead to 2014 and what is coming in the real estate market. The Urban Land Institute recently released it’s closely followed annual “Trends in Real Estate 2014 Report”. While most investors are interested in their local market, this report looks at the big picture. Something all investors need to stay aware of.
The national real estate industry is expected to continue growing in 2014 but at a slightly slower rate than 2013. More importantly, major investors will shift out of tier one markets into tier two markets due to the high cost of real estate in the “gateway” cities. Gateway cities are cities offering the most international airplane flights and international business. Cities such as Boston, Chicago, Los Angeles, New York City, San Francisco, and Washington D.C. But there are other important cities now offering a better return on capital. These include Austin, Dallas, Houston, Miami, Orange County, Portland, San Jose, Seattle, and Minneapolis. These are the types of cities that institutional investors will be investing in during 2014.
There Will Be Changes
Probably the biggest change in 2014 will be a shift from residential real estate to commercial real estate. While residential made solid improvements in 2013 (expected to be up an average of 7.5% or higher by year’s end) the market for 2014 will shift to commercial properties. Inside the commercial sector, expect warehousing to see the most growth and retailing to see the least. E-commerce will continue to take market share away from brick and mortar businesses. As a result, more distribution centers (warehousing) will be added and brick and mortar will suffer.
Apartment buildings will remain in demand as the Millennial generation continues to prefer renting over buying. However, 2013 saw apartment building prices surge and won’t make for the best investments in 2014.
Continued Improvement Still Depends on Job Growth
The good news for the residential sector is that unemployment in 2014 is expect to continue it’s downward trend to reach 6.5% by year end. The Gross Domestic Product (GDP) is expected to increase 3% in 2014, which translates into monthly job growth of 250,000 compared to the 2013 average job growth of 190,000. That means the residential sector will see growth going forward. The change will be to more owner occupied sales instead of investor purchases. The residential prices increases of 2013 mean the market is not nearly as lucrative for investors in 2014.
The condominium market will remain weak in 2014. New construction of single-family homes will grow next year but there remains a glut of condos on the market that needs to be absorbed before any new construction of condos is expected.
It’s All About Economic Growth
The economic numbers across the board are starting to look better and better. Earlier this week, the Federal Reserve stated that industrial production grew in November at the fastest pace in a year, increasing manufacturing output above its pre-Great Recession peak for the first time. This is the basis for a forecast adding 250,000 jobs per month in 2014.
In November, U.S. production grew at an annual rate of 3.2%. Much better than the predicted rate of 0.6%. The even better news is that this growth came mostly from foreign factory orders as the European and other global economies improve. The downside to this is that as the economy moves into high gear, the Federal Reserve will relax its low interest policy in 2014. Overall, 2014 looks to be a solid growth year for real estate.