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Top players predict commercial real estate picture to stay strong
Steve Brown | The Dallas Morning News


Construction workers with Capital Rail Constructors lift a 2,000-pound girder into place on the Dulles extension of the Silver Line of the Metro last month. (Pete Marovich For The Washington Post)

More construction cranes will be sprouting on America’s skylines. The commercial real estate sector is forecasting one of the longest periods of expansion on record. Top players predict that investment and returns in U.S. real estate will stay strong through 2017.


The forecast is for almost $500 billion a year in transactions over the next three years, according to a new study by the Urban Land Institute, which is meeting in Houston this week. The Washington, D.C.-based organization is the country’s largest commercial real estate association.


“Real estate volumes have been growing steadily,” said Urban Land Institute’s William Maher, a director with LaSalle Investment Management. “It looks like they will continue to grow in 2015.


“For real estate, it’s really about jobs,” Maher said. “This is the highest rate of job growth we have had for 15 years.”


The U.S. commercial property market has been expanding since 2010, following a sharp downturn during the recession.


Transaction totals are expected to increase this year and in 2016 to almost twice the 14-year annual average.


No surprise then that average commercial property prices are jumping.


“Last year it was up 13 percent — an enormous number,” Maher said. “This year it’s forecast for 10 percent, but trailing down.”


Even with higher price tags on many properties, the returns are high enough to continue attracting investment dollars, top industry execs say.


“We are pretty bullish about real estate demand and the ability to grow income,” said Lee Menifee, managing director of Prudential Real Estate Investors, one of the country’s top commercial property players. “Real estate still seems priced very competitively compared to other asset classes.”’


Menifee said that so far most lenders have kept a rein on financing for development.


“For speculative construction, outside of the apartment market it’s fairly difficult to get financing unless you have a fair amount of leasing — certainly much more than 10 years ago,” he said.


But the office construction increase in some cities is starting to raise eyebrows in the business.


More office construction is now being built in the Dallas area than at almost any time since the 1980s boom. Much of it is already leased.


“One of our big surprises is how fast office construction cycles have picked up,” said Paige Mueller, managing director with RCLCO Real Estate Advisors.


Another concern for real estate is the flood of foreign money flowing into the U.S. commercial property sector.


“For 2014, we had roughly $40 billion of foreign direct investment into U.S. real estate, representing roughly 10 percent of the total market,” said Brian Ward, president of capital markets and investment services with Colliers International.


In the first quarter of this year, foreign sources had poured another $22 billion into this country’s property markets — about a 17 percent share.


“If the current pace were to hold up, it’s a massive, massive increase in foreign investment in U.S. real estate,” Ward said. “There is way too much global capital looking for opportunities in real estate.”


The huge volumes of money being moved into real estate projects so far hasn’t meant a breakdown in underwriting, said Gayle Starr, senior vice president with industrial building developer and investor ProLogis.


“The capital is not so free that it’s gotten stupid again,” Starr said.


But she acknowledges that the flow of investment dollars is accelerating. “The banks and life insurance companies are falling all over each other” to do deals, Starr said.


Some investors are already planning for a retrenchment.


“Anything you buy has to be able to withstand a 10 to 15 percent pricing correction in the next three years — it’s going to happen,” said Glenn Lowenstein with Lionstone Investments, which has been a commercial property owner in the Dallas area.