From a risk-adjusted standpoint, the regional retail mall sector ranked first on RERC’s RAR (Risk-Adjusted Return) metric at 1.3, followed closely by the Industrial Warehouse and Power Center asset classes which both tied at 1.1. Power Centers showed the largest year-over-year change, moving from an RAR Metric rating of 0.9 in 2012. Rounding out the bottom end of the metric were the Industrial R&D, Office – CBD and Hotel sectors, ranking 0.8, 0.7 and 0.6, respectively.
On a national level, commercial real estate market fundamentals remained steady in 2013, but there was a slight change in demand for certain property types. Early last year the multifamily construction exploded, but that momentum has tapered off a bit as an oversupply situation has developed in many markets. Undeterred in the age of internet shopping, the retail asset class has regained stability and pushed itself to the front of the four major property groups as solid market fundamentals and consumer confidence have returned.
The Industrial Warehouse sector showed notable increases in tenant and investor demand as companies are relying more on shipping orders directly to their internet customers. Last year, this sector ranked fourth on RERC’s list and had a RAR metric of 0.9. This year the asset class ranked second with a 1.1 RAR metric rating. As this sector continues to expand, there is a notable increase in build-to-suit and spec construction as demand for large warehouse space increases across the major market hubs.
Looking strictly at returns, Regional Malls showed an average return of 7.90% at the end of 2013, down 18 basis points from 8.08% at the end of 2012. Industrial Warehouse space dropped 22 basis points on a year-over-year basis with a 2013 average of 8.03%, and the Neighborhood/Community sector dropped by 27 basis points to 8.13% for the same time period.
Although market fundamentals have been recovering slowly over the past few years, growth in commercial real estate value in undeniable and depending on the health of the job market, real estate returns are poised to remain consistent in 2014. Although RERC is expecting slightly lower total returns in 2014 compared to 2013 due to lower value appreciation from a risk-adjusted perspective, commercial real estate is offering solid returns in an economic landscape that remains slightly unpredictable and somewhat volatile.