Gazing into the Crystal Ball: A Look Ahead to 2011

By Robert Bach, Senior Economist, Grubb & Ellis Co.

My crystal ball was shattered during an unfortunate luggage-handling incident back in 2006, but let’s not let that stop us from looking ahead to the investment market in 2011. Grubb & Ellis expects the dollar volume of transactions to increase another 75 percent to around $190 billion on top of the doubling seen in 2009.

While these are impressive increases, they will return transaction volume close to the levels recorded in the 2003-2004 period before the credit bubble began to inflate to uncontrollable proportions. Demand for core properties will remain intense, but investors are expected to reach for yield by taking on more risk – Class A-/B+ properties, for example – particularly as the economy recovers and interest rates rise. The cap rate compression for core properties experienced in 2010 is unlikely to be repeated in a rising-interest-rate environment.

As 2010 draws to a close, economists are revising their forecasts upward for 2011, estimating that the package of tax extensions and cuts about to be passed into law could add a full percentage point to growth next year. That could mean faster improvement in leasing market fundamentals such as vacancy and rental rates, though it will take several years for the leasing markets to return to equilibrium.

It seems like everyone has a list of favorite markets, and so do we. Each year, Grubb & Ellis develops an Investment Opportunity Monitor that identifies the metropolitan markets with the strongest prospects for each major property type over the coming five years. The monitor for each property type consists of 15 to 20 variables divided into three categories – demographics, economics and real estate fundamentals. The variables are assigned weights based on their relative importance. Employment growth and barriers to entry are two of the most important variables, and to a large extent they represent a trade-off. Rapidly growing markets frequently have low barriers to entry – easier and cheaper for developers to put up new buildings – while markets with high barriers to entry typically see slower job growth precisely because land for new development is scarce and expensive.

While our marketing department would shoot me if I gave away the entire list, I will say that, among the usual suspects – supply-constrained coastal markets – we have some surprises appearing in the top 10: Austin and Raleigh in the office rankings, Atlanta in the industrial rankings and Chicago in the retail rankings. There are no surprises in the apartment rankings as they are all coastal markets. Stay tuned for more.