KPMG: Geographic Expansion Key Focus for CRE

By Keith Loria, Contributing Editor

The 2013 KPMG Commercial Real Estate Outlook Survey reveals that commercial real estate industry executives believe geographic expansion will be a key focus over the coming year, especially in the Southwest and Northeast.

“Although our survey didn’t cover views on any particular market, clearly Southwest, Texas and California have seen substantial rebound primarily because of job growth and faster economic recovery than other parts of the country. Texas, in particular, didn’t have as significant a downtown as other parts of the country and rebounded quite strong,” Greg Williams, national leader of KPMG LLP’s Real Estate practice, told Commercial Property Executive. “In the Northeast, an additional factor is foreign money coming in to the U.S.; they are looking for security and safety, so the large 24-hour gateway cities like New York and D.C. have been attracting a lot of capital.”

According to the annual survey by the audit, tax and advisory firm, 58 percent of executives said they expect their company to increase spending most on geographic expansion, an increase of 21 percent from last year and 11 percent from its 2011 report.

“It’s a very optimistic outlook with 72 percent of respondents expecting the market to improve overall (up from 58 percent) and 84 percent saying their companies’ revenue improved over the last year and expect it to increase next year as well,” Williams said. “I’m somewhat surprised at the 84 percent, I expected it to be stronger than the year before, but we still haven’t had the robust job growth you need to have for sustained recovery in real estate, so it was stronger that I thought.”

The annual survey also shows that multi-family development is expected to increase substantially and the retail and hospitality sectors are expected to see growth. Of those surveyed, 43 percent believe multi-family development will increase, 19 percent expect a significant amount of development in retail in 2014, up from five percent in last year’s survey, while 18 percent expect a significant amount of development in hospitality, up from 7 percent in last year’s survey.

Acquisitions (53 percent), improving real estate fundamentals (44 percent), and geographic expansion (38 percent) were selected as the top three drivers for revenue growth of the respondents’ companies over the next three years.  Class A assets in primary markets (48 percent) and development opportunities (25 percent) were identified by commercial real estate executives as the top assets they would be in the market to acquire in the next year.

Another key finding involves companies looking for investment opportunities outside of the U.S., with Latin America and Asia Pacific identified as the two most likely areas.

“Expansion is big, with companies starting to look outside the U.S. for investment opportunities to find yield, which is relative new compared to previous surveys,” Williams added. “Market expansion is an important focus for commercial real estate executives as they strive to grow the top line.”

While optimism seems to ring true throughout the survey, Williams does warn that the government sequestration and other political and regulatory uncertainty lagging out there does give people a little caution.

“There is some uncertainty out there as people assess how potential regulations and tax policy impact their businesses and proactively, manage those impacts,” Williams concluded. “Another concern is the lagging European recovery and wondering if another shoe will fall over there and have a spill-over affect on the market.”

Pricing pressures (32 percent), lack of customer demand (30 percent), and regulatory and legislative pressure (24 percent) were cited as the most significant growth barriers over the next year.

The KPMG survey was completed in spring of 2013 and reflects the responses of 100 senior executives in the CRE industry.