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Forecast: Commercial recovery to accelerate in 2014

Jones Lang LaSalle predicts 10% investment volume growth and “particularly strong gains” from global investors seeking “a much w

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CHICAGO – Dec. 17, 2013 – Jones Lang LaSalle’s (JLL) researchers brought out the firm’s crystal ball and issued their forecast for commercial real estate in 2014.

According to the firm, a “global real estate disconnect” between buoyant investment markets and more cautious leasing markets is narrowing, and it will continue to narrow in 2014 as the recovery broadly diversifies ahead of many global counterparts.

JLL’s 2014 global viewpoints notes “surprising upsides in investment sales volume” in 2013, an improving lending environment, a heightened appetite for risk and investors’ movement into secondary markets. JLL expects those factors to continue in the coming year with global investment volume growth of 10 percent year-over-year to $550 billion.

The firm expects particularly strong gains on the U.S. horizon with further gains in more diversified investment across primary and secondary markets and sectors.

“We’re seeing a tremendous weight of capital from a growing and diverse set of capital sources interested in a much wider range of U.S. real estate,” says Ben Breslau, Jones Lang LaSalle’s Americas research managing director. “Investors feel more comfortable with the economic outlook and they’ve shown a greater appetite for risk that has led to a 21 percent global increase in year over year investment volumes.”

JLL is less exuberant about the global leasing market, however.

“Global leasing volumes for the full-year are expected to be flat, and in most markets and countries, 2013 is likely to turn out to be a weak year for rental growth,” says John Sikaitis, managing director of office research for Jones Lang LaSalle.

JLL predicts that the commercial market will see a slight 5 to 10 percent improvement in the growth of leasing volumes in the year ahead – but expect a wide variation in leasing momentum across world geographies.

In the United States, the office leasing forecast is brighter based on demand diversifying and supply dwindling. CBD (central business district) locations have shifted to landlord-favorable conditions in the vast majority of markets driven by the highest quality and most efficient buildings, with potential rent spikes in the next 24 months due to limited construction. While new office development is steadily increasing, especially in tech-rich and energy-heavy geographies, overall construction levels will be below trend until at least 2015. With limited new supply delivering ahead, mid-sized and large tenants, especially in America’s CBDs, will face challenges in 2014.

Demographic dynamics: Demographics will play a stronger role in the U.S. office market in 2014. The suburbs aren’t dead but will increasingly diverge further into two markets: choice locations on amenities, transit and with a sense of place will heavily outperform suburban locations lacking those characteristics.

JLL also expects office rent growth to pick-up modestly into 2014 and move beyond tech and energy markets. Overall, Jones Lang LaSalle is forecasting office rents to grow at a 5.5 percent clip in 2014 with net effective rents climbing even higher due to shrinking concessions.

“The big takeaway that we are starting to see is that after two to three years of a very silo-ed recovery in the energy and technology market, demand is starting to diversify,” said Sikaitis. “Now, we are seeing a lot of markets contribute to higher leasing volumes, giving viability to the recovery we haven’t seen in the past.”
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