Commercial real estate will continue its climb back in 2011

Commercial real estate experts predict the local market will continue its slow but steady recovery from the Great Recession in 2011, with the medical office sector leading the way.

“Medical office and multifamily will remain the gems for those placing debt and equity,” said Amy Burmeister, who leads Summit Realty Group’s investment-services team.

The growth in health care real estate appears to be driven largely by health care reform. Reform is “helping to change the face of health care real estate,” said Keith Konkoli, a senior vice president at Duke Realty, who said the prospect of more people being insured and thus seeking care is leading to greater demand for space.

In an effort to increase revenue, hospital systems are spending capital acquiring physician groups and smaller hospitals and developing electronic medical records, Konkoli said. “Consequently, they are looking for help from developers on real estate projects,” which he said is among the factors that should provide opportunities in the sector in 2011.

The local multi-family housing sector, meanwhile, should see continued strong interest from investors, said George Tikijian, whose firm Tikijian Associates specializes in apartments.

Apartment occupancy rose from 89.3 percent in 2009 to almost 91 percent last year. It’s expected to strengthen further in 2011, to 91.5 percent, according to Tikijian estimates. Better occupancy is leading to rent growth, making stable properties attractive to buyers, Tikijian said.

He noted that the Indianapolis area is attracting more than its share of capital because the perception of the city nationally is that it has relatively good job growth and a fiscally stable government.

Tikijian predicts there will be more lender activity here in the new year but that development will continue to be a challenge because of stricter underwriting and cash requirements. New product will continue to hit the market, however, largely thanks to government-supported tax credit deals.

The outlook for other sectors is mixed, but no one sees the market backsliding.

A modest increase in demand for office real estate is expected throughout much of the year, but demand could grow at a more rapid clip in the second half of the year if job growth returns, said Mary Beth Kohart, a vice president in office services for Cassidy Turley.

Tim Norton, the leader of Summit Realty Group’s office team, also sees demand picking up. He said that as absorption strengthens, landlords will offer fewer concessions. But continued instability in the market caused by troubled assets reverting to lenders means tenants will be savvy shoppers and will carefully evaluate the financial health of landlords before signing new leases or renewals.

Norton predicts the North Meridian and Keystone submarkets, which have significant vacancies, will be the slowest to recover. He said the south submarket will continue its rapid growth, due largely to demand for medical office space on the south side.

In the retail sector, Bill French of Cassidy Turley expects development to return, but in very limited fashion. On the industrial front, Summit Realty’s Andrew Morris said a shortage of available inventory will make it a challenge for new and expanding users to find space, which will put upward pressure on rents. Morris thinks speculative development of industrial space could return late this year or in 2012.

Whatever happens in 2011 will occur against a backdrop of uncertainty thanks to a proposed change in accounting rules, noted John Merrill, the new managing director of the Indianapolis office of CB Richard Ellis.

A new rule proposed by the Financial Accounting Standards Board and expected to be completed in 2011 will require tenants to show leases as liabilities on their balance sheets beginning in 2012 or 2013. The rule change could delay decision-making, especially among large corporate users, Merrill said.

Brokers themselves are likely to make some big decisions in 2011, Merrill said, as they jump from one company to another. “There will be an unusually high number of brokers changing companies as they try to position themselves for changing market conditions,” Merrill said.