The slowdown in commercial real estate development during the recession should give commercial property landlords room to raise rents.
Rick Romano a portfolio manager at Prudential Real Estate Investors, gave that assessment Wednesday during an economic outlook briefing organized by Prudential Financial Inc., Newark, N.J. (NYSE:PRU).
Romano and other panelists said they are optimistic.
“Looking to fall and towards year’s end, I think there will be some reversion away from the extreme pessimism on the economy right now,” said Robert Tipp, chief investment strategist at Prudential Fixed Income.
Prudential has been encouraging clients to continue to invest in the $90 trillion fixed income market. “Fixed income has pretty much continued to defy the naysayers,” Tipp said.
Edward Keon, managing director at Prudential’s Quantitative Management Associates, also expressed optimism.
“We do believe the second half will start to see better economic activity,” Keon said.
In the commercial real estate sector, Prudential has focused its attention on apartment and hotels that have the potential to increase rents.
Rental occupancy rates have been flat in Middle America, but they have increased for office buildings in coastal cities such as New York, San Francisco and Washington, Romano said.
“Not a lot was built during the credit crisis,” Romano said. “There was no access to financing. So what that means is that landlords will be in a position of pricing power as demand starts to recover and as we start to see jobs grow.”
The Internet is starting to affect the outlook for retail properties, Romano said.
Retailers that sell more soft goods, such as clothing, seem to have more ability to pay higher rents, while retailers that sell hard goods more easily bought over the Internet, such as electronics, seem to suffering more and moving more toward kiosk-oriented sales, Romano said.
In the residential real estate market, the home ownership rate has dropped to 66%, from 70%, and that has created opportunities for residential landlords to raise rents, Romano said.