OIL AND GAS activities will continue to be a focus through 2014 as demand for energy worldwide accelerates and the United States moves toward energy independence. The apparent worldwide economic improvement, in conjunction with the transforming energy efficiencies and correlating demands, sets the stage for long-term investment opportunities in energy. We believe that another year of relatively stable energy prices is likely, unless the Middle East loses stability.
As demand for energy grows within the global economy, the U.S. energy boom is offsetting existing Middle East oil supply disruptions, keeping upside price pressures in check. Domestic oil production increased in 2013, putting the United States on its way to becoming the world’s largest natural gas and oil producer.
Favorable policies in North Dakota and Alaska are helping to ignite America’s energy revolution. Domestic drilling continues to be focused on liquid-rich shale plays, with horizontal drilling and hydraulic fracturing widely used to enhance production in existing areas. The Energy Information Administration (EIA) expects natural gas production to grow 2.1% in 2014 and 1.3% in 2015.
TIMBERLAND continues to rebound from historical low prices as the housing recovery moves into gear and supply is constrained by ecological events, such as the losses from the mountain pine beetle in British Columbia. As such, timberland is positioned for growth and should be a strong-performing investment in 2014.
In addition to supply challenges, demand is expected to continue to increase. We see this increase as a result of continued strength in export markets, the anticipated continuation of the U.S. domestic housing market recovery, and the noteworthy emergence and growth of woody biomass energy markets on a global scale.
Yet, there are execution challenges. In the early 2000s we experienced a bifurcation between large-acreage institutional acquisitions (more than 50,000 acres) and smaller “middle-marketâ” transactions (several hundred to several thousand acres). Much institutional capital was spent chasing a declining number of large-acreage deals and an “efficiency premium” that emerged in these markets.
Today, that bifurcation is blurring and we see market pressures that suggest smaller, direct investors may be able to rationalize lower discount rates given the low-risk nature of the asset class.
PRIVATE BUSINESS The recovery for private businesses was sporadic but positive in 2013, and in 2014 we expect corporate balance sheets to hold strong liquidity. The sectors expected to lead merger and acquisition (M&A) activity include technology, communications and health-related fields. And, while the domestic recovery has been slow, the United States appears to be a top target for acquisition among foreign buyers.
While 2013 tax policy changes continue to affect growth, business owners are now struggling to understand their obligations associated with the Affordable Care Act and the related costs.
We anticipate that 2014 will likely bring acceleration in particular markets and sectors, and overall could prove to be favorable for business owners.
REAL ESTATE Following an upswing in domestic and foreign economies in the last year, demand for U.S. commercial real estate (CRE) in general is trending upward. We expect these trends to continue through 2014; however, they will vary according to product type and markets.
• Multi-family properties: Apartment rental rates now exceed pre-recession levels, and apartment construction has increased as a result. Completions in 2013 were the highest since 2009 and are expected to be roughly one-third greater in 2014.
• Industrial Space: Vacancy rates are approaching cyclical lows after 14 consecutive quarters of positive growth. Accelerating rent growth is anticipated, and newer, functional spaces should fare especially well.
• Office Space: Vacancy recovery for office space has been less robust than for apartments and industrial properties. While office payrolls have surpassed their pre-recession peak, the trend toward less space per employee continues.
• Retail Sector: Recovery, particularly in neighborhood and community shopping centers, has been hampered by modest job growth. With the exception of outlet centers, which have become more sophisticated and upscale, new deliveries are not expected to be a significant factor in 2014, as most markets focus on renovations over new development.
FARM AND RANCH LAND Although farm and ranch prices have recently been driven higher by farmers eager to add acreage, we expect prices to level off through 2014. We also expect normal growth in commodities such as corn, soybeans and wheat, spurred on by macro-trends such as an increasing world population.
We’ve seen widespread fluctuations in corn prices over the last few years, with a high of almost $8 per bushel in 2012 before plunging to current levels around the $4 area. The U.S. is the largest producer and exporter of corn in the world, and given world demand and growing populations, we see corn prices moving back to the trend line, which would imply corn prices in the $5 area and moving up gently over time.
The growing world population, coupled with a strong middle-class segment, is demanding more food and more dietary protein, resulting in strong demand for grain crops.
With these commodity prices increasingly moving back on trend from the higher levels of the last 18 months, we see farmers becoming more reluctant to buy farmland. While the higher commodities prices of the last few years left many farmers in a position where they could pay premium prices for land, that may change in 2014, with farmers becoming more conservative as crop prices and profits return to trend.