The USA’s commercial real Estate Market is set for a stable 2017, with decent returns on offer for investors.

Steered ahead by strengthening demand in smaller markets, the National Association of Realtors forecasts stable ground for the commercial property sector.

“The positive direction for commercial real estate this year will be guided by the steadily expanding US economy, which has legs to grow and continues to be one of the top economic performers and safest bets in the world,” comments Lawrence Yun, NAR chief economist.

Yun says the US economy is poised for slight improvement in 2017: “Last year was the 11th year in a row of subpar GDP growth, but renewed corporate optimism leading to a focus on investment and a desperately needed boost in residential construction should pave the way for modest expansion this year of around 2.4 percent. Steady hiring and low local unemployment levels are finally supporting higher wages and increased spending, which in turn bodes well for sustained demand for all commercial property types.”

National office vacancy rates are predicted to retreat 1.1 per cent to 12.1 per cent over the coming year, as job growth in business and professional services brings increased need for office space. The vacancy rate for industrial space is expected to decline 1.3 per cent to 7.1 per cent, and retail availability to decrease 0.7 per cent to 11.2 per cent.

Only the multifamily sector is predicted to have little change to its vacancy rate over the next year as new apartment completions keep openings mostly flat at 6.5 per cent.

According to Yun, commercial property prices — especially in Class A assets in larger markets — surpassed pre-crisis levels last year because of aggressive bidding and lower inventory levels. However, with the Federal Reserve expected to raise short-term rates three times in 2017, a minor price correction may be in store this year as cap rates move higher.

“Similar to the biggest ongoing challenges in the residential market, supply and demand imbalances continue to put upward pressure on commercial property prices as investors search for yield in smaller markets,” adds Yun. “Realtors are increasingly citing inventory shortages as their top concern as the pace of new projects slows in large cities and middle-tier and smaller markets see a growing appetite for space.”

The latest Realtors Commercial Real Estate Market Survey highlighted the strong underlying demand for commercial properties up to $2.5 million, where most transactions from NAR’s commercial members reside. Compared to a year ago, sales volume rose 12.9 percent, prices increased 5.5 percent and the average transaction value equaled $1.1 million.

Foreign investment in US commercial property to stay strong

18th January 2017

Foreign investment in US commercial property is forecast to stay strong this year, as the country remains attractive to overseas investors.

“Acquisitions activity should remain high in 2017, if slightly lower than the previous year,” forecasts Chris Ludeman, Global President, Capital Markets, CBRE. Indeed, the volume of foreign capital remains robust, with more than $60 billion invested in US commercial real estate in 2016.

At the start of 2017, the interest rate environment is undoubtedly one of the largest influences on real estate capital markets. The election of President Donald Trump has bolstered confidence in the American economy, with the Federal Reserve Board raising interest rates at the end of 2016 for only the second time since the global financial crisis. The Fed Reserve expected to engage in three rounds of monetary tightening, increasing short-term rates this year. Longer-term interest rates should remain stable or increase only modestly.

Slightly higher bond yields are expected to have a limited impact on capitalisation rates, due to strong economic and real estate fundamentals, in addition to the solid demand from foreign investors. The spread between cap rates and Treasuries — a proxy for the additional returns commercial real estate is expected to yield relative to low-risk government bonds — is wide enough that the incremental moves the Fed appears poised to make will not necessarily result in higher cap rates. Cap rates are therefore expected to remain steady in markets where fundamentals are still improving. Similarly, commercial real estate values should remain steady during this period.

Global capital flows into the US are expected to remain “very strong”, with the comparatively strong economy and a scarcity of high returns elsewhere keeping the US a favorite destination for foreign capital. China is again expected to be the biggest driver of international investment.

“Plans for expansionary fiscal policy with the incoming presidential administration have raised expectations for economic growth and inflation, both of which make investment in real assets like commercial real estate more attractive,” says CBRE. “As a result, overseas institutional investors and sovereign wealth funds are expected to increasingly target the US to fill their real estate portfolios in 2017.”

The preference for liquidity is expected to keep highly sought-after properties in gateway markets popular, but CBRE highlights secondary markets such as Dallas/Ft. Worth and Atlanta as likely to attract a greater portion of foreign capital, as investors become more comfortable investing outside of premium core product.

Financing only obstacle as US commercial property recovers

17th May 2016

US commercial property continues to show strong signs of improvement, buoyed by the economy and increasing employment figures. Now, only financing remaining a potential obstacle on the road to recovery.

Realtors specializing in commercial real estate expressed confidence in the market, but concern over the availability of commercial financing, during a recent forum at the 2016 REALTORS Legislative Meetings & Trade Expo.

Clients of Realtors who practice commercial real estate traditionally receive financing from smaller local or regional banks, many of which have slowed their lending as a result of the new financial regulations. When the audience was polled about their major concerns for 2016, lending was the number one issue by a wide margin.

“The big guys have access to big money, while those specializing in smaller transactions do not have access to those sources. The largest banks can handle the compliance and higher capital requirements, but the smaller banks have less resources to meet these new regulations,” said NAR Chief Economist Lawrence Yun.

Yun called for a relaxing of regulation on small financial institutions.

“Smaller sized banks do not cause systemic risk; if a small bank goes under, it will not affect the entire market. They, and the businesses that depend on them, need regulatory relief,” he commented.

Nonetheless, the smaller commercial market is also enjoying steady recovery, with market fundamentals strengthening across most sectors. Industrial and apartment sectors are seeing vacancy rates below pre-recession numbers, and the office sector is almost at its pre-recession level. However, recovery in the retail sector has remained “sluggish”, with vacancies still high and rents slow to rise.

“People are no longer walking around the city to buy things, they are going online and having their purchases delivered,” added Yun. “This has kept the retail sector from fully recovering, leaving it as the only ‘soft’ sector in commercial real estate.”

Employment boosts occupancy rates in US

30th November 2015

Photo:   Michael Tapp

Improving employment opportunities are boosting occupancy rates in the US, according to the National Association of Realtors.

National office vacancy rates are forecast by Realtors to decrease 0.8 per cent to 14.8 per cent over the coming year, thanks to continued job creation. The vacancy rate for industrial space is expected to decline 1.4 per cent to 9.7 percent, and retail availability to decrease 1.3 per cent to 11.3 per cent. With new apartment construction projects coming through the pipeline in several markets, only multifamily vacancies are forecast to increase over the next year, from 6.1 per cent to 7.3 per cent.

Lawrence Yun, NAR chief economist, says the outlook for the commercial real estate sector continues to look bright, despite multiple headwinds: “Temporary turbulence in the financial markets, a stronger US dollar hurting exports and economic weakness overseas chipped away at third quarter growth and led to some deceleration in the pace of commercial investments. The good news is that these deterrents are slowly residing, which should ultimately reawaken the growing appetite for commercial space heading into next year.”

Regionally, several states in the South and West have outperformed the rest of the country in job growth over the past year. Led by strong demand for apartments from faster household formation and rent growth, metro areas in those states are expected to see elevated levels of new construction, which will lead to a slight uptick in vacancy rates.

Even though rising occupancy and rents will continue, meanwhile, property prices are forecast to decline slightly in 2016 as the Federal Reserve starts to raise interest rates. However, investments are still expected to continue on an upward trend.

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