Colliers: CRE Changes Coming

There is a “palpable” sense that change will soon come to commercial real estate markets, reported Colliers International, New York.

“Between President-elect Trump, the aging economic expansion and implications for the property markets, it’s clear that changes lie ahead,” said Colliers International Chief Economist Andrew Nelson. 

The incoming Trump administration will inherit a strong economy poised for continued moderate growth, Nelson said in Colliers’ State of the U.S. Market report. “The planned stimulus package of tax cuts and infrastructure spending should boost growth, but at the expense of greater inflation and interest rates,” he said.

Trump’s broader economic platform should benefit some sectors including energy and finance, but will likely reduce economic growth overall and raise odds of a recession by 2019, Nelson noted.

“In addition to strong property fundamentals, real estate capital markets have benefited from low interest rates, which have reduced acquisition costs and made other investment options less compelling,” Nelson said. “Property transactions remain at historically high levels this year, but pricing continues to reach further into record territory, deterring some buyers.”

Property markets have sectors healed at different paces since the 2008 downturn, Nelson said, noting the multifamily sector was the first to recover, with occupancy reaching its pre-crisis peak by 2012, due to an increase in renting among bankrupt homeowners as well as Millennials. Apartment rents have surged to new records despite swelling supply and occupancy rates remain near historic highs, he said.

“The industrial sector was the next to mend, as muted construction combined with exploding demand drove up occupancy and rents,” Nelson said. “Occupancy reached its peak from the last cycle in 2013 and the sector now maintains its lowest vacancy rate on record.”

But the office-sector recovery has lagged despite strong job growth, and occupancy likely won’t get back to its pre-crisis peak until next year, Nelson noted. “A key reason is a significant overhang of ‘shadow’ space from the recession,” he said. “But more firms are also using contract workers, enabling telecommuting and shifting to layouts requiring less space per worker.”

The retail sector continues to struggle nearly ten years after its prior peak, Nelson said: “While many centers and prime shopping districts thrive, many more fight for survival as e-commerce eats away at their sales and retailers adopt leaner platforms.” 

Nelson noted that putting more dollars in consumers’ pockets through tax cuts and job gains could help the retail sector, “though bricks-and-mortar retailers likely won’t benefit as much as their online competition.”

Looking ahead, Nelson said he expects that economic fundamentals will keep property markets strong in 2017 and going into 2018. “Interest rates are still low and many institutional investors are sitting on record levels of capital targeted to the property sector, all of which should maintain demand for the near term.” 

But investors need to balance the prospects of higher inflation against the rising odds of a recession, Nelson noted. “Risk-averse investors should seek assets offering top-credit tenants under long-term leases that reduce the risk of vacancy losses but do not hedge against inflation,” he said. “Investors seeking yield may tend to favor multi-tenant assets, but may face downside risks when the cycle runs its course.”

Property fundamentals will likely continue to improve “at a moderate pace” for the near term, Nelson said, “But investors should prepare for the inevitable end-of-cycle impacts.”