Analysts: Not The Top of Market Cycle

Several analysts say despite suggestions that the current commercial real estate cycle has peaked, data point to commercial real estate remaining attractive to investors both domestically and abroad, with the U.S. outlook stronger than elsewhere in the world.

NAI Global President Jay Olshonsky noted at the 2016 NAI Global Market Outlook conference that 2015 saw a record $1 trillion in worldwide commercial sales.

“We’re not at the top of the market cycle, and conditions are in place to see that level increase,” said Citigroup Global Head of Real Estate Tom Flexner. “Year-over-year, we’re seeing increased cross-border transactions, with a total of $90 billion of foreign investment in U.S. commercial real estate. Virtually every sovereign wealth fund has increased its target real estate allocation over the past three years by material amounts.”

Flexner said the U.S. commercial real estate market will benefit from investors anxiety about more volatile assets elsewhere in the world.

Indeed, in a recent KPMG survey, nearly three-quarters of respondents said they expect foreign investment in U.S. real estate to increase over the next 12 months, citing low interest rates and U.S. tax incentives as well as favorable risk-versus-return equations for U.S. real estate.

NAI Global Chief Economist Peter Linneman said he feels less bullish about Europe and Asia, citing Euro instability and lack of transparency in China. He said investors need a deeply connected network and flexibility to minimize risk and the current risk-reward balance is not attractive to equity investors.

For the U.S., Linneman pointed to interest rates, oil prices and capital markets as three factors that will most affect commercial real estate. He said a Federal Reserve interest rate increase will stimulate the overall economy, with the housing market benefiting six to 10 months after an increase.

“If we were playing baseball, I’d say that right now with real estate fundamentals we are in the sixth inning of a really slow game,” said NAI Global Chief Economist Peter Linneman.