Transwestern: Change in the Air

The U.S. could see faster economic growth this year than it has experienced in several years–which would affect different commercial real estate sectors differently–said Transwestern, Houston.

Transwestern’s Insights report cited rising interest rates and inflationary pressure as well as rebounding oil prices and a strengthening dollar as potential indicators of growth ahead.

“Low unemployment will increase demand for talent and boost wages, driving up the need for high-quality, attractive [office] space at convenient locations,” Transwestern said. “Technology will continue to transform workplaces, as work-anywhere, work-anytime solutions spark further demand for flexible space, 24/7 access, enhanced connectivity and security.”

Transwestern said some office occupiers will “reassess” workplace densification measures that may have gone too far, but increasing efficiency will continue to drive decisions that improve the bottom line.

Many multifamily deliveries originally expected in 2016 have slipped into 2017, in part due to a labor shortage among construction trades, Transwestern said, noting that developers and the capital markets will closely monitor absorption as this “significant number” of apartment deliveries hits the market thie year.

In addition, apartment construction lending has contracted and loan-to-cost ratios have drifted lower while spreads are increasing, Transwestern said. This will affect the number of building permits issued this year.

A new trend, micro-unit multifamily developments, could expand into secondary markets, Transwestern predicted. In more and more cities, the migration of residential renters into urban neighborhoods has accelerated rent growth and pushed even entry-level lease rates for downtown housing beyond the means of many recent college graduates, service workers and young professionals. High-efficiency studio units achieve the high rent per square foot that developers and investors require to meet their return on investment threshold while offering an affordable apartment with amenities and finishes otherwise found only in Class A market-rate properties, the report said.

“Because young renters show a preference for walking, biking, public transit and ridesharing over driving, micro-unit developments typically have reduced parking requirements, helping to control construction costs,” the report noted.

More manufacturing could shift back to the U.S. as the economy continues to improve, Transwestern said. “Relentless” demand for industrial space in many markets–especially institutional-quality assets–will keep availability low and reinforce the sector’s position as an attractive asset class for investors, the report said.

Supply-chain optimization will spur demand for distribution centers of all sizes, from 25,000-square-foot spaces to those measuring 1 million square feet or more, Transwestern predicted. “Restrictive access to debt will hamper land acquisition for speculative development, while banking regulatory challenges create opportunities for non-traditional lenders to fund industrial projects,” the report said. “Look for tightened lending to trigger a pricing correction by the fourth quarter.”

Retail center prices cooled in the fourth quarter as investors adjusted underwriting to reflect slight interest rate increases, Transwestern noted. “Expect transaction volume to slow from the past two years’ record-breaking pace but remain brisk, fueled by abundant buyer interest,” the report said. 

Successful retailers will look for ways to incorporate physical stores in multichannel platforms that include online sales, the report said: “Look for more online-only sellers to debut brick-and-mortar stores as the industry evolves to improve the customer experience. Grocers will compete for prime locations, food halls will proliferate and office building landlords will reposition–and often expand–their retail components.”