CBRE Expects ‘Steady Start’ to the Year

The 2017 outlook for U.S. commercial real estate capital markets remains favorable, said CBRE, Los Angeles.

“Acquisitions activity should remain high in 2017, if slightly lower than the previous year,” said CBRE Capital Markets Global President Chris Ludeman. “Global capital flows into the U.S. are expected to remain very strong, with China again the leading source.” 

Ludeman noted that as the asset appreciation rate slows, investment returns are likely to decline, “but nevertheless still achieve favorable levels,” he said.

Although bond yields remain low relative to their historical levels, a comparatively strong economy and low returns in competitive investments has kept the volume of foreign capital chasing U.S. real estate “robust,” CBRE said. Foreign investors acquired more than $60 billion in U.S. commercial real estate last year.

President-Elect Trump’s “expansionary” fiscal policy place have raised expectations for economic growth and inflation, both of which make commercial real estate investment more attractive, CBRE said. As a result, overseas institutional investors and sovereign wealth funds will likely increasingly target the U.S. 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 secondary markets such as Dallas/Ft. Worth and Atlanta are poised to attract a greater portion of foreign capital as investors become more comfortable investing outside of premium core product,” CBRE said.

Debt represents nearly two-thirds of commercial real estate investment and debt should remain widely available in 2017, CBRE said. But two challenges to mortgage capital availability remain: commercial mortgage-backed securities and bank lending, especially for construction loans.

Early 2016 bond market volatility and a changing regulatory environment led to substantially lower CMBS issuance in 2016–just over $75 billion last year compared to 2015’s $101 billion, said CBRE Global President of Debt and Structured Finance Brian Stoffers, CMB. 

“The CMBS industry will likely adapt to new risk-retention rules that were enacted in late 2016; however, the new rules will add costs to the conduit lenders, and it is not yet clear how those costs will be absorbed,” Stoffers said.

Banks also face regulatory pressure that may reduce their financing activity for both existing assets and development projects this year, Stoffers noted. “The latter is particularly problematic since banks are the primary source of construction capital in the U.S.,” he said. “For construction financing, the industry is likely to see continued tightening of credit standards and higher loan costs at a minimum; a notable decrease in the actual volume of construction loans is quite likely as well.”

But Stoffers said that other mortgage capital sources–particularly life insurance companies, Fannie Mae and Freddie Mac–will remain “very active” this year, with lending at or exceeding 2016 volumes.