Avison Young: CRE Cycle Could Reach ‘Extra Innings’

Some analysts have said commercial real estate is showing signs of being late in the game. But Avison Young Chair and CEO Mark Rose said the game could go into extra innings.

“The widely held opinion is that real estate is in the seventh inning,” Rose said. “We disagree. We see something very different. We might be in the seventh or eighth inning from a pricing perspective, but given the market forces and attributes that currently exist, we could be in the seventh inning of a very long extra-innings game for our industry.” 

Rose said real estate now represents a legitimate investment alternative and it currently produces higher yields than stocks and bonds. 

Rose said he has seen pundits take both sides of the interest rate debate, from low rates indefinitely to a return to historical levels. But he noted that virtually all developed countries are piling on additional debt, meaning no government wants to raise rates. “Economists disagree about how best to proceed, but a majority of business executives understand that we need to normalize rates one day–and sooner rather than later,” he said. He noted that it would be hard to conceive a climate with less consensus.

Avison Young U.S. Operations President Earl Webb said U.S. real estate markets showed strength in most fundamentals throughout 2016. “The year was marked by continued improvement resulting in numerous markets breaking decades-long pricing and occupancy records,” he said. “The U.S. provided investors with solid rates of risk-adjusted returns, the supply of space kept pace with steadily increasing demand in nearly all asset classes and the influx of foreign capital continued to amplify pricing pressure for the most desired gateway assets.” 

Webb noted that “burgeoning” demand for online shopping led to “immense opportunities in industrial, distribution and warehouse assets” as supply chains become increasingly complex and strive for efficiency at the same time it disrupted traditional brick-and-mortar retail assets. 

As a new president takes the oath of office today, Webb said that an increase in federal government spending–and a breakup of Capitol Hill gridlock–should have a positive effect on economic activity and real estate fundamentals.

“Given the many variables of the current climate, just like the 2016 World Series finale, this cycle may be going into overtime,” Rose said.