RCLCO: Market Approaching ‘Late Stable’ Stage

Commercial real estate is in or nearing a “late stable” stage for most property types in most geographies, reported consulting firm RCLCO, Los Angeles.

“Our base case scenario for real estate performance assumes these ‘late stable’ conditions extend beyond 2017, though the probability that ‘left tail’ events derail this trajectory continues to be high,” RCLCO Director of Institutional Advisory Services Taylor Mammen and Senior Associate Taylor Kuntz said in the firm’s Real Estate Chartbook.

Several property types in some markets, including Washington, D.C. and Houston appear to have surpassed peak conditions, “though we have no reason to expect a sharp downturn,” the report said.

Mammen and Kuntz noted property operating fundamentals are positive, but moderating. “Economic and demographic drivers are still increasing demand, though construction activity is catching up as inventory nears equilibrium,” the report said.

Mammen and Kuntz said so far, Trump Administration policies and actions have shown little effect on real estate capital markets. “Conditions seem largely unchanged from the fourth quarter,” the report said.

Transaction volume fell in the first quarter but remained above the long-term average. “We suspect this is a hangover from the fourth quarter, when investors were paralyzed by indecision from the U.S. presidential election and did not focus on underwriting,” RCLCO said. “The amount of capital seeking investments continues to exceed available opportunities, but moderating operating fundamentals appear to be neutralizing pressure on pricing.”

On the debt side, demand for debt probably exceeds what lenders would like to supply, particularly for non-core investments, the report said. In addition, lenders’ cost of capital will likely increase this year along with the Federal Funds rate–many economists expect the Federal Reserve will increase interest rates this week and possibly again later this year.

“On balance we anticipate moderating though still generally positive operating and investment performance for 2017 resulting largely from healthy property market fundamentals,” the report said. “Current capital market dynamics are maintaining sufficient levels of liquidity and holding pricing steady–but require close monitoring.”