CRE Outlook: Continued Strong Demand

ORLANDO–People in the commercial real estate industry should feel good about 2015–and they can look forward to continued strong demand in 2016, said Real Capital Analytics’ Jim Costello.

Deal volume reached $534 billion in 2015. “That’s a lot of activity and a lot of investor interest in the sector,” Costello said here at the recent Mortgage Bankers Association Commercial Real Estate Finance/Multifamily Housing Convention & Expo. He noted that individual asset sales reached $100 billion in the fourth quarter and said this indicator never exceeded $80 billion even in 2006 and 2007.

“That indicates a broader base of investors driving the market,” Costello said. “It’s not just big portfolio deals driving up totals.”

Costello said he sees a lot of investor hunger for the yield that real estate delivers.

Victor Calanog, Chief Economist and Senior Vice President with Reis, New York, said industry fundamentals look steady.

“It’s hard to point to any sector where you can identify a bubble that could take the economy down with it,” Calanog said. “In retrospect, in 2006 through 2008 the housing market was big enough to do so, but right now I’m hard pressed to say I’m worried about that as an economist.”

Calanog reported hearing some anecdotal reports that developers have grown less bullish. “Most real estate recessions were supply driven,” he said. “Now we’re hearing reports about lenders slowing down the money they are giving to developers.”

The office vacancy rate dropped 40 basis points over the course of 2015 to finish the year at 16.3 percent, the best vacancy rate since 2007 and 2008, Calanog noted. “A whole lot is happening in central business district areas right now as opposed to in the suburbs,” he said. “CBDs are leading the way. But in suburban areas you can be in trouble if you lose your single tenant in your office building. I’m not sure you’ll find a new tenant for it very quickly.”

Rocco Mandala, Executive Vice President with CBRE, Los Angeles, said strong absorption numbers indicate continued demand for apartments. “It seems like the market still continues to absorb it all,” he said. “But costs are rising. And with rents rising, how deep is our market to support that?”

Calanog said analysts have worried for several years that wages stayed roughly flat while rents steadily increased. “So that’s an open question,” he said. “But looking at the product, there’s no question it will lease up quickly.”

Unless the economy slows considerably, multifamily demand should remain healthy, Calanog said. “You have to look back to the 1999 era to find growth as robust as we’ve seen recently, so you’re looking at fairly strong income growth,” he said. “Occupancy growth has retreated a bit, but the sector remains at under four percent vacancy, so I’m not crying a river for multifamily right now.”