Wells Fargo: CRE Momentum Could be Slowing

Commercial real estate fundamentals remain generally solid but might be losing momentum, said Wells Fargo Securities, Charlotte, N.C.

“As 2019 comes to a close, commercial real estate fundamentals appear to be losing a bit of steam,” the Wells Fargo Securities CRE Chartbook said. “Broadly speaking, demand for commercial properties has downshifted and new development looks lethargic relative to recent history. That noted, even with the light dimming a bit, by no means do we think commercial real estate will soon be in the dark. Vacancy rates across every property type remain low, and, while rent increases have cooled off a bit, growth remains positive.”

The U.S. economy also appears relatively healthy, the report noted. “This resiliency is perhaps best reflected in the labor market, which continues to defy expectations and generate sturdy payroll growth, record low unemployment and steadily improving wages–all factors which should bolster demand for CRE in 2020,” it said.

Lower interest rates could also act as a “tailwind” to commercial real estate, Wells Fargo Securities said, noting the Federal Reserve lowered the Federal Funds rate by 75 basis points during 2019. “A lower cost of capital provides the impetus for increased real estate investment and property prices may already be reflecting some newfound investor optimism,” the report said. “After cooling for most of the year, property prices are once again on the upswing.…with the exception of retail, property prices for every property segment have regained momentum.”

This “reacceleration” in property valuations and lower interest rates should ease investor concerns about a dramatic upturn in cap rates, which remain low at 6 percent, the Chartbook said: “Absent a spike in interest rates or a surge in new supply, cap rates should remain low.”

Wells Fargo said banks have noticed some “cooling” domestic economic growth and some uncertainty surrounding President Trump’s trade negotiations. In the Fed’s Senior Loan Officer Opinion Survey, lenders reportedly tightened commercial real estate loan standards during the third quarter. “That noted, loan originations appear to be turning up,” the Chartbook said, noting the Mortgage Bankers Association’s Commercial/Multifamily Mortgage Origination Index was up 15 percent year-to-date in the third quarter, led by healthcare (up 146 percent), industrial (up 43 percent), office (up 21 percent) and multifamily (up 14 percent). Both retail (down 13 percent) and hotel (down 16 percent) saw lower origination figures.