The U.S. commercial real estate market has been fairly strong in 2016, but a new three-year economic forecast from the Urban Land Institute predicts a slowdown for the two years with commercial transaction volume expected to decline to $475 billion in 2018.
However, this decline is relative to a market which saw record highs not seen since 2015. In addition, the economy is relatively secure with unemployment levels at less than 5%, low inflation, and historically low lending rates and fixed income rates of return.
New supply in some markets is starting to slow down, with only one market continuing to rise steadily. However, investor flows continue to increase and transaction volume is high.
A close examination of overall trends will help investors position themselves for a successful year in 2017. Below, we’ll take a look at some of the trends that characterized 2016 and are expected to continue on into the next year.
Commercial Real Estate Predictions: Global Urbanization Continues
Global urbanization or the exodus of both baby boomers and millennials to the city in search of jobs and amenities will continue to be a factor in 2017.
According to the U.S. Census Bureau, the urban population in the United States increased by more than 12%, a nearly 3% increase over the overall growth rate of the U.S. during the same period. The trend has even made its way to suburban areas, with developers importing mixed-use development and increased public transportation options creating a city-like atmosphere.
Commercial Real Estate Predictions For Foreign Investment In The U.S.
The U.S. continues to be an attractive market for foreign investors seeking a stable investment source. With higher yields and higher appreciation rates, foreigners invested more than $87 billion dollars in 2015.
Even though slow economic growth in most of Europe and China may slow down investment in those countries, changes to FIRPTA, the Foreign Investment In Real Property Tax Act will increase investment, since the law now treats foreign investors similarly to U.S. citizens.
Commercial Real Estate Predictions: Retail Will Continue To Shift
Retail continues to evolve as online companies like Amazon open “showrooming” spaces and more brick and mortar stores shift more of their merchandise to online models. Industry experts suggest that the new model of providing a showroom for customers to try out products – Apple Style- while providing order fulfillment online will likely herald a new breed of the retail store.
This new model, termed “clicks and bricks” presents growth opportunities for investors with the location and wherewithal to woo high-end online retailers.
In terms of consumer spending, Interest rates are expected to rise, which should encourage consumers to spend more with credit cards. However, this will not likely save certain older retailers like JCPenney and Sears.
Retail availability rates are expected to reach a plateau in 2017, however, retail rental rates are predicted to reach a high for the first time in eight years. Still, forecasts appear to be less optimistic than they were at the beginning of 2016, and retail development is expected to be “subdued” in 2017.
Commercial Real Estate Predictions: Lower Oil Prices
Major oil companies continue to produce oil despite signs that the world is oversupplied.
Oil prices are at a 13 year low at $27 per barrel, which has a strong impact on the commercial real estate economy. Two main sectors will be affected negatively by the drop: states whose are strongly connected to the energy industry, such as Texas and North Dakota, as well as metropolitan areas with a high concentration of firms in the energy sector.
On the upside, the rest of the country will benefit from the energy drop in both direct and indirect ways. Americans as a whole are expected to save between $50-75 billion on gasoline, which will not only encourage more traveling but will also free up income for increased retail purchases. This will spur an increase in retail sales, which should give a small boost in the brick and mortar retail market.
Commercial real estate investors will also directly benefit from lower oil and energy costs which will translate to lower construction and manufacturing costs.
This will increase demand in the industrial and manufacturing spaces as businesses expand to take advantage of lowered costs. Other property markets will also see a short-term increase as well, due to lower operating costs.