If you pay any attention to the global economy, you know January wasn’t a ton of fun.
But still, it was just one month. Can it really say anything about the future of the commercial real estate market in the United States? Bisnow.com got the opinions of six top economists, and as you might expect, those opinions vary.
Stockbrokers struggled through the worst January since 2009 this year.
Some cautioned against paying too much attention to the market (and the resulting bluster from politicians and cable news). Others predicted pain in the short-term but economic success in the long-term. The general feeling seemed to be: “Be patient, we’ve seen this before.”
Here are the highlights:
- Robert Bach, director of research – Americas for Newmark Grubb Knight Frank: Bach confessed some angst, but told Bisnow, “If the economy muddles through, so will commercial real estate.”
- Ray Torto, Harvard lecturer and former global chief economist at CBRE: Torto predicts a positive long-term outlook for CRE and pins the blame for short-term struggles on factors like low oil prices and China’s drooping stock market. “Hope is not a tactic to pursue right now,” he told Bisnow. “Implement careful planning and executions.”
- George Ratiu, director of quantitative and commercial research for the National Association of Realtors: Have no fear; the CRE market has seen this before (and recently, too). “Looking at the post-recession recovery, we’ve had other periods of volatility … which had minimal impact on CRE performance,” Ratiu told Bisnow.
- Jack G. Kern, director – research and publications for Yardi: Kern says CRE is naturally affected by global stock markets, but doesn’t see an issue as long as proper precautions are taken. “Properties bought based on solid underwriting and reasonable fundamentals will continue to do fine,” he told Bisnow. “Those acquired without recognizing the risks properly will be back on the market soon enough.”
- Victor Calanog, chief economist at Reis: Calanog isn’t expecting 2016 to mimic last year. “Property fundamentals rocked 2015, but we expect 2016 to be a bit rockier,” he told Bisnow.
With January (thankfully) in the rearview mirror, this CRE topic will be worth monitoring as we wait to see if the global economy improves.
The year 2015 is one that multifamily investors will remember fondly.
Higher-than-expected demand helped absorb most of the rental supply, keeping vacancy rates low. Meanwhile, rent continued to rise in many markets. Experts are split as to what investors should expect from multifamily in 2016. But Freddie Mac struck a cautiously optimistic tone in its newest Multifamily Outlook 2016 report.
Freddie Mac based its outlook on continued economic growth and the following key drivers:
- Strength in the job market
- Reduced affordability of owning a home
So, more people have jobs, and fewer people can afford to own homes. That makes renting an attractive option, especially in metropolitan markets.
Freddie Mac is cautiously optimistic about the multifamily market.
Freddie Mac does expect growth rates to moderate in 2016, but not as much as the more dire projections indicate. Relatively low vacancy rates in most markets will contribute to rent growth in the year ahead.
You might ask why Freddie Mac is being cautious. Well, it admits that turmoil in the financial markets is a cause for some concern. Still, it’s not nearly enough for Freddie Mac to be scared of the multifamily market anytime soon.
Read more about Freddie Mac’s multifamily outlook from Multi-Housing News.
San Diego is an 18-hour city that is gaining popularity.
The Urban Land Institute has released its annual Emerging Trends in Real Estate report, painting a picture of a real estate market that might not be down but is certainly changing.
GlobeSt.com has the full report, but here’s a quick snapshot of some of the emerging trends highlighted by ULI:
- 18-hour cities: The rise in interest among markets like Austin, Denver, and San Diego was detected in last year’s report, and ULI sees that movement outside of 24-hour gateway cities continuing.
- Moving to the suburbs: Within gateway markets, rising prices are leading investors to consider suburban opportunities. Millenials may favor downtown areas and urban environments now, but it’s only a matter of time until marriage and family push them to the suburbs. Suburbs that also offer the benefits of an urban setting should do well.
- Office strength: Look no further than the office sector for signs of continued economic recovery. Office jobs have accounted for more than one third of the employment gain, bringing vacancy down and pushing rents up. That’s a trend that should hold in 2016.
- Moving forward: Home ownership rates dropped drastically during the global financial crises, settling in at 63.4 percent in the second quarter of 2015. ULI expects the future housing to be shaped by a necessity to improve housing options for everyone.
Keep an eye out for more on ULI’s findings in the weeks ahead.
The multifamily market of Washington, D.C., is poised to do well in 2016. (Photo by Ad Meskens/Wikimedia Commons)
Experts from around the country hinted at their expectations for the year ahead in a recent wide-ranging GlobeSt.com feature on multifamily markets.
Much of the conversation centered on which multifamily markets will do well in terms of transactional activity in 2016. Multifamily performance has been strong in most markets during the economic recovery. But there are a few places to watch as investors continue to seek out rent growth and low vacancy rates.
Multifamily investment sales set records in 2015.
- Multifamily investment sales set records in 2015.
Start with the old standbys New York, Washington, D.C., Miami and San Francisco. Bryan Sullivan, VP of acquisitions and investment at the Habitat Co., said those primary markets are still pulling in institutional and foreign capital. That’s especially good to see in the case of Washington, D.C., which underperformed in the first half of 2015 before seeing a drop in vacancy rates and some mild rent increases. Its multifamily market is on the mend.
Investors will also look to changing markets like Denver, Chicago, Atlanta, Charlotte and Nashville. What makes them changing markets? An influx of young professionals and companies that has legitimized some overlooked neighborhoods. Sullivan cited the example of Chicago’s West Loop, which has seen its growth start to accelerate.
As per usual, Millennials will be a factor. Gary Goodman, SVP of Acquisitions at Passco Cos., made a point to highlight Southeastern markets like Atlanta, Nashville and Tampa as especially appealing to that demographic. As a result, they are expected to be strong multifamily markets. These are trends we’ll keep an eye on!
New capital is entering the real estate market. Where will it end up?
Money is flowing into the U.S. real estate market, and that trend is expected to continue in 2016. The big question: Where will all that new capital go?
Total acquisition volume for the 12 months ending June 30, 2015, was $497.4 billion (up 24 percent year-over-year), according to the 2016 ULI Emerging Trends Report. That type of growth isn’t likely to be sustainable, but the fact remains that investors will have capital to spend in 2016.
As we try to figure out where that new money could flow, here are a few options:
- Secondary markets: We’ve written about the rise of 18-hour cities before, and this seems to be a likely place for investors to spend capital. Markets like Austin, Denver, San Diego, and San Antonio are “cool,” “hip” and starting to grow.
- Outside the box: Investors may rethink their definition of real estate, or at least expand it. ULI highlighted the expansion of Real Estate Investment Trusts (REITS) to include cell towers and outdoor advertising. The market could grow by offering investors more opportunities to invest in infrastructure.
- Comeback story: Old properties are becoming new again thanks to the popularity of renovation and redevelopment. Consider the number of companies that are re-thinking the design of their office spaces. In some cases, the current demands of millennial workers can make rehabbed industrial space even more desirable than new Class A options.
- Going alternative: Properties that have traditionally been of interest to a small number of investors (medical offices, senior housing, data centers, labs) may find themselves in demand on a larger scale.
Clearly, CRE investors will be looking at their full range of investment options in 2016. The U.S. market offers plenty of choices, and now investors have the capital to match.
Are cities that never sleep being replaced in popularity by cities that know when to take a break? To an extent, according to the 2016 ULI Emerging Trends Report, which indicates some real estate investors are starting to favor 18-hour cities over their 24-hour gateway counterparts.
San Diego is an 18-hour city that is gaining popularity.
Secondary markets are becoming more attractive as global and domestic investors look for new opportunities. These markets, such as Austin, Denver, San Diego, and San Antonio, offer the benefits of large urban areas at a lower cost. Plus, they are often considered “cool,” which makes them unique and creates a quality of life that attracts a good work force.
This builds on a trend highlighted by Emerging Trends in 2014 and is supported by three major points:
- Stronger macroeconomic performance in the U.S. has helped absorption and improved occupancy in most American markets.
- Real estate investors are becoming bold as they find themselves in a better position to take on additional risk.
- More data on secondary markets is available than ever before, giving investors peace of mind when considering investment opportunities.
It’s unclear whether an economic downturn would hurt the investor interest that 18-hour cities have generated. History suggests that these markets are more volatile than gateway cities, but there are positive factors that could make 18-hour cities a viable option for the future:
- Capital markets have been careful about funding new development
- Investors have become smarter, focusing on precise areas or neighborhoods in a market.
Look for 18-hour cities to continue gaining momentum in 2016. Check out the full ULI report here.
What’s Ahead for Hotel Construction?
The new Four Seasons hotel in Fort Lauderdale is slated for completion in 2018
Hotel occupancy, construction and sales are approaching peak levels and 2016 could be the last strong year for this expansion cycle. Recent analysis from Marcus & Millichap and JLL provides these details:
- Room occupancy rates are near an all time high, reaching 65.6 percent by December 2015, says a recent Marcus & Millichap report.
- Room rents are on the rise, increasing 5.2% to $120.99 on average. With more tourists and business travelers occupying rooms, owners and investors are enjoying an average revenue per available room of $80. So, of course, an increase in interest is sparking near-record levels of new construction.
- Hotel sector capital markets also remained strong, with global hotel deal volume rising by 10 percent to nearly $60 billion in 2014, says JLL. Both Wall Street and Main Street are currently lending on hotels and transaction volumes could reach $68 million in 2015. See JLL’s Hotel Investment Outlook Report for more.
Caution for investors
Analysts are also warning investors to think ahead when building new hotels: assets that takes three years to build could open after the demand for hotels starts to drop again. As a result, developers are focusing on select service hotels that are less expensive and faster to build than full-service hotels:
- Courtyard by Marriott
- Holiday Inn
- Hampton Inn
These service hotels are making up a good portion of the 4,038 projects currently under construction, which will bring 507,221 new hotel rooms on the market in 2016. That may seem like a lot, but it’s a far cry from the 5,883 new hotels that came online in 2008. Also, cross-border transactions should account for one-third of deals in 2015, with the U.S., China, Singapore and the Middle East as the biggest capital exporters.