How long will this strong CRE investment cycle last? That’s what’s on the minds of many CRE executives surveyed recently by DLA Piper. Among the key findings from the survey are:
- Cautious optimism: We all know that CRE is cyclical. It’s been a good seven years of growth. About 62 percent of the executives surveyed are bullish about investment during the next year — down from 89 percent in the 2014 survey.
- Non-gateway markets are king: As pricing in core markets continue to push out investors, cities such as Austin, Seattle, Denver and Raleigh are becoming the hot spots. This is particularly true among domestic investors, according to the report.
- Record pricing, but reduced transaction volume: There was just $25.1 B in commercial property sales in February of 2016, down almost 50 percent from the previous year.
- Foreign investment will continue: The U.S. is considered a safe haven and will continue to draw foreign investors into non-gateway markets and core markets (which are considered an even safer bet).
Among the top non-gateway cities to watch, according to the survey respondents, are:
See the law firm’s “State of the Market” survey for more.
Multifamily growth in Houston was downgraded in a recent report by Yardi.
After adjusting their estimates for the second quarter of 2016, commercial real estate experts are anticipating a period of slow, but steady, multifamily growth over the next three months.
Rents on multifamily properties reached an all-time high of $1,181 last month, rising 0.5 percent over February, according to the Yardi Matrix Monthly report. But the report also predicts that rent appreciation will taper off soon. National rents are already showing the signs, decreasing by 20 basis points from February 2015.
Of the 30 major metropolitan markets for which Yardi creates forecasts, 13 were downgraded from the end of first quarter, 11 were increased and six remain the same. The top markets and their expected rent growth included:
- Portland (14.1 percent)
- San Francisco (11 percent)
- Sacramento (10.6 percent)
- Denver (10.3 percent)
Mid-Atlantic markets Richmond, Va.; Washington, D.C.; and Baltimore were the only markets to fall below their long-term average for growth. This is likely due to their weakness in the high-end lifestyle rent sector.
See this Commercial Property Executive story for more.
According to The Real Deal, Manhattan land sales slowed during the first part of 2016. Data and analytics firm Real Capital Analytics (RCA) shows that there were only $90 million worth of development deals in January and zero on record in February.
What’s going on? Looks like three main factors are at play–stringent financing, lackluster luxury condo sales and the termination of the 421a tax abatement program. Another key factor is that buyers are not willing to pay the high prices sellers are touting. This is having a ripply effect on development sites. Click here for more.
When it comes to shopping, U.S. consumers aren’t being swayed by snow, nor rain, nor … well, you get the idea.
The month of January brought bad weather for much of the country. But that didn’t stop consumers from heading to brick-and-mortar stores or online retailers in droves. The fact that overall retail sales grew in January is remarkable considering the volatility in global markets and overseas economies. The rise in retail sales is in line with other indicators of growing economic strength.
Still, it’s a small sample size, right? Well, last month actually stands as part of a greater trend. Total retail sales jumped 3.4 percent over the 12 months that ended Jan. 31, according to research by Marcus & Millichap.
There are two factors most responsible for the growth:
- The price of gas is low enough that consumers find themselves with more money to spend.
- Consumers have proven themselves willing to spend that money.
Spending in categories like food and drink (as well as more frivolous pursuits) is up across the board over the last 12 months. Further evidence of consumer confidence comes in the form of a rise in sales on larger, long-lasting items. Building materials and furniture sales rose over the past 12 months. Marcus & Millichap projects U.S. retail vacancy to drop 30 basis points to 5.9 percent in 2016.
It appears consumers are taking advantage of stable employment outlook and loosening up a bit. That’s great news for retail sales.
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.