The U.S. property markets and economy withstood a tumultuous 2016, and they're well positioned to do the same in 2017, according to Cushman & Wakefield's global chief economist Kevin J. Thorpe. These charts illustrate Thorpe's case for cautious optimism for commercial property players in 2017.
1. Cushman & Wakefield forecasts a dampening in prices, as a result of less trading activity and of tighter financial market conditions—reflected most obviously in the long-end of the yield curve.
Year-over-year growth in the RCA/Moody’s CPPI All Commercial Property Price Index averaged 14.1% in 2015 and will end 2016 averaging a more reasonable 7.2%.
The rise in interest rates will likely impact pricing before the effects of stronger economic growth drive NOI higher. As a result, values will continue to grow at a decelerating rate in 2017 and 2018, but certain assets in certain markets will see price declines in the near-term.
Eventually the stronger economic growth scenario will strengthen NOI, likely offsetting the discounting impact of higher interest rates, which will likely begin in the second half of 2018, Thorpe says.
2 & 3. Within one week of Donald Trump's election win, the 10-year U.S. Treasury yield surged by almost 50 basis points (bps)—from 1.8% on November 7 to 2.3% on November 16—and as of December 22, 2016, climbed another 30 bps to 2.6%.
This most recent repricing reflects the general consensus among investors that near-term growth, particularly in the latter part of 2017 and for all of 2018, will benefit from the potential changes to policies that were proposed by the President-elect and Republican leaders of Congress during the campaign, Thorpe says.
4. When the Federal Open Market Committee (FOMC) voted to increase the federal funds target rate by 50-75 bps, it was a reaction to the steady improvement and current strength of the U.S. economy.
But FOMC members also revised upwards their projected appropriate path for the target rate. Between its September and December meetings, the FOMC revised the federal funds target rate trajectory upwards—from two increases in 2017 to three.
5 & 6. Job openings remain at a near-record level; that portends favorably for future job creation. Although a tighter labor market will cause job growth to taper off somewhat, Cushman & Wakefield expects the U.S. economy to continue to produce a healthy number of jobs around the 1.5 million mark in 2017 and 2018.
7. In 2016, Cushman & Wakefield forecasts demand to hit 23 MSF before falling further in 2017, to 18 MSF.
Given the pipeline of new construction, the firm estimates that vacancy will start to rise in 2017.
8. After the six-year span from 2010-2015 double-digit returns, Cushman & Wakefield's estimate for 2016 has been revised downwards to 7.8%.
Income returns have softened, but they have also remained steady for the past three quarters, with most of the downward revision coming from slower capital appreciation. The firm's forecast calls for NCREIF returns to average 6.4% in 2017.