Strengthening demand in smaller markets should keep the U.S. commercial real estate sector on stable ground in 2017, according to the latest National Association of Realtors quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, says the U.S. economy is poised for slight improvement in 2017. "Last year was the 11th year in a row of subpar GDP growth, but renewed corporate optimism leading to a focus on investment and a desperately needed boost in residential construction should pave the way for modest expansion this year of around 2.4 percent," he said.
"Steady hiring and low local unemployment levels are finally supporting higher wages and increased spending, which in turn bodes well for sustained demand for all commercial property types."
The apartment sector is expected to preserve its status as a top performer this year simply because ongoing supply and affordability challenges are keeping the nation's low homeownership rate from seeing meaningful improvement, Yun says.
Even with a small uptick in the vacancy rate as new building completions catch up with demand, rents will likely maintain their solid growth in most of the country.
"Especially in the costliest metro areas, higher home prices and mortgage rates are squeezing the budget for many renters looking to buy and inevitably forcing them to sign a lease for at least another year," said Yun.
According to Yun, commercial property prices – especially in Class A assets in larger markets – surpassed pre-crisis levels last year because of aggressive bidding and lower inventory levels.
However, with the Federal Reserve expected to raise short-term rates three times in 2017, a minor price correction may be in store this year as cap rates move higher, he says.
"Similar to the biggest ongoing challenges in the residential market, supply and demand imbalances continue to put upward pressure on commercial property prices as investors search for yield in smaller markets," said Yun. "Realtors are increasingly citing inventory shortages as their top concern as the pace of new projects slows in large cities and middle-tier and smaller markets see a growing appetite for space."
The latest RealtorsCommercial Real Estate Market Survey highlighted the strong underlying demand for commercial properties up to$2.5 million, where most transactions from NAR's commercial members reside.
Compared to a year ago, sales volume rose 12.9 percent, prices increased 5.5 percent and the average transaction value equaled $1.1 million.
Yun says at least in the short term, the possibility of a more tax-friendly business environment combined with the positive benefits of 1031 exchanges could quicken the pace of economic growth and support stronger commercial market fundamentals. The industrial sector – already enjoying increased demand from the soaring popularity of e-commerce – could see a further decline in vacancy rates if increased manufacturing comes to fruition and accelerates the need for more warehouse space.
"The positive direction for commercial real estate this year will be guided by the steadily expanding U.S. economy, which has legs to grow and continues to be one of the top economic performers and safest bets in the world," concluded Yun.