Despite some forecasts claiming the bubble would burst, 2016 proved to be another strong year for U.S. commercial real estate markets. Despite sensing a bit of a slowdown in several key sectors, we at CohnReznick have reason for continued optimism in 2017.
President Trump’s vow to change regulations and tax structures would certainly impact commercial real estate. And while we should anticipate both uncertainty and volatility this year, new growth opportunities should also be on the horizon.
Here are some of the key trends and observations shaping commercial real estate in 2017.
1. Confidence Will Drive Strategic Planning
Property values are approaching 2008 levels. But this time it’s not a false bubble. The market is not overleveraged and the fundamentals are stronger. A feeling of renewed confidence is driving how investors are approaching their strategic planning for 2017. The anticipated lifting of regulatory barriers and the lowering of tax rates should trigger commercial real estate growth in sectors ranging from hospitality to industrial. Interest rates will likely rise, but the industry as a whole seems well-positioned to absorb any adverse impact.
2. The Evolution of REITs
Various REITs have begun reshaping to be more laser focused on a specific geography or segment in the market. While there is some hesitation with development activities, we’re seeing publicly-traded REITs partner with best-in-class developers—who are taking a substantial amount of the development risk—and these REITs are getting in early, and at a lower price point.
We anticipate growing activity among non-traded REITs, the crowdfunded or so-called e-REITs, which are structuring lower fees, building in liquidity mechanisms, and attracting a new class of non-accredited
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3. Multifaceted Multifamily
While demand for multifamily housing has showed signs of slowing in 2017, there will still be opportunities for developers in many markets. These opportunities will be driven by multiple demographic groups, particularly the large millennial and boomer generations, and the increasing need for both student and senior housing. The challenge for developers will be in addressing the increasingly sophisticated expectations of this residential market sector.
4. The Retail–Logistics Link
Advanced warehouse and distribution facilities will have expanding commercial real estate needs nationwide, addressing the growing logistical demands of a retail economy shifting to e-commerce. But as developers and investors look to smooth the “last mile” in the delivery chain, they likely will be turning their attention to building and strategically placing micro-distribution centers. These may find homes in repurposed big-box store spaces.
5. Urban Density Dynamics
We expect to see urban densification continue to trend upward in 2017, especially in the development of high-density and mixed-use centers such as Oceanwide Plaza in Los Angeles. These centers offer luxurious living, retail, work, and entertainment spaces that also come with parks and other common areas. Suburban communities with good
mass-transit connections will try to mirror this urban rebirth, offering a live–work–play mix of residences, retail, and lifestyle amenities on a walkable scale.
“We expect to see urban densification continue to trend upward in 2017, especially in the development of high- density and mixed-use centers such as Oceanwide Plaza in Los Angeles.”
6. Global Volatility and Foreign Investors
Historically, the U.S. commercial real estate market has been seen as a safe harbor in volatile times, and Foreign Investment in Real Property Tax Act (FIRPTA) reform has opened new sources of foreign investment. In 2017, we see foreign investors looking beyond Class A properties in top-tier cities to find value in rising urban areas nationwide. There may be a perception by some that U.S. prices have gotten too high and Beijing is already planning to tighten rules on investment capital leaving the country.
7. Headwinds, Tailwinds … and Crosswinds
From China’s slowing economy to rising interest rates, commercial real estate will face headwinds during 2017. But there are tailwinds, too – propelling surging sectors from student housing to logistics spaces – with millennials and baby boomers fueling new development in rising urban areas.
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Commercial real estate could be buffeted by hard-to-gauge crosswinds, too, as the dust continues to settle from both Brexit and the U.S. presidential election. Uncertainty also swirls around the status of government regulations, critical tax policies, and other key issues for the new administration and the new Congress.
With additional issues such as looming debt maturities, and opportunities for recapitalizations and distressed purchases as a result of these maturities, 2017 promises to be a news-making year in commercial real estate.