'Cautiously Optimistic' CRE Outlook Warns Cycle End is Near

Michael Tucker mtucker@mba.org

February 07, 2018

After years of growth, the outlook for commercial real estate is ‘cautiously optimistic,' but the cycle's end approaches, reported commercial real estate valuation services firm Integra Realty Resources, Denver.

"Whether or not the economy can maintain forward motion is the definitive question in the year ahead," said Integra Realty Resources Chairman Anthony Graziano.

Integra studied all five major property sectors. It noted results vary significantly by sector, from contracting retail sector transaction volume to solid absorption for offices.

The office sector saw "solid" absorption last year, Integra said, as nearly half of suburban markets are still in expansion, the highest since the financial crisis. "The shift from downtown to suburban properties reflects a realization that central business districts have become fully priced," the report said.

Office transaction slipped 6 percent to $94.5 billion through the first three quarters of 2017, "evidence of greater buyer discipline," the report said.

Driven by e-commerce and global trade, the industrial sector remains a capital magnet, Integra said. "The industrial sector has outperformed all other property types with double-digit total returns, high absorption rates, rising occupancy and rent growth."

More than 8 in 10 industrial markets nationwide remain in expansion mode, the report noted. On average, industrial markets could see market rents increase nearly 2.5 percent this year.

"Retailers continue to be disrupted by e-commerce, shifting demographics and consumer spending habits," Integra said. It noted "aggressive" asset management rather than portfolio growth is the key to success for investors. Retail transactions totaled $46.9 billion through third-quarter 2017, down 19 percent from the year before.

After several surging years, the hotel market is losing momentum, the report said. Fundamentals remain strong enough to forecast stable, but look for slow growth through 2018. Hospitality transaction volume fell 25 percent year-over-year to $31 billion through the third quarter.

The rental apartment sector continues to push forward, the report said, predicting market rents will increase 2.45 percent on average. But transaction volume between fourth-quarter 2016 and third-quarter 2017 fell 9.8 percent to $150.6 billion. Some markets, including Baltimore, Washington, D.C. and Atlanta are seeing oversupply.

Fordham University Real Estate Institute Special Advisor Hugh Kelly noted now is the time for real estate owners and investors to begin thinking about defense strategies. "However, it should be a less severe downside for the commercial real estate industry than the downturn in 2008 thanks to more disciplined buyers," he said.

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