Commercial Real Estate: A Broader & Brighter Outlook

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The National Association of REALTORS® recently released their Spring 2015 issue of Commercial Connections titled “A Boarder & Brighter Outlook”.  Features include an outlook on the first quarter market survey, new research on cross-border investment, NAR’s commercial legislative and regulatory priorities for the year, and updates from our technology partners Commercial Search and RPR Commercial.

First quarter forecasts are typical in the business world, but relating those predictions to the commercial real estate industry can be a challenge. The National Association of REALTORS solicited insight from George Ratiu, NAR’s Director of Commercial Research, and members across the country for their take on why the outlook for commercial real estate is looking so good from their point of view.

Why is 2015 expected to be a strong year for commercial real estate?

As economic factors continue improving, employment, consumer confidence and spending, business investments commercial real estate fundamentals strengthen. Net absorption is expected to increase across all property types in 2015, as demand for commercial space grows. Completions of new commercial spaces are also growing, but at a slower pace than absorption, leading to declines in availability and rising rents. The only exception to the rule comes in the apartment markets, where strong new supply is already exerting downward pressure on rents. As fundamentals ensure growing positive cash flows, investors continue to find commercial assets attractive. Since the post-recession trough of 2009, investment sales have posted higher volume with each subsequent year and 2014 was no exception. Sales volume in 2014 totaled $433 billion, according to Real Capital Analytics. Prices rose across the board, with apartment and CBD office properties exceeding pre-recession peaks. Moreover, in 2014 commercial lending found new vigor, as sources broadened and capital availability increased. In light of these factors, 2015 should offer continued advances in property prices, sales volume and leasing activity.

What local factors or economic indicators can members in small to mid-sized markets look for in order to help their clients capitalize on improving access to financing?

Tracking basic economic factors such as employment, wages and retail spending at the local level provides important insight into the overall health of markets. Based on NAR’s Commercial Lending Survey, the majority of REALTORS® consider local and regional banks as the main sources of capital. Maintaining relationships with local lending sources is likely to provide timely updates on changes in lending terms and cost of capital. As sources of capital are likely to continue broadening, REALTORS® should remain aware of additional sources of liquidity which have become more active in smaller markets—institutional investors, insurance companies, cross-border capital.

What national or international economic indicators should REALTORS® continue to watch?

In addition to the performance of the national economy, REALTORS® should consider the changes in interest rates a fundamental indicator, as it directly relates to cost of capital. Also, while considering employment trends, personal and household income would be figures worth following, as they translate into both consumer confidence and consumer spending. Internationally, maintaining an awareness of global economic health provides insights into how the U.S. economy and markets perform relative to other major countries. Having an eye on currency exchange trends offers a view on the relative cost of U.S. commercial properties. With cross-border investors accounting for about 10 percent of U.S. commercial transactions, the value of the dollar relative to major currencies can impact this segment of the market.

Commercial fundamentals outlook stated office vacancy rates are expected to drop 0.1%, along with industrial space vacancy rates dropping 0.4%, retail space vacancy rates dropping 0.3%, and multifamily vacancy rates raising 0.1%. GDP is expected to rise 3.1%, and apparent rent to rise 3.7%.

Multifamily housing continues to be the top-preforming sector with the current rental demand exceeding supply, leading to rent growth that is easily outpacing inflation in many metro areas throughout Ohio. Potential speed bumps include; weakness in global economy, economic sluggishness overseers, and strengthening U.S. dollar.

The post above appears in the May edition of ACAR’s monthly column in Properties Magazine.

Read the column

Properties Magazine is a monthly publication dedicated to realty, construction and architecture in Northeast Ohio.

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