Investment Outlook Stays Upbeat, Despite Unknowns: NAI Global Panel

Although major policy changes could change the prospects for some asset categories, the picture remains largely positive, experts say.
NAI Global President Jay Olshonsky served as the moderator for the NAI Global Economic Briefing Webcast on March 2.
NAI Global President Jay Olshonsky served as the moderator for the NAI Global Economic Briefing Webcast on March 2.

Despite the  current uncertainty about policy decisions that may affect the U.S. economy, commercial real estate remains an attractive asset class for investment, noted two guest speakers on the recent quarterly NAI Global Economic Briefing Webcast.

Moody’s Analytics Managing Director Steve Cochran and Integrity Data Solutions LLC Founder & CEO Maria Sicola, said this positive outlook is largely the result of solid U.S. economic fundamentals that they expect to continue strengthening—and possibly perform better than expected—under the new administration.

Cochran pointed to the relatively consistent 2 percent GDP growth rate, sub-5 percent unemployment and strong labor market.

However, he noted that this optimistic forecast is “more policy-dependent than (he’s) ever seen before” because of the potentially significant changes that could come about.

Policies that support the positive forecast include the new administration’s proposed fiscal stimulus, which Cochran expects will start to have an impact in 2018, generating stronger-than-expected GDP growth, as well as wage and employment growth.

He noted, however, that there will likely be a “payback” in 2019 and 2020, as employment growth slows, and rising wages bring higher inflation and interest rates. The federal funds rate could rise closer to 4 percent than 3 percent through 2019, he said, adding that “2020 is probably where the odds are the greatest for running into the next recession.”

Restrictions on immigration also pose a significant risk to the forecast, Cochran noted. The U.S. population has been growing more slowly during the past 10 years, and under current policies, immigration would account for about half of future increases during the next several decades. However, stricter policies could result in near-stagnant population growth by 2035-2045.

The Northeast would be most affected by tighter immigration rules, as the region already has the slowest population growth in the U.S., Cochran note. The West and Southwest would enjoy the biggest increases.

Real Estate Remains Attractive

Despite this uncertainty, the real estate industry still has some years of growth ahead, Sicola said, a sentiment shared by many industry executives. She cited a recent Real Capital Markets investor sentiment survey that said 42 percent of respondents feel it’s time to buy, with 27 percent feeling it’s time to buy but trending toward hold.

The industrial sector, in particular, will continue to perform well. Demand for logistics and warehousing has been high, with construction at record highs and vacancy rates at historic lows, she said. Booming construction could lead to oversupply in 2019 to 2020.

Changes to trade policy, such as the proposed border adjustment tax, could be detrimental to this sector in particular, especially for markets that are along the borders and coasts, she noted.

The office sector, on the other hand, will face a slowdown, with lower rent growth and higher occupancy rates through 2018.  Some niches offer better-than-average investment potential, such as suburban office product near transportation hubs.

While demand in the apartment sector has slowed after years of high absorption, with some urban markets oversupplied by Class A product, secondary markets still offer opportunities for investment, particularly in Class B and C assets, she noted.

Overall, “it’s clear that there is still significant appetite for investment in real estate,” Sicola said, adding that suburban office, medical office, data centers and logistics could all become more significant in the next few years.