JLL Report Sees Solid Year Ahead for CRE

Despite recent market volatility, JLL's latest U.S. economic outlook predicts good market fundamentals will allow commercial real estate to hold strong in the coming year.
Ben Breslau

Benjamin Breslau, Managing Director, JLL

Through all the volatility, the U.S. economy is poised for a solid 2016, according to JLL’s recently released Q1 2016 U.S. Economic Outlook. The same holds true for the commercial real estate market.

“We may be entering the latter stages of the cycle, and with various economic and geopolitical risks like the slowdown in China and the risk of a BREXIT we should expect more volatility,” JLL Managing Director Benjamin Breslau told Commercial Property Executive. “However, we still believe 2016 will be another solid year for commercial real estate in the United States. In fact, 2017 should be OK, too. An analogy that I think works well is baseball: We are in what I would say is maybe the seventh-inning stretch of this cycle, but there is game left to be played and always the potential for this to go into extra innings.”

According to the report, economic fundamentals are the biggest driver in forecasting a solid year ahead for CRE.

“In the U.S., job growth has remained positive for an impressively long time, and we expect that to continue resulting in further tightening of the labor markets and wages finally kicking in to modest growth mode,” Breslau said. “Also, the supply side of the real estate equation remains relatively in check, despite some pockets of healthy construction in multifamily, industrial hubs and some select office markets. Despite the fragile financial markets, this is a pretty good fundamentals mix for real estate.”

When it comes to the leasing market, the first quarter’s volatility and fears of a recession in 2016 created a sort of “wait-and-see” mentality among tenants, and the report cites dramatic pullbacks in specific markets like Houston due to oil price declines. There are some cracks showing in tech as well, which has been in high gear for several years. However, there’s still solid demand overall, and Breslau said leasing activity should remain healthy, maybe even accelerate a bit as the year progresses from the slow start, particularly in the office, multifamily and industrial sectors.

Millennials have been a catalyst for growth and change in this cycle, driving demand for urban, amenitized, transit-oriented, mixed-use “live, work, play” type environments.

“They have fueled the demand in new edgy neighborhoods, micro apartments and creative office space,” Breslau said. “Millennials demand a more flexible, mobile and customized experience rather than traditional, generic and structured. Employers across industries are chasing these young knowledge workers as opposed to the other way around as has happened in the past, which has big implications on real estate.”

Office vacancy is near an eight-year low right now, and JLL expects continued rent growth in 2016 overall.

“Demand remains strong in central business districts and the price gap between urbanized centers and others has widened significantly. However, if we’re looking at where the most growth lies, it is probably in the suburbs,” Breslau said. “Suburban office supply continues to attract tenants, especially as the suburbs become more transit-oriented and fill in needed amenities. With the leading edge of Millennials in their mid-30s and entering a different phase of family life, one of the biggest opportunities of the next decade could be urbanizing key hubs in the suburbs.”