Report Says Crosscurrents Won’t Bring CRE Down

Situs RERC, Deloitte and NAR's latest report discusses how the CRE industry will fare in 2016 amid mixed messages for the U.S. economy.
Ken Riggs,

Ken Riggs, President, Situs RERC

It’s good news for commercial real estate, according to a report released by Situs Real Estate Research Corp., Deloitte and the National Association of Realtors (NAR). As the team concludes in their newly released report, Expectations & Market Realities in Real Estate 2016—Navigating through the Crosscurrents, the real estate industry will continue to do well in 2016.

Economic crosscurrents were in play as 2015 came to a close and they persisted as we entered 2016. Employment growth continued on the upswing but stock market indices went on the decline; retail sales experienced no growth, despite the fact that consumers had more money to spend; and while central banks were pursuing policies to stimulate growth, the Federal Reserve announced it would raise the federal funds rate following a nearly seven-year period of keeping the rate hovering around zero. As we entered 2015, stock market issues persisted and the dollar continued to rise.

The crosscurrents, however, won’t hold back the real estate market. “2016 will be an interesting period for investors,” per the report.

Vacancies across the commercial real estate sectors will also continue to drop, although the decline will be minor—except in the apartment sector, where a mass of new deliveries could result in a minor increase. Investment sales, however, is a different story.

“We expect sales velocity to continue to level off in 2016, although there could be certain secondary and tertiary markets where activity will continue to expand awhile longer. But values and prices are rational for now, and while we do expect a correction in the CRE market, it appears to be manageable,” Ken Riggs, president of Situs RERC, told CPE.

Also speaking on the anticipated correction in asset values, George Ratiu, director of quantitative & commercial research with NAR, told CPE, “An important nuance of this moderation is that it will not impact all markets uniformly. Whereas top-tier markets (New York, San Francisco, Washington, D.C., Chicago and Los Angeles) witnessed the early post-recession rebound in 2010 and have had five years of growth, most secondary and tertiary markets only moved into recovery mode in 2013. Consequently, these smaller markets have a much longer expected upward trend.”

Overall, the outlook is good. Given that the commercial real estate market has not been overbuilt, fundamentals are not expected to degrade.