RICS Brings Good News to CRE Investors

RICS’s U.S. Commercial Property Monitor for Q1-2015 paints a rosy picture of the CRE market's position in today's economy.
Sam Rubinsohn

Simon Rubinsohn, RICS

RICS’s U.S. Commercial Property Monitor for Q1-2015 revealed that despite slower economic growth, the U.S. commercial real estate market looks strong, with forecasts of average capital value growth of 5 percent a year between now and 2018.

The RICS survey said that demand for all types of property will rise strongly amid expectations that the economy will rebound solidly in coming quarters, coming off a 3.7 percent last quarter of 2014.

“The chief takeaway is the market is continuing to strengthen, shrugging off the most recent macro news, because fundamentally, the economy is recovering and there’s not enough good quality stock out there to accommodate the expanding economy,” Simon Rubinsohn, RICS’s chief economist, told Commercial Property Executive. “The takeaway therefore is about the rebound in the economy underpinning a stronger market at a time when cheap money is continuing to provide significant incentive for investors to seek assets yielding the returns you can get on commercial property.”

The report showed occupier demand increased solidly across all sectors and outpaced a very modest growth in supply, yet respondents continued to report new developments starting up in all sectors. This, Rubinsohn said, means that rental demand is expected to outstrip supply and at an increasing rate in the near term, the coming year and the next three years.

“Although the first quarter GBD data was a bit weak, one has to look through the sort of headline GPD numbers. What is quite clear about the U.S. economy is that it is generating jobs,” Rubinsohn added. “People may have issues with some of the jobs created, but they’re jobs and people who are employed have to be placed in different locations and that is underpinning the occupier market. There is a demand for space.”

Governance finance has been a bit restrictive post the credit crunch and has just kicked into gear in a way that responds to market need. Supply has lagged behind the upsurge in demand so you have an imbalance, which is contributing to the strength of the occupier market.

This view is in part founded on the belief that the “Goldilocks” economy will result in the Federal Reserve only moving very slowly on interest rates. However, underlying the appetite from investors to raise exposure to the sector is a firm occupier market with rents moving upwards as tenant demand continues to outstrip available supply.

The report shows core cities such as New York, Chicago, Boston, L.A., San Francisco and Washington remain high on real estate investors’ lists but since pricing is approaching record levels in these areas and cap rates remain compressed, many investors are going to the secondary cities, such as Dallas, Denver, Houston, Charlotte and Philadelphia.

When it comes to New York, however, Rubinsohn said the city is in a class by itself. In fact, nearly two-thirds of respondents of the survey from New York view their own market as expensive, versus less than half in other parts of the country.