RICS Survey Sees Rising Rents, More Investment in Most US Markets in 2017

Despite uncertainty over the recent interest rate increase and the new presidential administration, respondents predict a fairly strong year.
Simon Rubinsohn, RICS
Simon Rubinsohn, chief economist, RICS

Washington—Despite uncertainty over the recent interest rate increase and the new United States presidential administration, respondents to a RICS survey predict a fairly strong year for commercial real estate with several sectors and markets seeing rising rents and more construction.

“I think the main takeaway is that the market indicators still seem fairly resilient,” Simon Rubinsohn, RICS chief economist based in London, told Commercial Property Executive. “The national figures are pretty solid at the moment.”

Results of the RICS U.S. Commercial Property Monitor survey for the fourth quarter of 2016 were based on questionnaires sent in early December and received about a month later. Respondents were asked to compare the third and fourth quarters and give an outlook for 2017. A total of 1,695 responses were received, about 496 from the U.K. While Rubinsohn did not have a U.S. breakdown, he noted there was a good response rate from New York CRE executives. The next survey will go out in March with results published in late April.

“There’s some uncertainty due to the Fed raising interest rates and bond rates increasing substantially after several years of very low rates, which will reduce the cap rate compression experienced over the past eight years,” Michael Yovino-Young FRICS, president of Yovino-Young Inc., Berkeley, Calif. “Cap rates have already increased modestly but are predicted to increase further in the next 18 months. This will be the result of the economy reacting hopefully to the anticipated changes the Trump administration has planned for the investment market, banking industry, Wall Street and other relevant areas. The next year should be very interesting as far as appraising commercial real estate is concerned but difficult to predict in advance.”

Other than the New York area, where occupier demand fell and caused rental expectations to drop as well, the report found a positive outlook for rents in 2017, with the largest gains—about 3 percent—expected in prime office and multifamily. Survey results showed a 2.3 percent rent increase is projected in secondary multifamily and a 2 percent increase in prime industrial. The expectations for secondary office and secondary retail rents were in negative range, the survey noted.

Overall, the RICS Occupier Sentiment Index remained in positive territory in the fourth quarter of 2016 for the third consecutive quarter. The last negative reading for OSI dates back to the third quarter of 2010. Development starts continue to show a positive trend for 2017, led by the office sector.

The survey notes that occupier demand in New York has fallen, pushing rental expectations down for prime and secondary retail and secondary office, plus a 1.5 percent decline in outlook for the all-property prime office average.

“What we found is that the momentum clearly has slowed,” Rubinsohn said, adding that New York City is “no longer bounding forward in terms of cap rate.”

The report notes that around 70 percent of respondents now view the U.S. market as being expensive or very expensive with only about one quarter describing it as being around fair value. But the survey showed that 91 percent found New York to be expensive or very expensive and only 9 percent deem it around fair value. It also found eight in 10 respondents believe the market to be either in the peak phase of the cycle or the early stages of a downturn. By comparison, about one-third of contributors see the overall U.S. market as being in the early or mid-phase of a downturn.

The good news for New York comes from the investors who responded to the RICS survey. Data indicates that investment inquiries picked up in the fourth quarter, the fastest pace in a year. Foreign interest in New York investment opportunities also sped up during this interval, particularly in the office sector. That mirrored the overall U.S. figures which so an increase in inquires from international investors.

“The outlook for commercial construction, particularly of offices and residential properties, has been exceptionally robust as of late,” Paul Roberts, a survey respondent and lead project controls manager for Faithful + Gould in New York, said in a prepared statement. “In a short span of time, we’ve seen a large number of these types of projects under construction in Manhattan and the outer boroughs, including Hudson Yards, several residential towers in Long Island City, and a combined residential/commercial project in Brooklyn. However, as we move into late 2017, there is a potential for a slight slowdown of construction when this oversaturation of the CRE and residential markets leads to increased vacancy levels and delays new projects from starting.”

Image courtesy of RICS