Commercial Fundamentals Will Continue Slow Climb

WASHINGTON, DC—Each of the four major property types except multifamily is expected to see modest vacancy declines over the next year, the National Association of Realtors said Monday in its latest quarterly commercial real estate forecast. Across the board, US commercial real estate has been steady despite global and domestic headwinds buffeting the economy, says Lawrence Yun, NAR's chief economist.

“Ongoing overseas weakness and the slowdown in business investment despite historically low interest rates held second-quarter growth at a tepid and disappointing pace,” Yun says. “Only steady job creation, solid consumer spending and residential construction—albeit not enough of it—kept the economy afloat during the first half of the year.”

NAR is forecasting a 150-basis point decline in office vacancies over the next 12 months to 10.4%, while industrial vacancy is expected to decline by 70 bps to 8.7% and retail by 100 bps to 10.5%. Conversely, apartment vacancies will see a little movement in the opposite direction, rising 20 bps to 6.1% as new construction is delivered.

“Tightening vacancy rates and rising rents are clear positive fundamentals, but commercial real estate property prices have been bid up too high and look to weaken in the upcoming months,” Yun says. NAR expects a decline of between 3% and 5% in Green Street Advisors' Commercial Property Price Index over the next 12 months.

In the meantime, smaller markets have seen the greater increases in sales volume, according to NAR's report, with these markets seeing a year-over-year increase of 8.4% in Q2 after 8.5% in Q1 as investors seek higher yields. By comparison, volume on individual property sales is down 4% Y-O-Y for the first half of 2016, while portfolio transactions withstood a 39% decline.

NAR's commercial brokers, who mainly have clients that rely on financing to secure deals, are concerned  that underwriting standards have stiffened in light of increased regulatory scrutiny. ”Any further tightening in credit standards, which never fully normalized after the recession, would inflict the most pressure on the small and mid-sized businesses that mostly look to community banks and credit unions for commercial property financing,” says Yun. “Not having the necessary access to capital could keep a lid on building and leasing activity and in turn keep the economy from getting closer to its long-term average of 3% growth.”

Nonetheless, he adds, “The US economy has its flaws and has been stuck in slow-growth mode ever since the Great Recession. However, it's still the top performing economy in the world, and US commercial real estate should continue to remain a stable investment and attractive option for investors even as rates move upward.”

WASHINGTON, DC—Each of the four major property types except multifamily is expected to see modest vacancy declines over the next year, the National Association of Realtors said Monday in its latest quarterly commercial real estate forecast. Across the board, US commercial real estate has been steady despite global and domestic headwinds buffeting the economy, says Lawrence Yun, NAR's chief economist.

“Ongoing overseas weakness and the slowdown in business investment despite historically low interest rates held second-quarter growth at a tepid and disappointing pace,” Yun says. “Only steady job creation, solid consumer spending and residential construction—albeit not enough of it—kept the economy afloat during the first half of the year.”

NAR is forecasting a 150-basis point decline in office vacancies over the next 12 months to 10.4%, while industrial vacancy is expected to decline by 70 bps to 8.7% and retail by 100 bps to 10.5%. Conversely, apartment vacancies will see a little movement in the opposite direction, rising 20 bps to 6.1% as new construction is delivered.

“Tightening vacancy rates and rising rents are clear positive fundamentals, but commercial real estate property prices have been bid up too high and look to weaken in the upcoming months,” Yun says. NAR expects a decline of between 3% and 5% in Green Street Advisors' Commercial Property Price Index over the next 12 months.

In the meantime, smaller markets have seen the greater increases in sales volume, according to NAR's report, with these markets seeing a year-over-year increase of 8.4% in Q2 after 8.5% in Q1 as investors seek higher yields. By comparison, volume on individual property sales is down 4% Y-O-Y for the first half of 2016, while portfolio transactions withstood a 39% decline.

NAR's commercial brokers, who mainly have clients that rely on financing to secure deals, are concerned  that underwriting standards have stiffened in light of increased regulatory scrutiny. ”Any further tightening in credit standards, which never fully normalized after the recession, would inflict the most pressure on the small and mid-sized businesses that mostly look to community banks and credit unions for commercial property financing,” says Yun. “Not having the necessary access to capital could keep a lid on building and leasing activity and in turn keep the economy from getting closer to its long-term average of 3% growth.”

Nonetheless, he adds, “The US economy has its flaws and has been stuck in slow-growth mode ever since the Great Recession. However, it's still the top performing economy in the world, and US commercial real estate should continue to remain a stable investment and attractive option for investors even as rates move upward.”