May 23rd, 2017 10:23 AM by Ron Mastrodonato
WASHINGTON – May 22, 2017 – While challenges face commercial real estate markets, Realtors® specializing in the sector should have confidence that growth will continue, according to speakers at a commercial economic issues and trends forum at the recent Realtors Legislative Meetings & Trade Expo.
NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets. The panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.
George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. "During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue," he said.
Unemployment has declined to 4.4 percent, consumer confidence is at its highest point in 15 years, and as the economy improves, the commercial real estate market has improved as well, said Yun. However, "a rising interest rate environment is likely to halt commercial price growth or even cause a minor decline," he said. "That outlook is supported by the expanding economy and the over 2 million jobs gained in the past year."
Global commercial investors hit the pause button on investments, added Ratiu, and that segment declined nearly 20 percent year-over-year in the first quarter of 2017. However, certain U.S. markets are seeing good global cash flow with $76 billion coming into the U.S. "Overall, global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains," he said.
With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the U.S. market this year.
"Over the past five years, a near majority of Realtors experienced an increase in the number of international clients," said Yun. "We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market's gradual recovery."
One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.
"Realtors are seeing evidence of markets being impacted by regulators' increased scrutiny of banks' balance sheet allocations to commercial real estate loans," said Ratiu. "Considering that 64 percent of Realtor clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37 percent of Realtors' markets – a four percent increase from last year."
John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors.
"Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend," he said.
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