Muoio: While no segment is invulnerable to the impact of a cyclical downturn, our projections have apartment demand slowing, but not halting, in the event of a downturn. This means that vacancies in that segment will rise as completions overtake absorption, but to a lesser degree than in the office sector, where demand will turn negative in the event of a cyclical downturn. We also expect apartment rents to continue to grow during a downturn, albeit at a slower pace, as vacancies will remain low enough to continue supporting growth. In a cyclical downturn, both office and industrial rents would see rent declines, while retail rent will see slowed growth but will not likely decline.

GlobeSt.com: Which sector or sectors show signs of trouble ahead?

Muoio: If economic growth continues, none of the major property segments are showing danger signs at this time. However, we have been noting for some time that the increase of multifamily development in many markets is starting to push up vacancy rates, since supply is being completed faster than the units can be absorbed. With regard to the retail sector, rather than facing acute trouble ahead, the brick-and-mortar segment remains mired in a battle with e-retail that has left demand for retail space persistently weak. Another pocket of risk would be some of the hotter office markets that are seeing increased development, which leaves them vulnerable if demand retracts amid a cyclical downdraft.

GlobeSt.com: What else should our readers know about transactional volume?

Muoio: Transaction volume is slowing, though it is still at a healthy level. There appears to be some disconnect between buyers and sellers on pricing that is inhibiting deals from being completed.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

IRVINE, CA—While no segment is invulnerable to the impact of a cyclical downturn, projections have apartment demand slowing, but not halting, in the event of a downturn, making it one of the stronger sectors, Ten-X's chief economist Peter Muoio tells GlobeSt.com. According to a recent report from the firm, four of the five sectors tracked—all except hotel—outperformed their 10-year averages in terms of deal volume, and in terms of cap rates, the apartment and retail sectors have reached new cyclical lows, while industrial and hotel also declined. We spoke exclusively with Muoio about the various sectors and what he sees for their future.

GlobeSt.com: How do you see pricing and cap rates changing for the office, industrial, retail and multifamily sectors over the next couple of years?

Muoio: That's a complex question because there are multiple factors involved. Interest rates are likely to increase in the coming years, putting upward pressure on cap rates after years of interest rate declines abetted the cap rate decline. However, cap spreads to treasuries are relatively wide, so there is room for spread compression to offset rising interest rates to varying degrees by property segment. I say “to varying degrees” because cap spreads relative to their historical average vary by segment. Apartment spreads are the tightest relative to their history, so that makes apartment cap rates more vulnerable in our view to rising interest rates than, say, office or industrial, where spreads are relatively wide when compared with their historical norms.

GlobeSt.com: Which sector has the best chance to continue growing even in the event of an economic downturn?

Muoio: While no segment is invulnerable to the impact of a cyclical downturn, our projections have apartment demand slowing, but not halting, in the event of a downturn. This means that vacancies in that segment will rise as completions overtake absorption, but to a lesser degree than in the office sector, where demand will turn negative in the event of a cyclical downturn. We also expect apartment rents to continue to grow during a downturn, albeit at a slower pace, as vacancies will remain low enough to continue supporting growth. In a cyclical downturn, both office and industrial rents would see rent declines, while retail rent will see slowed growth but will not likely decline.

GlobeSt.com: Which sector or sectors show signs of trouble ahead?

Muoio: If economic growth continues, none of the major property segments are showing danger signs at this time. However, we have been noting for some time that the increase of multifamily development in many markets is starting to push up vacancy rates, since supply is being completed faster than the units can be absorbed. With regard to the retail sector, rather than facing acute trouble ahead, the brick-and-mortar segment remains mired in a battle with e-retail that has left demand for retail space persistently weak. Another pocket of risk would be some of the hotter office markets that are seeing increased development, which leaves them vulnerable if demand retracts amid a cyclical downdraft.

GlobeSt.com: What else should our readers know about transactional volume?

Muoio: Transaction volume is slowing, though it is still at a healthy level. There appears to be some disconnect between buyers and sellers on pricing that is inhibiting deals from being completed.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.