MIAMI—One of the key themes we closely monitored in 2017 was the divergence in buyer and seller pricing expectations. That's one of the many observations from Chris Muoio, senior quantitative strategist at Ten-X.
“This widening of the bid-ask spread was sourced over doubts over the continuation of the cycle on the buy-side, a rise in interest rates heading into the year and seller expectations for robust pricing increases,” Muoio tells GlobeSt.com. “The end result was a decline in transaction volume from the year prior.”
Ten-X believes this “gap” will begin to close this year, and it will do so due to sellers accepting the new paradigm. The lack of appreciation over the past year will temper expectations, as will continued tepid fundamentals in the coming quarters.
The economic cycle has shown no signs of abatement, with a strong labor market continuing to fuel growth. However, this is not translating into improved fundamentals across CRE as it usually does. Retail is grappling with the headwind of e-retail, stunting absorption and constraining NOI. Office markets fall into two camps: some markets are seeing low demand amid more tepid economic situations with other higher beta markets seeing large supply additions rising to match their absorption levels.
The industrial sector, which has been benefiting from the rise in e-commerce is now seeing a steady supply pipeline, limiting gains in occupancy. The hospitality sector is fighting heavy supply additions, as well as the rise of home-sharing as an alternative. On the whole, CRE fundamentals remain tepid at best, and this is in the midst of a solid, healthy expansion.
Another trend worth noting is the increase in redevelopment opportunities that could be on the horizon for 2018. One of the fallouts from e-retail's surge has been significantly higher vacancies in secondary and tertiary mall and other retail properties. We believe that this year will mark the start of a redevelopment trend of these properties into mixed-use locations that heavily feature some form of residential property. This is also something outdated, high vacancy suburban office parks will begin to see as well.
Looking ahead to next month, Jerome Powell is set to take over from Janet Yellen in early February, if he is confirmed by the Senate as expected. However, despite the transition in leadership, we believe the course of monetary policy will be virtually unchanged. His comments point to a similar outlook on the economy as Yellen, with perhaps a slightly higher emphasis on labor force participation rates, which should result in the continuation of gradual interest rate increases and very slow balance sheet unwind. The only place where he may diverge from his predecessor is on the regulatory front, where he is likely to be laxer towards the financial sector.
Want to read more 2018 predictions? Check out these articles: How Retail Will Evolve in 2018 and What to Expect in Atlanta's Medical Office Building in 2018.
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