Muoio: There are two things that brick-and-mortar retail is facing: the continued gains by e-retailers and shifts in what consumers are spending on. E-retail's share of retail spending is increasing at an accelerated pace. The ubiquitous nature of smartphones and tablets and the development of better and better apps for online shopping are redirecting consumer spending from traditional stores to online ones. More and more sectors of spending are shifting online, including food shopping. The result is twofold: some brick-and-mortar stores are forced to close in the face of this competition, while other brick-and-mortar stores reconfigure their business models to better compete, often leading to smaller store footprints. The combined impact is less demand for bricks and mortar retail space, even as the economy and consumer spending grow.

The second impact is that consumers have shifted their spending toward experiences and away from hard goods. This redirected spending includes things like travel, gyms, spas and salons, and dining out, as well as other things. This is not necessarily all negative for owners of brick-and-mortar retail properties since some of these things take place in retail-like space. However, it requires reconfiguring and re-thinking what a retail center is and how to attract these new sorts of tenants.

GlobeSt.com: How will the new administration's policies impact the retail real estate sector, in your opinion?

Muoio: In the aftermath of the election, the level of uncertainty regarding federal government policy has ratcheted up. Issues that are important to commercial real estate fundamentals and investors and are now very much in play include trade policy, immigration, tax law, health policy and financial regulation.

Policy changes have always created significant risks and opportunities for real estate investors, so while it is too early to know the details of how policies in all these areas will change, there will be impacts on commercial real estate and capital flows into the CRE space.

Some potential impacts based on comments President-Elect Trump made during the campaign (and his transition activity so far) include:

• The Affordable Care Act, which was already showing signs of stress, will likely be replaced. If the changes reduce the level of subsidy to healthcare spending by the federal government and shifts more pricing awareness back to consumers, it could diminish demand for medical care. Whether this would be positive or negative for burgeoning medical retail space is unclear, since the medical clinics that occupy retail space are viewed as a lower-cost alternative to the consumer, but overall demand for healthcare may fall.
• Reduced regulatory aggressiveness to banks could improve CRE lending flows to all sectors, including retail. Whether the CMBS risk-retention rules will be revisited is not clear.
• Reduced immigration flows would be a blow to key markets that are getting a demographic boost from international arrivals. The construction industry could see higher wage pressure from enhanced competition for workers, which could raise development costs and alter the replacement-cost-versus-value-add formula, limiting new commercial development. Any big infrastructure initiatives or spending would also drive up construction costs, magnifying this impact. This could constrain development and supply pipelines in the retail space.
• A simplified tax code, including a lower corporate tax rate, could lead to repatriation of corporate cash from abroad and spur investment spending.

GlobeSt.com: What impact will rising interest rates have on retail real estate?

Muoio: The rate hike's effect on the economy will be minimal by itself, and this raise is in response to stronger wage growth and economic conditions we have seen over the second half of the year. The uptick in economic growth and wages would continue to boost the cyclical tailwind driving retail fundamentals' improvement.

For commercial real estate, financing and borrowing costs will rise in concert with interest rates, which could be a headwind for deal volume; though rates are still at very low levels historically. Cap rates will face upward pressure from rising interest rates, but cap-rate spreads are higher than their historical norm in many sectors and may fall to help offset some of the gains in interest rates. We believe property valuation will become more closely aligned with the performance of real estate fundamentals going forward, as the rising tide that lifted all boats has dissipated. Trophy markets and assets, which were used as safe havens during the search for yield, are also at risk of seeing their valuations decline, as they traded with very tight spreads during the cycle.

GlobeSt.com: What else should our readers know about the outlook for the retail real estate sector?

Muoio: In speaking with commercial real estate professionals, the general message I am getting is heightened uncertainty about policy, what this means for the business cycle and higher interest rates changing the economics of deals in progress. The net result of all this is caution, which suggests we will start 2017 with lower deal volume.

IRVINE, CA— While it is too early to know the details of how policies in all areas will change, there will be impacts on commercial real estate and capital flows into the CRE space, Ten-X's chief economist Peter Muoio tells GlobeSt.com.

As we recently reported, according to a report from the firm, the star performer among major property sectors during December was retail, where values increased by 1.4% from the previous month. Ten-X noted that the sector typically is boosted during the busy holiday shopping season, although it remains hampered by e-retail competition and shifts in consumer spending behavior that appear to be permanent.

We spoke with Muoio about some of the report's findings about retail and how the new administration's policies might impact this segment.

GlobeSt.com: The retail sector has been doing surprisingly well in the wake of e-commerce, but may face some secular headwinds in 2017, according to your report. What are these headwinds, and how do you anticipate the sector will weather them?

Muoio: There are two things that brick-and-mortar retail is facing: the continued gains by e-retailers and shifts in what consumers are spending on. E-retail's share of retail spending is increasing at an accelerated pace. The ubiquitous nature of smartphones and tablets and the development of better and better apps for online shopping are redirecting consumer spending from traditional stores to online ones. More and more sectors of spending are shifting online, including food shopping. The result is twofold: some brick-and-mortar stores are forced to close in the face of this competition, while other brick-and-mortar stores reconfigure their business models to better compete, often leading to smaller store footprints. The combined impact is less demand for bricks and mortar retail space, even as the economy and consumer spending grow.

The second impact is that consumers have shifted their spending toward experiences and away from hard goods. This redirected spending includes things like travel, gyms, spas and salons, and dining out, as well as other things. This is not necessarily all negative for owners of brick-and-mortar retail properties since some of these things take place in retail-like space. However, it requires reconfiguring and re-thinking what a retail center is and how to attract these new sorts of tenants.

GlobeSt.com: How will the new administration's policies impact the retail real estate sector, in your opinion?

Muoio: In the aftermath of the election, the level of uncertainty regarding federal government policy has ratcheted up. Issues that are important to commercial real estate fundamentals and investors and are now very much in play include trade policy, immigration, tax law, health policy and financial regulation.

Policy changes have always created significant risks and opportunities for real estate investors, so while it is too early to know the details of how policies in all these areas will change, there will be impacts on commercial real estate and capital flows into the CRE space.

Some potential impacts based on comments President-Elect Trump made during the campaign (and his transition activity so far) include:

• The Affordable Care Act, which was already showing signs of stress, will likely be replaced. If the changes reduce the level of subsidy to healthcare spending by the federal government and shifts more pricing awareness back to consumers, it could diminish demand for medical care. Whether this would be positive or negative for burgeoning medical retail space is unclear, since the medical clinics that occupy retail space are viewed as a lower-cost alternative to the consumer, but overall demand for healthcare may fall.
• Reduced regulatory aggressiveness to banks could improve CRE lending flows to all sectors, including retail. Whether the CMBS risk-retention rules will be revisited is not clear.
• Reduced immigration flows would be a blow to key markets that are getting a demographic boost from international arrivals. The construction industry could see higher wage pressure from enhanced competition for workers, which could raise development costs and alter the replacement-cost-versus-value-add formula, limiting new commercial development. Any big infrastructure initiatives or spending would also drive up construction costs, magnifying this impact. This could constrain development and supply pipelines in the retail space.
• A simplified tax code, including a lower corporate tax rate, could lead to repatriation of corporate cash from abroad and spur investment spending.

GlobeSt.com: What impact will rising interest rates have on retail real estate?

Muoio: The rate hike's effect on the economy will be minimal by itself, and this raise is in response to stronger wage growth and economic conditions we have seen over the second half of the year. The uptick in economic growth and wages would continue to boost the cyclical tailwind driving retail fundamentals' improvement.

For commercial real estate, financing and borrowing costs will rise in concert with interest rates, which could be a headwind for deal volume; though rates are still at very low levels historically. Cap rates will face upward pressure from rising interest rates, but cap-rate spreads are higher than their historical norm in many sectors and may fall to help offset some of the gains in interest rates. We believe property valuation will become more closely aligned with the performance of real estate fundamentals going forward, as the rising tide that lifted all boats has dissipated. Trophy markets and assets, which were used as safe havens during the search for yield, are also at risk of seeing their valuations decline, as they traded with very tight spreads during the cycle.

GlobeSt.com: What else should our readers know about the outlook for the retail real estate sector?

Muoio: In speaking with commercial real estate professionals, the general message I am getting is heightened uncertainty about policy, what this means for the business cycle and higher interest rates changing the economics of deals in progress. The net result of all this is caution, which suggests we will start 2017 with lower deal volume.