WASHINGTON, DC—Notwithstanding expectations of a flattening in property price growth over the next year, strong leasing demand and investor appetite in smaller markets should keep commercial real estate on firm footing. So says the National Association of Realtors in its latest quarterly CRE forecast.
NAR's chief economist, Lawrence Yun, says the domestic economy is chugging along at a respectable pace. “A very healthy labor market and stronger confidence and spending from both consumers and businesses boosted economic expansion to a solid 3% last quarter,” Yun says. “There's legs for more of the same growth to close out the year, which bodes well for sustained interest in all types of commercial space.”
On a macroeconomic basis, NAR says the third quarter's GDP growth is expected to moderate slightly to 2.8% in Q4, closing out the year at an annual rate of 2.3%. Payroll employment is projected to pick up speed over the latter half, averaging 1.6% for the year, which would push the unemployment rate down to 4.3% by year's end.
Since consumer prices have experienced softer-than-expected gains, the Federal Reserve is likely to moderate its approach to making increases in short-term interest rates. NAR forecasts the federal funds rate to reach 1.2% by Q4, while US inflation is projected to average 2% for the year.
Accordingly, NAR says national office vacancy rates are forecast to retreat 110 basis points to 11.9% over the coming year, thanks to a continuing streak of steady job growth. Industrial vacancies are also expected to retreat by 110 bps, to 7.8%, while retail availability is projected to decrease 40 bps to 11.4%. Even with new construction bringing more supply to many markets, the national multifamily vacancy rate is expected to decline from 6.6% to 6.1%.
Meanwhile, multifamily led Q3 leasing, along with the industrial sector. In the case of industrial, distribution warehouses and logistic centers drove close to 70% of new construction leasing in Q3, thanks to demand generated by e-commerce and trade. Although 225.4 million square feet of additional space is currently in the pipeline, vacancy rates are still expected to trend downward as logistics supply slowly catches up with demand.
On the investment sales front, Yun says the appetite for commercial property remains high, but he adds that the current cycle appears to be headed into the maturation phase. “While inventory shortages are still driving prices higher in most markets, shrinking cap rates and the higher interest rate environment are expected to lead to a plateau in price growth over the next year, especially for class A assets in large markets,” he says. As a result, “investors will continue to look to small and tertiary markets for properties that have the best opportunity to provide stability and generate solid returns.”
The investor shift away from large markets to smaller ones has been creating a divergence in sales activity, according to NAR. In Q2, large markets saw a 5% annual decline in sales; conversely, sales were up by 4% year over year in smaller markets.
“The economy is healthy for the most part, but headwinds abound in the short term,” Yun says. “A temporary slowdown in areas severely impacted by hurricanes Harvey and Irma, geopolitical tensions abroad and any minor correction in the financial markets could temporarily knock the economy slightly off course in coming months.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
