Commercial Real Estate 2017 Outlook
The real estate industry is increasingly influenced by rapid technological advancements and significant demographic shifts, which include growing urbanization, longevity of Baby Boomers, and differentiated lifestyle patterns of Millennials. In addition, macroeconomic and regulatory developments continue to impact profitability. How can companies gain a competitive advantage and drive top- and bottom-line growth? Here are some trends to pay attention to in 2017
The modest economic improvement could temper the pace of commercial real estate (CRE) transaction activity. The Federal Reserve is likely to raise interest rates in the short-to-medium term. Higher interest rates are likely to increase mortgage costs and could deter real estate investments to some extent. The employment-to-population ratio is projected to peak in 2018, as retiring Baby Boomers may reduce the share of employed. The improving labor markets and household wealth will likely boost consumer confidence.
Demand for office space will reduce as corporations adapt to employees’ “live, work, and play” behavior and leverage technology to automate tasks. Industrial sector will potentially continue to benefit from the rise in e-commerce activities, especially in non-core markets. Improved consumer confidence and rising urbanization will likely support retail and multifamily demand, even though excess supply may limit the improvement in multifamily fundamentals. Retail real estate owners will continue to creatively reuse the space vacated by anchor retailers to offer a variety of entertainment options and ultimately enhance customer experience. Home builders are building more units for rent, as rental demand and rental values have been strong and home builders look to grow and diversify. This strategy is likely to influence home builders’ business models and blur lines with multifamily owners.
In retail, net absorption is lagging expectations. Retailers are expanding, but the growth is being concentrated in a few hot spots rather than tracking new housing developments. While housing starts are gaining momentum, current totals are well-below the long-term average. Any sustained rebound in retail fundamentals will require renewed growth in the housing sector to drive it.
The medical office sector has been in flux in recent years, and there could be additional changes in the years to come. For now, the consolidations in the healthcare industry are causing larger space requirements. In recent years, the average square footage of lease deals has nearly doubled. The result has been some functional obsolescence in 1980’s-1990’s-vintage buildings that had been occupied by solo practices in previous years. It remains to be seen how the medical office market will adapt to the changing healthcare delivery system.
The industrial market has shown strong tenant demand for space. There has been a mix of tenants moving into spec space, some owner-user activity and a significant total of build-to-suit development. Similar to the retail market, a rise in activity in the local housing sector will support greater demand for local industrial properties.
Looking ahead to 2017, Commercial sector looks strong and will continue as markets become more favorable to local and regional investments.
