The flow of the Commercial Real Estate market is influenced by a lot of variables including the condition of the economy, population demographics, and government regulations, just to name a few. While there isn’t a magic eight ball that can give you definitive answers as to what the market will do, there are a few key factors that can provide some insight. This year real estate investors are monitoring three trends in the market as indicators of what lies ahead.
Historically interest rates have been a sound signifier of the state of the economy, so in December of 2015, when the Federal Reserve raised interest rates for the first time since 2006, the change definitely made headlines. Although the hike was only by a quarter of a percentage point (0.25%), which raised the target range to 0.25%-0.5%, this past December the Fed once again raised rates by a quarter of a point to a range of 0.50%-0.75%. And subsequent hikes are on the horizon; Fed officials predict they will raise rates at least three more times over the course of 2017.
These changes can impact the CRE market in many different ways. The rate hike itself signifies lower unemployment rates and an increasingly stronger economy. A strong economy tends to indicate a strong real estate market, so in that respect the outlook is positive. As far as immediate tangible changes to commercial real estate go, even small rate hikes mean that borrowers will pay more in interest. They also contribute toward the cost of capital; higher rates mean the price to borrow money is also higher. The promise of continued hikes may motivate some to invest sooner rather than later, while for others this could make investments less affordable or attainable and could cause both borrowers and lenders to be more cautious when approaching loans.
Global economic and political uncertainty leave a big question mark for the year ahead and something for investors to keep an eye on. Recent reports have indicated that China is planning to slow foreign investments, and at the beginning of this year, state regulations have already started tightening for Chinese citizens and institutions investing in overseas real estate. It will be interesting to see if these new restrictions will have a long-term effect on the U.S. CRE market, or if determined foreign investors will find loopholes.
As the fallout continues from Great Britain’s vote to “Brexit” the European Union, the strength of both the euro and the pound is uncertain. Volatility in foreign currency could mean investors turn to the U.S. commercial real estate market as a sound and stable investment choice. In the face of all this uncertainty, the World Bank predicts global economic growth of 2.7% which is slightly higher than last year. Global growth is more likely to mean inflows into the U.S. market, but it is still too early to tell how all this uncertainty will affect CRE.
Commercial real estate supply growth has been slow over the past few years and there’s no way to tell if or when it will pick up (see above uncertainties). We do know that continued slow growth with only pockets of supply available continues to drive up rent prices as the demand skyrockets.