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Stable Growth Expected for Commercial Real Estate in 2017

WASHINGTON (February 23, 2017) – Steered ahead by strengthening demand in smaller markets, the commercial real estate sector should remain on stable ground in 2017 and offer decent returns for investors, according to the latest National Association of Realtors® quarterly commercial real estate forecast.

National office vacancy rates are forecast by Realtors® to retreat 1.1 percent to 12.1 percent over the coming year as job growth in business and professional services brings increased need for office space. The vacancy rate for industrial space is expected to decline 1.3 percent to 7.1 percent, and retail availability to decrease 0.7 percent to 11.2 percent. Only the multifamily sector is predicted to have little change to its vacancy rate over the next year as new apartment completions keep openings mostly flat at 6.5 percent.

Lawrence Yun, NAR chief economist, says the U.S. economy is poised for slight improvement in 2017. “Last year was the 11th year in a row of subpar GDP growth, but renewed corporate optimism leading to a focus on investment and a desperately needed boost in residential construction should pave the way for modest expansion this year of around 2.4 percent,” he said. “Steady hiring and low local unemployment levels are finally supporting higher wages and increased spending, which in turn bodes well for sustained demand for all commercial property types.”

The apartment sector is expected to preserve its status as a top performer this year simply because ongoing supply and affordability challenges are keeping the nation’s low homeownership rate from seeing meaningful improvement. Even with a small uptick in the vacancy rate as new building completions catch up with demand, rents will likely maintain their solid growth in most of the country.

“Especially in the costliest metro areas, higher home prices and mortgage rates are squeezing the budget for many renters looking to buy and inevitably forcing them to sign a lease for at least another year,” said Yun.

According to Yun, commercial property prices – especially in Class A assets in larger markets – surpassed pre-crisis levels last year because of aggressive bidding and lower inventory levels. However, with the Federal Reserve expected to raise short-term rates three times in 2017, a minor price correction may be in store this year as cap rates move higher.

“Similar to the biggest ongoing challenges in the residential market, supply and demand imbalances continue to put upward pressure on commercial property prices as investors search for yield in smaller markets,” said Yun. “Realtors® are increasingly citing inventory shortages as their top concern as the pace of new projects slows in large cities and middle-tier and smaller markets see a growing appetite for space.” 

The latest Realtors® Commercial Real Estate Market Survey highlighted the strong underlying demand for commercial properties up to $2.5 million, where most transactions from NAR’s commercial members reside. Compared to a year ago, sales volume rose 12.9 percent, prices increased 5.5 percent and the average transaction value equaled $1.1 million.

NAR’s most recent Business Creation Index (BCI) also showed a positive trend for smaller commercial businesses. Created to monitor local economic conditions from the perspective of NAR’s commercial members, December’s BCI found that Realtors® reported more business openings and fewer closings over the past year in their market. 

Yun says at least in the short term, the possibility of a more tax-friendly business environment combined with the positive benefits of 1031 exchanges could quicken the pace of economic growth and support stronger commercial market fundamentals. The industrial sector – already enjoying increased demand from the soaring popularity of e-commerce – could see a further decline in vacancy rates if increased manufacturing comes to fruition and accelerates the need for more warehouse space.

 “The positive direction for commercial real estate this year will be guided by the steadily expanding U.S. economy, which has legs to grow and continues to be one of the top economic performers and safest bets in the world,” concluded Yun. 

NAR’s latest Commercial Real Estate Outlook1 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.

The NAR commercial community includes commercial members, real estate boards, committees, subcommittees and forums; and NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

Approximately 70,000 NAR members specialize in commercial real estate brokerage and related services including property management, counseling and appraisal. In addition, more than 200,000 members are involved in commercial transactions as a secondary business.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.1 million members involved in all aspects of the residential and commercial real estate industries.

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1Additional analysis will be posted under Economists’ Outlook in the Research blog section of Realtor.org in coming days at: http://economistsoutlook.blogs.realtor.org/.

The next commercial forecast and quarterly market report will be released May 30 at 10:00 a.m. ET.

Information about NAR is available at www.nar.realtor. This and other news releases are posted in the “News, Blogs and Videos” tab on the website. Statistical data in this release, as well as other tables and surveys, are posted in the “Research and Statistics” tab.

For further information contact: Adam DeSanctis, 202-383-1178 adesanctis@realtors.org

Commercial Real Estate: January 2017

1031 LIKE KIND EXCHANGES: In June 2016, House Republicans released their “Blueprint on Tax Reform,” a comprehensive document outlining principles for future tax reform plans. The House leadership and Ways and Means Committee began working on a comprehensive tax reform package right away in 2017, convening working groups to examine different areas of the tax code. While the Blueprint does not mention 1031 like-kind exchanges, that does not mean they are safe, as revenue-neutral tax reform will require sources of funding to make up for lowered taxes elsewhere. The Blueprint does allow for business expenses, including real property, to be written-off immediately – which some believe will make 1031s unnecessary.

NAR ACTION: NAR participates in multiple coalitions to protect Section 1031 from repeal or limitation. As part of the “1031 Like-Kind Exchange Coalition,” which includes non-real estate industry groups, NAR commissioned a study from Ernst & Young on the macroeconomic effects of repealing Section 1031. As part of the “Real Estate 1031 Like-Kind Exchange Coalition,” made up solely of real estate sector groups, NAR commissioned another economic study on Section 1031, this time focusing on its impact on real estate. NAR participates in Hill visits, meetings with key members of Congress (including leadership and the tax writing committees), and press events individually and as part of the coalition in support of Section 1031. NAR will continue to monitor this issue, and will oppose any plans to repeal or limit its use. Retaining Section 1031 was one of the talking points for the Spring 2015 and 2016 Hill visits, and NAR joined a letter to the Clinton and Trump presidential campaigns stressing the importance of retaining this provision in any future tax reform plans.

BASEL III: The Basel Committee on Banking Supervision released a proposal addressing Revisions to the Standardized Approach for Credit Risk, which outlines the risk-weighting regime for credit exposures for those using the standard approach. The proposal, High Volatility Commercial Real Estate (HVCRE), would have a negative impact on credit availability for commercial real estate through its changes to risk weighting different factors within the loan, and increased lending standards that would be higher than what regulators already have in place. The Committee also proposed a small fleet of changes, known as Basel IV, to complete ‘final calibrations’ of the Basel III standard.

NAR ACTION: NAR is active in working with its members and industry partners to understand the impact of Basel III standards in application. NAR signed onto a comment letter in March 2015 with several industry partners calling for the Committee to rethink its approach to the risk weighting standards and to scale back some of the changes that would be most limiting to commercial real estate lending. NAR submitted letters for the February 2016 House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises hearing “The Impact of the Dodd-Frank Act and Basel III on the Fixed Income Market and Securitizations,” and the June 2016 Small Business Committee Subcommittee on Economic Growth, Tax, and Capital Access hearing on the impact of regulatory burdens stressing the burden that overly-broad regulations for lending institutions have on commercial real estate. NAR signed on to a coalition letter urging for the delay in finalizing Basel III reforms, which was ultimately successful.

CREDIT UNION LENDING: The National Credit Union Administration (NCUA) enacted a rule that would eliminate restrictions on credit unions making member business loans (MBL). The rule gives credit unions more autonomy in creating commercial lending policies unique to each credit union. The rule created a new treatment for construction and development loans. The rule went into effect on January 1, 2017. The NCUA also adopted new rules expanding the field of membership for credit unions.

NAR ACTION: NAR wrote a letter in support of MBL rule change, highlighting the important role of credit unions in commercial real estate lending and the success of small businesses. These rule changes will help expand credit unions as a source of lending.