2018 CRE Outlook Cautiously Optimistic
DENVER – After years of unprecedented growth, the commercial real estate outlook is cautiously optimistic, with moderate, steady growth forecasted for the year ahead, according to Integra Realty Resources‘ (IRR) signature Viewpoint 2018 publication released today. The annual report provides a detailed overview of the local and national commercial real estate market across five key property types including, office, industrial, retail, hospitality, and multifamily. This year’s specialty property sector analysis covers the emerging Marijuana Real Estate sector, Senior Housing, Golf Courses and Caribbean Hospitality.
“For 25 years, our clients have relied on this report to make more informed commercial real estate decisions,” said Anthony M. Graziano, MAI, CRE, chairman of Integra Realty Resources. “Whether or not the economy can maintain forward motion is the definitive question in the year ahead. In this year’s report, we explore the major factors impacting continued economic expansion and a few of the key challenges and opportunities that face the commercial real estate market.”
The highly anticipated report was produced in partnership with veteran commercial real estate economist, Hugh F. Kelly, PhD, CRE, who added, “In the short term, we find the commercial property markets solidly in their ‘expansion phase’ in most areas of the country, but now is the time for real estate owners and investors to begin thinking about defense strategies. However, it should be a less severe downside for the commercial real estate industry than the downturn in 2008 thanks to more disciplined buyers.”
- The office sector posted another year of solid absorption. Nearly half (48.4%) of suburban markets are in expansion, the highest since the financial crisis. The shift from downtown to suburban properties reflects a realization that CBDs have become fully priced.
- The decline in office transaction volume, an overall drop of 6% to $94.5 billion through the first three quarters of 2017, is evidence of greater buyer discipline.
- Outlook: More markets expect cap rate increases than in years past. Expense growth rates are forecasted to increase by 2.5%. Values are expected to increase more than 2% in 38% of markets.
- Driven by Ecommerce and global trade, this sector continues to be a capital magnet. The industrial sector has outperformed all other property types with double-digit total returns, high absorption rates, rising occupancy and rent growth.
- From 1Q-3Q 2017, industrial transactions totaled $51.8 billion, up 23% over the same period in 2016, and up 18% in deal count (4,866).
- Outlook: 83% of national markets are in expansion mode. On average, industrial markets are calling for a 2.64% increase in market rents and 2.55% increase in expense growth rates through 2018.
- Retailers continue to be disrupted by ecommerce, plus shifting demographics and consumer spending habits. Aggressive asset management versus portfolio growth is the key to success for investors.
- Retail transactions totaled $46.9 billion through 3Q 2017, a decrease of 19% from the year before.
- Outlook: 66% of national markets are ‘in balance’ and 25% are within two years of becoming ‘in balance.’ On average, expect a 2.2% increase in retail market rents. With strong cap rate compression in prior years, 74% of markets expect cap rates to remain stable.
- After several surging years, the hotel market is losing momentum. Fundamentals remain strong enough to forecast stable, but slow growth through 2018.
- Hospitality transaction volume slipped to $31 billion through Q3/2017, down 25% from the previous year.
- Outlook: IRR anticipates asset value growth in 75% of hotel markets. Cap rates are forecasted to remain constant in 71% of markets. Market rents will grow at 3.3% in 2018.
- The rental apartment sector continued to push forward. Single-family housing sector slowed as employment growth decelerated.
- Transaction volume from 4Q/2016 to 3Q/2017 was $150.6 billion, down year-over-year by 9.8%.
- Majority of markets (91.9%) are in expansion phase. A shift to hypersupply is being seen in Baltimore, Washington, and Atlanta.
- Outlook: Market rents will increase on average by 2.45%. Uptick in number of markets (24%) that are forecasting higher cap rates. Approximately 10% of markets are expected to post 4% or higher value increases in 2018.
- Marijuana Real Estate Sector: CRE demand from this burgeoning industry has exceeded expectations.
- Senior Housing: Aging trends will continue to increase demand.
- Golf Courses: Millennials are improving prospects for this investment sector.
- Caribbean Hospitality: Growth in regional tourism flattening.
Download IRR Viewpoint 2018 free here.