Commercial Market on the Upswing, Construction Activity Sluggish

A strengthening economy and job growth nearing historic levels have given Realtors^® confidence in future commercial real estate market conditions, according to speakers at a commercial real estate forum during the 2018 REALTORS^® Legislative Meetings & Trade Expo.

Lawrence Yun, chief economist of the National Association of Realtors^®, led a panel discussion about the economic forces shaping commercial real estate markets and expressed that a favorable environment will lead to a rise in demand for commercial spaces in 2018 and 2019.

“Even after 90 straight months of job gains, the economy looks likely to expand over the next two years with job openings at the highest level in nearly 10 years. The gross domestic product should experience a 2.7 percent growth, therefore the demand for commercial spaces is expected to rise this year and next year,” Yun said.

One area of concern for Realtors^® is the lack of construction, which is hindering inventory. Yun pointed out that with subdued construction activity in commercial real estate in recent years, vacancy rates will continue to fall and rents will rise. “Concerns are growing around commercial property prices, which have dramatically shot up by 85 percent in the past seven years. With interest rates recently rising, commercial prices could decline and commercial investment sales may see an additional dip, though at a modest pace,” he said.

Most commercial sectors are on the upswing, according to Yun. Office demand is strong because of rising employment and moderate office supply, which will lead to modest vacancy rates, mainly due to the expansion of telecommuting. Increased trade and rising e-commerce has the industrial sector on a hot streak, with a growth of 20 percent, while retail sales are growing at 5 percent and completions remain low, with rents experiencing solid growth.

Two panelists joined Yun to discuss trends in multi-family demand and the impact the global the economy could have on commercial real estate over the next year. Richard Barkham, global chief economist at CBRE, gave his perspective on global economic trends and his outlook for commercial real estate.

“Commercial real estate is buoyant these days, and first quarter leasing is through the roof. Interest rates may turn up, but slowly over the next few years, and inflation remains weak, as wage growth has failed to gain traction. Relatively, supply is in line with demand and cap rates have hit a bottom and remain extremely firm,” Barkham said.

Danielle Hale, chief economist at realtor.com^® also shared highlights from her outlook for multi-family households.

“Apartment demand remains robust and the sector is seeing growth, especially in mixed-use urban development, as many consumers prefer a neighborhood close to work and entertainment,” said Hale. “Millennials are shifting into the largest generation of homeowners and will be a huge boom to the multi-family market in recent years. Multi-family building has seen the largest four-year stretch in supply since the 1980s and vacancy rates are trending at the lowest in years.”