Outlook for Commercial Real Estate Looks Strong

by FunnelCast

The latest CRE news reports show that the outlook for commercial real estate remains strong as we leave behind Q2 and move toward the conclusion of Q3. Both pricing and volume have shown signs of shifting upward, while risk premiums and cap rates decline.

One of the reasons that the future looks so bright for commercial real estate is the fact that an increasing number of investors are opting to take advantage of low interest rates. This is serving to drive up both pricing and transaction volume in all of the major sectors. Among the major sectors, the office sector is proving to be the leader, which should come as no surprise because it has proven to be historically dominant. Combined, the commercial volume within the five major sectors reached more than $81 billion during the second quarter of this year. This figure represents a 14 percent increase from one year ago. Approximately 55 percent of the total transaction volume was accounted for by the office and apartment sectors. This is a trend that is similar to the situation of one year ago. One element that does differ is that among those two sectors, the apartment sector's volume share has declined. On another note, retail transactions accounted for 16 percent of the total volume.

In terms of pricing, steady gains have also been achieved, with industrial pricing taking the lead in gains. In May, a 15 percent year-over-year gain helped the industrial sector to move into second place among the top five sectors, just behind the hotel sector. Since June of last year, the hotel sector has managed to maintain an average between 15 percent and 20 percent of year-over-year growth.

In the retail sector, significant price surges over last year were seen, not dissimilar to the growth currently being experienced by the industrial sector. That growth has begun to level off in recent months, however, largely due to an increase in online shopping. The shrinking amount of space needs required on a per-customer basis has also contributed to slower growth in the last few months within the retail sector.

As the economy continues to improve, the outlook for the commercial real estate industry will continue to brighten, as well. Nationally, office vacancy rates are expected to change little over the course of the coming year. This is primarily due to new inventory entering the market. Declining vacancy rates are expected in the industrial sector, primarily due to shrinking trade deficits and an increase in exports. Although online shopping is rising, increases in consumer spending and personal income are expected to drive a decline in retail space in the coming months. In recent months, new construction within the multifamily sector has continued to increase at a steady pace. Simultaneously, the demand for rental housing has continued to rise.  

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