The USA commercial real estate market is set for a stable 2017, with decent returns on offer for investors.
Steered ahead by strengthening demand in smaller markets, the National Association of Realtors forecasts stable ground for the commercial property sector.
Experts said that the USA 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. 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.
National office vacancy rates are predicted 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.
According to some sources, 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.
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 last year, sales volume rose 12.9 percent, prices increased 5.5 percent and the average transaction value equaled $1.1 million.
Foreign investment in US commercial property is forecast to stay strong this year, as the country remains attractive to overseas investors. At the start of 2017, the interest rate environment is undoubtedly one of the largest influences on real estate capital markets. The election of President Donald Trump has bolstered confidence in the American economy, with the Federal Reserve Board raising interest rates at the end of 2016 for only the second time since the global financial crisis. The Fed Reserve expected to engage in three rounds of monetary tightening, increasing short-term rates this year. Longer-term interest rates should remain stable or increase only modestly.
Global capital flows into the US are expected to remain very strong, with the comparatively strong economy and a scarcity of high returns elsewhere keeping the US a favorite destination for foreign capital. China is again expected to be the biggest driver of international investment.