The Commercial Sector Braces for a Slowdown
September 13, 2017
Commercial real estate price growth in large markets is expected to flatten over the next year. But the sector is expected to continue on solid footing, with strong leasing demand and a strong investor appetite in smaller markets, according to the National Association of REALTORS®’ latest quarterly commercial real estate forecast.
“A very healthy labor market and stronger confidence and spending from both consumers and businesses boosted economic expansion to a solid 3 percent last quarter,” says Lawrence Yun, NAR’s chief economist. “There’s legs for more of the same growth to close out the year, which bodes well for sustained interest in all types of commercial space.”
One big trend, however, is that investors are shifting away from larger markets in favor of smaller ones. In the second quarter, large markets experienced a 5 percent annual decline in sales. On the other hand, smaller markets saw a 4 percent increase.
“While inventory shortages are still driving prices higher in most markets, shrinking cap rates and the higher interest rate environment are expected to lead to a plateau in price growth over the next year, especially for Class A assets in large markets,” Yun says. “As a result, investors will continue to look to small and tertiary markets for properties that have the best opportunity to provide stability and generate solid returns.”
Leasing on the four major commercial sectors is strong, real estate pros report. For example, demand for industrial space, particularly from e-commerce and trade, has prompted distribution warehouses and logistic centers close to 70 percent of new construction leasing, according to NAR’s report. About 225.4 million square feet of additional space is currently in the pipeline too.
In the apartment sector, construction is starting to slow in many markets. But vacancies are expected to stay low, due to continued increasing demand. That will cause rents to maintain their current trajectory of outpacing incomes, NAR reports.
“The economy is healthy for the most part, but headwinds [persist] in the short term,” says Yun. “A temporary slowdown in areas severely impacted by hurricanes Harvey and Irma, geopolitical tensions abroad, and any minor correction in the financial markets could temporarily knock the economy slightly off-course in the coming months.”
Updated: June 21, 2018