Economists Weigh In: Has US Commercial Real Estate Peaked?
Commercial real estate is hot. White hot. But how hot is too hot—and is property going to cool down soon? Bisnow asked six top economists about their views on whether or not US commercial real estate has peaked.
Here are their answers.
Jamie Woodwell, VP of Commercial Real Estate Research, Mortgage Bankers Association
“2015 was second only to 2007 in terms of the amount of transaction activity, so investment markets are running high, but domestic real estate remains a large, liquid and active market. When you combine the amount of equity property owners have available to tap into, with the amount of capital looking to be invested, the market remains ripe for activity.”
Jack G. Kern, Director—Research and Publications, Yardi
"The question about markets and real property values peaking and where we are in the cycle is not, in my view, the right way to look at things. Office, retail, industrial and multi-housing all respond to market forces in a somewhat different way and many of these have other determinants that will effectively change the timing of peaks and valleys in pricing and transactions.
Certain sectors are at pricing levels that are unsustainable and the return to normal pricing, returns and changing interest rates will force many property portfolios back to more realistic levels. The change, which will be limited at first and accelerate over the next four years, will be fairly steady, without the absolute collapse of the past recession. In the next five years, the aging of the population and shifts in the housing stock will be cause for growth in many sectors, notably durable goods and services, again lifting the economy. So it isn’t that the commercial investment market has peaked, but that it has slowed in growth and will now adjust to a less aggressive posture."
Robert Bach, Director of Research—Americas, Newmark Grubb Knight Frank
"To paraphrase a former president, it depends on what the meaning of the word ‘peaked’ is. With regulators putting some restraints, verbal and otherwise, on lenders, it seems like the debt markets will present a bigger challenge this year. Further, it seems like investors are expecting prices to level out or soften, which could become a self-fulfilling prophecy. The good news is that operating incomes should continue to rise, helping to cushion the stall in cap rates. Let’s call this the seventh-inning stretch."
Ray Torto, Harvard Lecturer, Retired Global Chief Economist at CBRE
"I do not expect the CRE investment market as reflected in prices to decline after the recent run-up. I still think the economic demand is there for CRE as well as the abundance of capital wishing to be in the asset class. So prices will hold up.
At the same time the transaction volume in the market for the first quarter will take a breather from the pace we have seen in 2014/2015. In this sense the volume will pale by comparison. I believe the early numbers from RCA already are indicating this and it seems right given the pace of the last year.
I would describe the CRE investment market aa at a plateau, moving to higher levels in the near future."
Ken McCarthy, Cushman & Wakefield Chief Economist
"We do not believe the US commercial real estate investment market has peaked. The economic fundamentals underlying the real estate market remain sound and will continue to do so in 2016 and beyond. While pricing and volumes may have temporarily slowed, we do not believe this is the beginning of a decline, but a pause following a period of strong growth. In addition, there is still a large volume of global capital seeking to invest in US commercial real estate which will continue to bid on assets. All in all, we do not see the kinds of excesses that typically characterize a market that is peaking."
George Ratiu, Director of quantitative and commercial research, National Association of Realtors
"Commercial real estate investments are generally driven by underlying economic and leasing fundamentals. A growing economy with a growing population drives demand for commercial spaces, which leads to increased cash flows, rewarding investors with positive returns. Since the end of the Great Recession, the US population has grown by over 17 million people. With improving employment trends, household formation has been moving toward the long-term average. Gross domestic product has advanced, even if in a moderate 2% to 3% range. Moreover, compared with other global economies, US economic growth has made the US a very attractive market for international investors. These factors translate into continued demand for commercial spaces. While we expect the aggressive price appreciation of the past two years to slow, investments in US commercial real estate should maintain momentum in 2016—barring, of course, any unforeseen shocks."