2018 Outlook For Top 4 Commercial Real Estate Sectors
There are several factors that indicate the cycle’s best years are in the past, Colliers International Chief Economist Andrew Nelson wrote in the company’s 2018 Outlook report, including slowing deal volume, eight consecutive months of declining commercial property prices, plateaued cap rates, a widening divide between seller asking prices and buyer bids and investors going in search of riskier assets for better returns.
Though the cycle is getting long in the tooth, the industry is expected to continue riding the waves of the strong economy to steady growth, albeit at a more moderate pace than years past.
“We’re not ready to pronounce an end to this economic expansion, which has been so good to the property sector. Although getting on in years — the expansion has been going on for over 100 months, and by mid-2018 will be the second longest in U.S. history,” Nelson wrote. “Courtesy of the strengthening global economy, likely tax cut stimulus from Washington and other positive influence, the economy is getting new life.”
Here is the forecast for the office, multifamily, industrial and retail sectors this year, according to Colliers International.
Slow and steady growth is expected in office markets. Job growth, though slightly down from its 2015 peak, remains robust. Employers added 175,000 jobs on average per month in 2017, compared to 2015’s 250,000.
Still, the sector will experience a balancing act of sorts as new supply levels converge with occupancy rates and asking rents. Vacancy rates nationwide have been stagnant for the past two years, standing relatively at the same rate, Colliers reports. The same can be said for rents the past several quarters. In addition, suburban office markets are expected to continue to outperform downtown centers thanks to several years of positive absorption and vacancy rates that hovered near pre-recession lows as of 2017.
Though labor markets are strong, wage growth has been relatively slow in comparison. Should wage growth continue to lag this year, Nelson predicts it could stifle consumer confidence and spending, eliminate savings and ultimately hurt the retail and multifamily sectors.
This year’s aggressive construction levels and apartment pipeline are going to put downward pressure on occupancy rates and rents, Colliers reports. Some economists posit the new tax law will spur more demand in the multifamily market because the new system slashed some of the benefits of homeownership, making it less attractive and renting more likely.
Industrial real estate is expected to remain a star performer in the market this year as investors flock to the sector’s strong fundamentals and record-breaking occupancy and rents. Construction is booming as operators continue to tackle online delivery and push to get products to consumers more quickly by opening modern, multilevel distribution hubs in densely populated markets.
The retail sector has taken blow after blow in 2017, and Colliers projects investors will continue to flee the sector in droves as store closings and bankruptcies continue to stir fear regarding the health of the industry. Even though Moody’s Analytics predicted the sector would have a softer outlook this year compared to the last — when roughly 8,000 stores closed around the country — major retailers and department stores have announced massive store closings during the first two weeks of the new year. Sears Holding Corp. recently announced it will close 64 Kmart stores and 38 Sears sites. In addition, major department chain Macy’s announced it will close 11 more stores this year, NPR reports.