High investment returns over the past few years have caused some investors to question whether the commercial real estate sector could be headed for a slowdown, or even a correction. However, a variety of factors including volatility in the US stock markets, uncertainty in international markets, and expectations of rising US interest rates, are likely to keep commercial real estate opportunities a smart choice for investors in 2016. In fact, commercial real estate prices are likely to continue their advance in 2016, albeit with some new considerations for investors.
Volatility in the US Markets
After nearly uninterrupted growth since the beginning of 2012, the US stock market finally experienced its first major correction at the end of August. Though this is perfectly normal after the stock market experienced growth of 67% in 3.5 years, the correction worried some investors who think the markets may be experiencing a long-term slowdown rather than a one-time revaluation.
These fears may begin to subside if the markets regain their earlier highs (they seem to be doing just that), however, the increased volatility has led some investors to reduce their market positions and look to other asset classes for safety. Real estate is often perceived as a more conservative investment than equities, and investors seem to think that the commercial real estate market isn’t as overvalued as the stock market, causing more money to pour into the former sector.
Many economists have postulated that the selloff in the US stock market was actually initially precipitated by troubles overseas. China’s own equities market suffered a major correction over the summer, signaling that the country may be undergoing a broad economic slowdown. This has had two effects on global markets. First, it created extra volatility in virtually every global equities market. But it also raised the prices of certain US investments, which were seen by Chinese and other overseas investors as an alternative to the Chinese market. The latter trend has been particularly true of US real estate markets, as Chinese capital has been pouring into commercial and high-end residential real estate properties in major US urban centers over the past 6 months.
Interest Rate Changes
In addition to these, anticipation that the Federal Reserve will be raising rates has caused increased volatility in mortgage rates. However, due to the potentially worrying economic factors outlined above, the Fed has repeatedly (first in July, then in August, and just now in October) delayed that action. It is now becoming increasingly apparent that rates are unlikely to rise in 2015, and probably not in the first half of 2016 either.
The other thing to note is that even when interest rates do increase, commercial real estate investments won’t be immediately affected. While in the long run higher interest rates would increase capitalization rates and have a downward effect on property prices, in the short term, a rate increase may actually have a positive effect, by communicating confidence in the US economy. Whatever action the Federal Reserve ultimately takes, rates are unlikely to rise dramatically in the next 18-24 months, which is a positive growth factor for the commercial real estate sector.
The Outlook for 2016
While commercial real estate prices have increased steadily over the past few years, the outlook for 2016 shows further growth. However, over the next year, commercial real estate investors will have to hunt around more to find good deals on properties. The influx of overseas money will limit inventories, and the foreclosures that flooded the market in the late 2000s have now greatly decreased in number. This has been most apparent in urban areas, where properties have seen the steepest price increases. That may be why some wealth advisers are already telling their clients to start looking outside the biggest urban centers to find better deals on real estate.
Despite the favorable outlook for 2016 commercial real estate, investors should make sure they work with a real estate portfolio specialist to properly navigate the marketplace and benefit from their experience. As an experienced investment advisor for family offices and high net worth foreign and domestic investors, RMC Realty Advisors is involved in all phases of the product life cycle, from acquisition to disposition, including asset management, receivership, and due diligence consulting services. Contact us today to discuss investment ideas, the current state of the commercial real estate market, and how we can make a difference in the fulfillment of your long-term investment goals.