The current global economic climate presents some unique challenges and opportunities for U.S. commercial real estate investors. It’s equally important for new and experienced real estate investors to be aware of the existing macroeconomic conditions working for and against them before they embark on making new investments this year.
Here are four trends that are shaping the commercial real estate investing landscape in 2016:
- Volatility in U.S. equity markets has led to more investment in real estate.
Rightly or not, real estate is viewed by investors as more stable than equities. It could be the fact that the real estate investment’s are backed up by hard assets, and is therefore viewed as having some “inherent” value unlike more abstract investment vehicles. In any case, when there is volatility in the markets, the real estate sector benefits from this uncertainty by experiencing an influx of new investment capital, and 2016 is no different.
There seems to be a very real divergence occurring between the volatility in the U.S. stock markets and other economic factors that are showing more stability of the U.S. economy, such as the still growing commercial real estate sector. In all, commercial mortgage originations were up 24% for 2015 from 2014 levels, and they climbed again in early 2016 as interest rates dipped further. Also discussed below real estate values are at all time highs.
- There is even more volatility in foreign markets, and many foreign investors are looking to park their money in US real estate (though some are pulling out).
Cross-border commercial real estate transactions increased more than 150% year-over-year in 2015, and with increased market volatility in 2016, the number of foreign investors seeking safe haven in the U.S. real estate market will likely grow further.
At the same time, foreign investors from countries that are hurting from low oil prices (Saudi Arabia, Russia, Brazil) may be looking to liquidate US real estate investments in order to generate the cash necessary to cover their losses from the energy sector.
- US property values are still climbing
This volatility has not stopped (indeed, it has perhaps bolstered) the growth of U.S. property values, which climbed an average of 5.9% in 2015 and which are expected to continue rising, albeit at a lower rate. It’s important to keep in mind that this is merely the nationwide average, as some properties in major urban centers have gained as much as 180% since 2009. It’s also worth noting that the unabashed optimism among commercial real estate analysts has abated, with a split occurring between those that forecast further growth and those that predict a plateau with an eventual decline.
The prognosis is better for investors looking to buy in certain major U.S. markets, such as New York and California. For instance, despite slower economic growth, confidence on the part of developers indicates a positive outlook for California’s commercial real estate development through 2018, according to a survey released by UCLA economists.
- Interest rates are still low despite recent Fed rate hike
Last but not least, the global events outlined above have led interest rates to go into a two month decline (though they did rise slightly in early March). In Japan and Germany, some banks have even issued negative interest in an attempt to make their economies more competitive in a global market. All this would seem to indicate that the decision by the Federal Reserve to raise interest rates in December of 2015 may have been shortsighted, and that, until there is more confidence in the U.S. and global economy, borrowing is likely to remain cheap. This, in turn, is favorable to commercial real estate investors, by keeping capitalization rates in check and bolstering asset prices.
Since experts disagree on where the commercial real estate market is going to end up by the end of this year, investors need to be careful and do the proper amount of due diligence on any properties they are considering for purchase.
As a trusted due diligence consultant, RMC Realty Advisors provides the necessary resources to critically evaluate real estate investments. Our expertise doesn’t only come from being able to find answers to critical questions—it’s knowing which questions to ask in the first place that can be crucial for the success of real estate investments. Contact us today to set up a consultation and benefit from our decades of experience navigating the commercial real estate sector.