Commercial Real Estate Outlook 2017

Posted on January 25, 2017

The real estate industry is increasingly influenced by rapid technological advancements and significant demographic shifts, which include growing urbanization, longevity of Baby Boomers and differentiated lifestyle patterns of Millennials.

However, in spite of these fluctuating changes, commercial real estate (CRE), has been steadily recovering in recent years sustained by improved job growth and strong demand for multifamily housing. Looking ahead to 2017, growth is expected to flow into the smaller markets, according to a commercial real estate forecast session in November at the 2016 REALTORS® Conference & Expo.

“Prices in smaller markets should continue to climb with strong tenant demand and declining supply supporting growth,” said Lawrence Yun, NAR chief economist. “As job creation continues, commercial real estate and vacancy rates will be stable across the country.”

That being said, this past year brought about some surprises that could have an impact on commercial real estate and the economy as a whole, in 2017.

Interest rates

The Federal Reserve announced this past month that it is raising interest rates by a quarter of a percentage point.

In addition, the Treasury yield moved up more than 50 basis points since the Nov. 8 presidential election, and was hovering around 2.5% ahead of the rate hike.

Higher interest rates could constrain property deals by making real estate less affordable, and it can also provide an incentive for borrowers and lenders to be more cautious in a bid to reduce risk. And higher interest rates typically signal a strong economy, which tends to be associated with a strong real estate market.

White House and Wall Street

The extent of changes to financial legislation will depend in part on who’s in charge. Trump’s pick of former Goldman Sachs banker Steven Mnuchin as the next Secretary of the Treasury and Goldman president Gary Cohn as director of the National Economic Council is a good indication that regulatory changes are planned. Mnuchin has explicitly said his No. 1 regulatory priority is to “strip back parts of Dodd-Frank that prevent banks from lending.”

Along the same lines, Trump has picked Elaine Chao, a former secretary of labor, who has been a member of the Wells Fargo board of directors since 2011, as transportation secretary.

It seems clear that the interests of the financial and commercial real estate industries will be well represented in the White House. What’s less clear is whether this will affect financial institutions uniformly or whether some will be treated more favorably than others.

Foreign investment

Recent news from China indicates that real estate deals and other forms of Chinese investment may be on the downswing. The financial press reported in late November that China was planning to clamp down on overseas investment, which rose more than 50% in the first nine months of the year. Although it’s not yet clear as to what extent this could affect U.S. commercial real estate lending. Foreign property deals of $1 billion and up by state-owned companies will reportedly receive extra scrutiny.

And finally, there’s the continued Brexit fallout. If the euro and pound are volatile or weak, European banks will have to weigh the relative stability of the U.S. commercial real estate market against the increased cost of capital, which puts non-U.S. lenders at a disadvantage. If the exchange rate is risky, recycling the financing that’s already in the U.S. could be the most conservative option.