Commercial Investment Real Estate July/August 2017 | Page 27

M any sports analogies are being thrown out to describe how close the U.S. com- mercial real estate market is to its cycli- cal peak. Regardless of whether fans are keeping score based on quarters, innings, or overtime, time is still left on the clock. It is no wonder that the maturity of the market cycle is garnering plenty of attention. The U.S. com- mercial real estate market is now eight years into its current economic expansion, which is lengthy by historical standards. “I don’t see a lot of risks to the cycle in 2017,” says Ryan Severino, chief economist at JLL in the New York City metro area. “I don’t even see all that much in 2018. I think we have at least a couple of years before we start to have that question about is the clock ticking or not.” Slowing Momentum Yet there are signs that the momentum is slowing. “The commercial real estate market right now is clearly late in the cycle overall, but that is some- thing that needs to be dug deeper into both by mar- ket and asset type,” adds Spencer Levy, Americas Head of Research for CBRE. Specifi cally, softening is occurring in areas, such as central business district offi ce rents, CBD mul- tifamily rents, and high street retail. Weakness also is appearing in peripheral B and C malls and power centers. At the same time, other sectors are still quite strong, such as industrial, suburban offi ce, and sub- urban multifamily, and Class B and Class C multi- family, according to Levy. Market cycles also vary widely based on geogra- phy, with some metros that have raced toward the peak, while others have proceeded at a slow pace and have greater upside potential ahead. “There is no such thing as a national real estate market. Every market and economy is local in nature,” says Ted C. Jones, Ph.D., chief economist and senior vice presi- dent at Stewart Title Guaranty Co. in Houston. For example, Houston has not created any net new jobs during the past two years. However, the market added more than 20,000 new apartment units last year. “We are seeing a pretty good erosion in Class A apartment rents,” Jones says. However, Jones remains bullish on the economy overall. Most economists are forecasting favorable economic and job growth, which bodes well for the broader commercial real estate market. Gross domestic product growth did decline to 1.6 percent in 2016, but it is expected to pick up more speed with a rise to 2.3 percent in 2017 and 2.6 per- CCIM.COM cent in 2018 before pulling back to 2 percent in 2019, according to the latest ULI Real Estate Consensus Forecast released in April 2017. The ULI Forecast for employment anticipates good, but lower, levels of growth ahead. The U.S. added 2.24 million jobs in 2016, and those num- bers are expected to decline to 2.20 million this year, followed by another 1.90 million in 2018, and 1.55 million jobs in 2019. “We think that the jobs situation is going to improve late this year and probably early next year — if the new Trump administration is able to get through some of its fi scal stimulus policies,” Levy says. “If we can’t get major tax reform done, I think we are at risk of a much more muted growth profi le.” Stealing the Show Industrial has been on an incredible run over the last several years, thanks in large part to the rise of Real GDP Growth 3.3% 2.7% Actual 2.5% 1.8% 20-Year Avg. (2.33%) 2.4% 2.6% 2.2% 1.6% Forecast 1.7% 2.3% 2.6% 1.6% 2.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 –0.3% –2.8% Sources: 2005–2016, Bureau of Economic Analysis; 2017–2019, ULI consensus forecast. Note: The previous ULI consensus forecast (released in October 2016) projected 2.1% and 2.0%, respectively, for 2017 and 2018. Industrial/Warehouse Availability Rates Actual 11.7% 10.0% 9.8% 9.9% 14.1%14.0% 13.0% 12.3% 10.8% Forecast 9.8% 20-Year Avg. (10.3%) 8.9% 8.2% 8.0% 8.0% 8.4% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: 2005–20 16 (Q4), CBRE; 2017–2019, ULI consensus forecast. Note: The previous ULI consensus forecast (released in October 2016) projected 8.6% and 8.7%, respectively, for 2017 and 2018. July | August 2017 25