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States in 2016. Changes in the 1980 Foreign Investment in Real Property Tax Act (FIRPTA), which now allow foreign investors to be treated in a fashion similar to their U.S. counterparts, will likely lead to an increase in foreign investment in the U.S. real estate market as well.
Slowing new supply.
Additions to supply will remain limited across the
board, with only modest supply growth in a few sectors—multifamily (now slowing for the remainder of 2016), student and senior housing (creeping up), and single-tenant industrial (regional/nodal distribution centers)—and repurposing in others (suburban malls). Lending sources were extremely skeptical about funding new construction coming out of the last recession, and the current lending environment is showing
signs of reticence as bank reserve requirements from Basel III and commercial mortgage–backed securities (CMBS) risk retention requirements from Dodd-Frank are due to kick in by late 2016. Market volatility has sharply reduced CMBS offerings as well. Insurance companies are stepping in to fill some of the gaps, and private debt funds are emerging as an alternative space. Of all the property sectors, only multifamily can be said to be near long-term new supply, although office is seeing some marginal supply additions in a few markets for the first time in years.
Ever-changing retail.
There will be continued stress on retail and continued retail shifts—including mixed (virtual/physical) spaces and entertainment-themed spaces. The technology of retail continues to evolve, and the “Amazon effect” is becoming pronounced. Analysts expect that the more successful retailers will be those that can optimize a combination of virtual online and physical in-store shopping experiences (“clicks and bricks”).
Amazon has begun to explore physical shopping spaces in combination with its wildly successful online model by opening its first physical store in Seattle this past fall (ironically, in a former Barnes & Noble location). It would not be a surprise to find physical retailers pushing similar formats in the other direction—including more “showroom”-styled storefronts (Tesla) with digital spaces offering fulfillment. As we said earlier this year, some retailers should probably seek out hospice care. In its 130th year, Sears could finally succumb in 2016, with some of its brands, like Craftsman and Kenmore, already being spun off to other outlets, while JCPenney is in recovery and taking up some of Sears’s traditional strengths (Penney’s is now competing in the appliance space). Macy’s is losing ground in the middle market, and has a short horizon to regain competitive advantage with lower-end discounters.
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