Overall, 2016 was another strong year for U.S. commercial real estate markets despite some forecasts claiming the bubble would burst, and we have reason for continued optimism in 2017. Still, with the impact of the recent elections on commercial real estate markets, the industry is anticipating possible changes in regulations and tax structures that could lead to some new uncertainty and volatility this year while opening new growth opportunities.
1. Renewed Confidence to Drive CRE Strategy
Property values are approaching 2008 levels, but this time it’s not a false bubble. The market is not overleveraged, and the fundamentals are stronger. A feeling of renewed confidence is driving how investors are approaching their strategic planning for 2017. The anticipated lifting of regulatory barriers and the lowering of tax rates should trigger CRE growth in sectors ranging from multifamily housing to hospitality to industrial. Interest rates will inevitably rise, but the industry as a whole seems well-poised to absorb any adverse impact.
2. The Role of REITs
We're seeing the reshaping of various REITs to be more laser focused on a particular geography or segment in the market. While there’s some hesitation with development activities, we're seeing publicly traded REITs partner with best-in-class developers—who are taking a substantial amount of the development risk—and these REITs are getting in early, at a lower price point.
We expect to see growing activity among nontraded REITs, the crowdfunded or so-called e-REITs, which are structuring lower fees, building in liquidity mechanisms, and attracting a new class of nonaccredited investors.
3. Multifaceted Multifamily
While some are still waiting for the bubble to burst, we expect the demand for multifamily housing to continue expanding in the next year, across multidemographic lines, particularly for the large millennial and boomer generations, and in both student and senior housing, as developers work to meet the increasingly sophisticated expectations of this residential market sector.
4. The Retail–Logistics Link
Advanced warehouse and distribution facilities will be expanding CRE segments nationwide, addressing the growing logistical demands of a retail economy shifting to e-commerce. But as developers and investors look to smooth the “last mile” in the delivery chain, they likely will be turning their attention to building and strategically placing micro-distribution centers, which could find homes in repurposed big-box store spaces.
5. Urban Density Dynamics
We expect to see urban densification continue to trend upward in 2017, especially in the development of high-density and mixed-use centers, such as the West Loop in Chicago, that offer luxury living, retail, work, and entertainment spaces, along with parks and other common areas. Suburban communities with good mass-transit connections will try to mirror this urban rebirth with a live–work–play mix of residences, retail, and lifestyle amenities on a walkable scale.
6. Global Volatility and Foreign Investors
Historically, the U.S. commercial real estate market has been seen as a safe harbor in volatile times, and FIRPTA (Foreign Investment in Real Property Tax Act) reform has opened new sources of foreign investment. In 2017, we see foreign investors looking beyond Class A properties in top-tier cities to find value in rising urban areas nationwide. We're watching Chinese investors closely, sensing a perception by some that U.S. prices may have gotten too high and with Beijing planning to tighten rules on investment capital leaving the country.
7. Headwinds, Tailwinds … and Crosswinds
From China’s slowing economy to the inevitability of rising interest rates, commercial real estate will face headwinds in 2017. But there are tailwinds, too, propelling surging sectors, from student housing to logistics spaces, and in the way millennials and baby boomers are fueling new development in rising urban areas.
CRE may be buffeted by hard-to-gauge crosswinds, though, as the dust settles from Brexit and the U.S. presidential elections, and as uncertainly swirls around the status of government regulations, critical tax policies, and other key directions of the new administration and the new Congress.
With additional issues such as looming debt maturities and opportunities for recapitalizations and distressed purchases as a result of the maturities, 2017 promises to be a news-making year in CRE.