According to the Royal Institution of Chartered Surveyors (RICS), 2017 started with only the second rise in federal interest rates since 2006 and the start of a new presidential administration that is already showing itself to be very disruptive on many fronts. Despite all this uncertainty, respondents to a recent survey predict a fairly strong year for U.S. commercial real estate overall - though with the New York metro area as a possible exception.
On the occupier side, the Q4 2016 RICS U.S. Commercial Property Monitor found a positive outlook for rents throughout the coming year, with the largest gains projected in the prime office and multifamily sectors - both near 3% - followed by secondary multifamily (2.3%) and prime industrial (2.0%). Expectations for secondary office and secondary retail are a little more downbeat. But the development starts indicator continues showing a positive trend in the pipeline, led by the office sector. Meanwhile, investor demand increased across all sectors and inquiries from international investors also continued growing.
"There's some uncertainty due to the Fed raising interest rates and bond rates increasing substantially after several years of very low rates, which will reduce the cap rate compression experienced over the past eight years," says Michael Yovino-Young FRICS, president, Yovino-Young Inc., Berkeley, Calif. "Cap rates have already increased modestly but are predicted to increase further in the next 18 months. This will be the result of the economy reacting hopefully to the anticipated changes the Trump administration has planned for the investment market, banking industry, Wall Street, and other relevant areas. The next year should be very interesting as far as appraising commercial real estate is concerned, but difficult to predict in advance."
New York: Caution on the market, but commercial construction booming nonetheless
According to the survey, occupier demand in the New York area has fallen, which has pushed rental expectations into negative territory for prime and secondary retail and secondary office, plus a 1.5% decline in the outlook for the all-property prime office average. However, the data for New York also suggests that investment inquiries picked up in Q4 2016 at the fastest pace since one year ago. Foreign interest also accelerated into the last quarter, with overseas buyers' appetites particularly strong for offices.
And perhaps investors are looking to buy some of the extensive new commercial property that is in the New York pipeline despite the lower rent expectations.
"The outlook for commercial construction, particularly of offices and residential properties, has been exceptionally robust as of late," says respondent Paul Roberts, lead project controls manager for Faithful + Gould, New York. "In a short span of time, we've seen a large number of these types of projects under construction in Manhattan and the outer boroughs, including Hudson Yards, several residential towers in Long Island City, and a combined residential/commercial project in downtown Brooklyn. However, as we move into late 2017, there is potential for a slight slowdown of construction when this over saturation of the CRE and residential markets leads to increased vacancy levels and delays new projects from starting."