In the aftermath of the 2016 election, the United States is experiencing a period of uncertainty. President Donald Trump’s administration is underway and moving quickly on some of the action items promised on the campaign trail. Congress is in session. How President Trump and Congress work together on hot button topics such as trade deals and tax reform could have a significant effect on the economy, which will inevitably have an impact on the commercial real estate sector.

The Federal Reserve raised interest rates slightly in December 2016, from .5 percent to .75 percent. Interest rates were frozen during the economic recession to encourage recovery. December marked only the second time in 10 years the interest rate was raised, which indicates the economy is on the mend. More increases are projected throughout 2017, another sign of confidence that recession may be behind us.

Other signs are also indicating similar optimism about growth and investment. Analysis conducted by CBRE predicts that federal bond rates will hold steady in 2017, with 10-year Treasury yields predicted to be in the 2.25 to 2.75 percent range. The yield on commercial real estate investments remains much higher, which means minor fluctuations in the federal bond rates should not affect commercial real estate capitalization rates. 

As a whole, CBRE analysis predicts the commercial real estate market will experience a slight market slowdown. Tenant demand is expected to wane while supply is predicted to slightly increase. .

Office

An estimated 50 million square feet of office space is slated for completion in 2017, but the office market as a whole is struggling to fill vacancies. The unemployment rate remained virtually unchanged from 2015 to 2016, which may make it more difficult for offices to find employees to fill empty positions. CBRE predicts that office jobs will decrease throughout the year, which may lead to a slightly increase in vacancy rates. Nevertheless, rents are predicted to grow modestly, by about 1.5 percent.

New development activity will likely occur in suburban markets as urban markets experienced significant activity during 2016, as well as slight decreases in demand.

Retailers

Consumer spending was higher in 2016, compared to 2015, and across the board, purchases were up among retail goods.  Growth in the industry is expected throughout the year, particularly among the food sale industry.

To entice customers to come to the store rather than purchase online, many stores may be considering improvements to improve their store experience. Online commerce is also projected to grow; CBRE predicts ecommerce may make up nearly 10 percent of total retail spending by the end of 2017. As such, physical expansion of retail stores may be limited, though rents are expected to grow slightly, about 1.7 percent.

Industrial

Increasing online activity bodes well for warehouses and industrial complexes. Analysis from Forrester indicates that e-commerce is projected to increase 9.3 percent over the next five years. CBRE estimates that for every $1 billion in new e-commerce sales, 1 million square feet of warehouse will be needed.

Acquisition pricing has been steadily increasing since the recession, and capitalization rates continue to be low in capital markets. Investors are paying record high prices for warehouse investments, and rents are expected to increase at the same rate as they have over the past few years.

One thing those following the warehouse sector may want to monitor is international trade deals. How the Trump administration negotiates trade arrangements, including tariffs on imports, may have an impact on the volume of international trade conducted in 2017.

Multifamily

Supply outpaced demand for apartments in 2016, and it is likely to do so again in 2017. Along with the influx of supply, vacancy rates are expected to increase and rise in rent growth to slow as well.

One of the areas that has grown the most is upscale multifamily housing developments in urban areas.  Research from Costar found that while supply of units in urban areas grew by around 15 percent from 2012 to 2016, development in suburban areas only grew about 5 percent. Several indicators point to the luxury apartment market becoming oversaturated; vacancy rates among luxury apartments increased in 2016 compared to moderately priced apartments.

CBRE predicts that suburban areas will have stronger growth than urban areas because they do not compete with urban areas and do not have the same oversupply of units as urban areas. The U.S. Census American Community Survey indicates more people are moving from the city to the suburbs than from the suburbs to the city, which could potentially mean more demand for multifamily housing in suburban markets.

Industry Trends

Technology, heath care and life sciences organizations have been among the strongest sectors for growth in recent years. CBRE predicts that technology, which accounted for 20 percent of office development since 2014, will become more stagnant as job growth slowed in 2016. Life sciences organizations may also note a decrease in demand for new facilities. Life sciences companies are increasingly looking to be more cost-efficient and as such are outsourcing nonintegral parts of their operations, such as manufacturing. On the other hand, health care may continue to be a strong market as health systems consolidate and seek new or expanded facilities.

Uncertainty Remains

The political climate in the U.S. may lead to more variance in building activity. Decreases in regulatory requirements, for example, may lead to more growth in the life sciences or technology sector. Trade deals may have an impact on the warehouse market.

Monitoring trends, particularly in rent increases, vacancy rates and interest rates may help the commercial real estate sector anticipate the changes in the market.

Linda Atkinson is a Managing Director in CBIZ Valuation Group’s Real Estate practice. She has more than 28 years of experience in real estate consulting and valuation analysis for multiple property types, including office, retail, multifamily, industrial and health facilities. She can be reached at latkinson@cbiz.com or 314.692.5818.