The commercial real estate sector is on target for steady growth in 2017, driven by growing demand among the country’s smaller markets, according to the National Association of Realtors.
The NAR predicts that office (down 1.1% to 12.1%), industrial (down 1.3% to 7.1%) and retail (down 0.7% to 11.2%) vacancy rates will all decline this year, with multifamily’s availability unchanged at 6.5%.
Job growth in business and professional services is expected to be the main driver behind the office segment’s performance, while new apartment construction is leading to a flat multifamily market.
Also contributing to the stability of the multifamily market this year is the continuing trend of higher home prices, increasing mortgage rates and the resulting low homeownership percentages, particularly in the priciest markets, according to NAR Chief Economist Lawrence Yun. This is forcing renters to put off home purchases and continue renting apartments instead.
“As office space growth slows in major metros that demand is rising in middle- and small-sized markets,” Yun said. “If potential tax reform can add to a business-friendly environment, this could accelerate growth in the CRE sector, including industrial, which would benefit from an increase in e-commerce. Overall, a growing U.S. economy makes its commercial real estate market a safe bet.”
In a somewhat contrary view, The Federal Reserve is reportedly keeping an eye on the U.S. commercial real estate market for signs of a bubble and could institute larger-than-expected interest rate hikes to cool what it considers a potentially “overheated” sector. Its overriding concern is reportedly the abundance of luxury apartment buildings, which have undermined rental rates in some markets like New York City and Miami.
The Fed has also advised commercial lenders to re-evaluate — and even tighten in some cases — their credit and other loan requirements in a CRE environment that has seen a recent increase in commercial mortgage delinquency rates after years of declines.