NAR: Commercial RE may peak in expensive markets

NAR: Commercial RE may peak in expensive markets

SAN DIEGO – Nov. 16, 2015 – While commercial real estate has steadily recovered in recent years, industry experts expressed concern that prices may have peaked at the Commercial Economic Issues and Trends Forum at the 2015 Realtors® Conference & Expo.

The fundamentals of the commercial real estate market have been gradually improving, and this has led to prices rising to new peaks, said Lawrence Yun, NAR's chief economist.

"There is an indication that prices may have topped for high-end commercial properties in major markets," said Yun. "Those properties priced above $2.5 million have enjoyed large price gains in recent years but are now at risk of experiencing a modest price decline."

Yun said larger commercial markets have seen significant growth over the last few years, but he predicts that it's now time for smaller markets and lower-end properties to shine. He called it positive news for commercial Realtors who tend to work with smaller properties valued between $500,000 and $1 million.

"Lower end properties were slower to recover, but a slight easing in lending conditions combined with job gains are leading to increased leasing and investment activity," said Yun.

Yun expects states in the western and southern parts of the U.S. to outperform the rest of the country in the leasing of all commercial properties. The areas' steady job growth should boost leasing in the retail, office, industrial and multi-family markets.

Jim Costello, senior vice president with Real Capital Analytics, joined Yun at the forum. Costello touched on growing fears of a potential bubble – fears he understands but believes are unfounded.

"Yes, the prices for commercial real estate are high, but they are high in a much more conservative lending environment," said Costello. "Back in 2006 and 2007, we saw deals being made that had no room for error, and today we have a lot more room for error. As long as current owners can continue to finance their assets and are not forced to sell, the worst we could see is the market stall."

Predictions of rising interest rates from the Federal Reserve, however, have some experts concerned about a potential price decline in the commercial sector.

"Will there be a rate hike in December?" asked Yun. "Most likely. And there will probably be another one in March and then another one in August. We are likely going to see several rounds of rate hikes for the next few years. We are in a rising interest rate environment, which will then compete against rental yield return on commercial real estate properties and thereby negatively impact prices."

The forecast for 2016 commercial market calculates that vacancy rates will shrink, as reported by Realtor members. In 2015, office vacancy rates were at 15.6 percent, and they're predicted to shrink to 15 percent in 2016.

The industrial market had a vacancy rate of 11.7 percent in 2015, which is forecasted to fall to 8.8 percent while retail should see a drop from 13.2 percent to 12 percent. Multifamily is the only market not predicted to see a decrease in vacancy but to remain at a constant 7.1 percent.

NAR predicts that the NCREIF Indices (a look at investment returns) will fall from 249.8 to 249.0, while the Green St. Advisors will decrease from 117.5 to 115.5.

© 2015 Florida Realtors®

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