The commercial real estate attorneys from Snee, Mahoney, Lutche & Helmlinger discuss important trends to watch for this year.
There are many factors that will ultimately affect the course of commercial real estate for this year, and unforeseen issues are always possible. Based on existing conditions, however, there are five potential trends to watch in 2015.
1. Increased capital flows. Increased capital flow is partially due to most institutions being still under-allocated to real estate. Consequently, we may see more investment capital coming into the commercial arena. Another factor pointing in this direction is the strong four-and five-year performance of both NCREIF (private investments) and NAREIT (publically traded real estate investment funds). Real estate seems to offer some of the best risk/reward opportunities available, especially considering the multiyear run in equity and bond values. We should expect more foreign and retail investor money to continue to push capital values up well beyond the 2007 high points.
2. Multifamily still prominent. Multifamily transaction volume has reached pre-recession levels. Real estate investment funds (REITs) and pension funds have fed a hungry appetite for the multifamily sector, and the pace isn’t expected to slow down any time soon. Apartment demand has been charged by the shocks of the recession. As values increase, cap rates fell back toward 6 percent. This snapshot is similar to what we saw in 2005 and 2006.
3. Retail bifurcation. The economic recession and wave of e-commerce have redefined the retail market equation. Although the industry’s evolution continues, we are already beginning to see a deeply bifurcated mix of high-end urban retail destinations at one end of the retail spectrum with discounters at the other. Scattered about in the middle are local grocery-anchored strips. After years of consumer cautiousness, an improved housing market should lead to an improved retail arena as well. Household wealth has risen to more than 5.5 times disposable income, the 20-year average. Annual expansion in retail sales is at 6 percent. These are indicators that retail activity is on its way to achieving a rate consistent with job creation and income growth.
4. Industrial improvements. Industrial real estate is subject to the whims of the national and global economies, as imports and exports change with the circumstances over days, weeks or months. There have been indications that economic slowing overseas has undermined growth at some of the major ports and larger airports. As retailers move to be closer to customers, some intermediate warehouse points have suffered little retrenchment. The Amazon distribution model has affected the warehouse market as well. Locally based brick-and-mortar retailers still need warehouse space in many of the same places they have always been, near population centers where stores are and people shop. Demand for industrial space, especially in gateway markets, has been growing.
5. Continued low supply. New supply is at a historic low. This is in part because market rents generally have not justified new construction and because financing has been constrained in the wake of the recession. This leaves upside potential in the property sectors to drive rents.
Based on current market tendencies and evaluations, we can expect these five trends to be a significant part of the story for commercial real estate in 2015. As previously mentioned, there are a variety of factors that may affect these trends, but consider these predictions to ensure you are prepared and positioned for the coming year. For more information regarding commercial real estate in Maryland, contact a commercial real estate attorney from Snee, Mahoney, Lutche & Helmlinger today.