CRE Is Well-Positioned for 2018
Drilling down further within the commercial real estate industry, property management also stands to have a strong 2018.Incredibly, at least for anyone who has lived through previous economic cycles, the current upcycle is now pivoting into its eighth year. And though there have been some concerns and a few negatives in the past year—sandbags on the exuberance, if you will—the overall outlook, especially for commercial real estate, and within that rarified group, property management, points to 2018 as a net positive. We had some moments of pause, of course, many of which took some of the wind out of the sails of investment. As an industry, we entered 2017 with question marks about the Brexit controversy, and we followed that up with the more homegrown unknowns of a new administration and the return of interest rate increases. But despite these concerns, the general economy is, in what Cushman & Wakefield calls in its fourth quarter Macro Forecast, a Goldilocks era—“one that is not too hot or too cold, but ‘just about right.’’’ The firm cites 2017 GDP growth north of 2 percent and just under two million net new jobs created last year as clear evidence of that “just right” scenario. Any real downside risk, as one might imagine, is “mostly on the policy side.” How does this translate into commercial real estate? We are starting 2018 with a projected national net absorption in the office sector of just under 50 million sq. ft., according to Cushman & Wakefield. New supply will temper that a bit further, possibly to 40 million sq. ft. as the year continues, but jobs will continue to come on-line, and overall vacancy should remain relatively flat, at about 13 percent. The vacancy rate will also impact rents, but they are nevertheless still expected to grow, albeit at a slower rate. We start the year at an average base of $30.54 per sq. ft. asking. And we see in 2018 that capital market activity will remain very strong, depending—as always—on the geographic location and product type.
Turning to the multifamily sector, there appears to be slightly more of a mixed bag. Research conducted by Marcus & Millichap reveals a mid-year 2017 rise in vacancy rates, this mostly the result of a spate of new construction. Happily, that was a peak, and coupled with the continued job creation referenced above, the outlook remains positive for rental momentum. And provisions of the newly passed tax bill concerning homeownership should further buoy the rental market.
Of course, there are concerns. And while they remain at the macro level, they do have the power to impact the commercial real estate apple cart. As mentioned above, we will begin to feel the practical application of the new tax laws, although the general consensus predicts those impacts to be relatively benign for commercial real estate as a whole. We also face the wait-and-see of a new Federal Reserve chairman, and even the unknown of the increasing tensions between the U.S. and North Korea still plague us.