2017 Update on the Commercial Real Estate Market

The Commercial Real Estate Market is very segmented as compared to the residential market. The main segments are Office, Industrial, Retail, Hospitality and Multi-Family.

Let’s look at each market segment and its specific market conditions as of mid-2017.  Remember, most real estate indicators are lagging indicators.

Office Real Estate Market

According to Colliers International – “Despite the fact that the U.S. office market is cooling, the market overall is solid and stable with occupancy at peak levels and record rents in several markets. Investors remain committed to the office sector but are shifting their strategies.

As the U.S. is entering its ninth year of economic expansion, the office market remains historically strong. Tenant demand is a wild-card factor, with absorption levels considerably lower than during previous cycle peaks. Office construction volume remains elevated and holding firm, but is below the historic high.”

There are also new innovators such as WeWork. WeWork is a shared office space concept that is now available in 20 countries. WeWork is taking current office space and creating “Workspace, Community, and services for a global network of creators”.

Industrial Real Estate Market

According to JLL, there are three things for the Industrial market to keep its eye on:

  1. The number of new units that are breaking ground

    Chart

  2. Net absorption – it’s lagging behind new deliveries (see chart)

    Chart

  3. Domination of logistics and distribution for leasing and new construction (see chart)

    chart

Retail Real Estate Market

According to Deloitte, many retail assets are becoming liabilities with a risk of even further decline.  Retailers are looking to online for growth opportunity however the traditional brick-and-mortar stores aren’t completely doomed. Of the top 20 brick-and-mortar stores, 17 of them are also the top online retailers.  So, brick and mortar are important but the experience within is changing. “…disruption in shopping habits caused by e-commerce, retailers are scrambling to find new ways of luring shoppers into stores — adding technology, creating in-store coffee and beer and wine bars, even eliminating inventory altogether.

Stores of the future, experts say, are all about creating in-store experiences that incorporate technology in smaller store footprints.” Annie Sciacca

Hospitality Real Estate Market

According to Cintas.com, the current trend is toward new development of banded hotels instead of buying current inventory. Much of the trend is because of the changing expectation of the traveler.  Millennials are now the largest demographic and they are the driving force behind this trend.  They travel more and spend more when they travel.  It is expected that in the next 5 years 52.8 percent of Millennials vs. 32.1 percent of Boomers will travel. Oleg Pavlov, Quadrum Global founder and CEO, sums up the trend as a win for everyone: “Given where the hotel investment market is today, we believe that self-managing our newest crop of hotel projects puts us in a better position to create value for investors and customers over the entire lifecycle of these projects.”

Multifamily Real Estate Market

According to REIS, we are seeing an uptrend in the national vacancy rate of 4.4% nationally at the end of 2Q.  This is still low; however, it is up 10 basis points and is the third consecutive increase in vacancies. It is projected that by the end of 2017 there could be 200,000-250,000 new apartment units hitting the market. It looks like funding will start to dry up in 2018-2019 for new construction of multifamily units.

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