The world is “oversupplied,” and it is predicted that profound economic impact, implications for property market fundamentals, and commercial real estate pricing will be affected in the investment and CRE markets in 2017. According to National Real Estate Investor, high transaction volume, increased investor flows, and strong fundamentals will shape the United States property market this year. Here are the five trends that will play a significant role:
- Global economic and political uncertainties.
The Brexit vote in the U.K. has added new uncertainties that will not be fully understood, much less resolved, in the near term. The IMF has downgraded global growth twice since January as uncertainties blur the outlook. For U.S. markets—real estate in particular—the impact is likely to be largely positive as U.S. assets become more attractive and valuable to global investors. We can probably expect enhanced inbound foreign investment in U.S. real estate as the U.S. becomes even more of a safe haven.
- Low interest and cap rate environment.
While it seems fairly certain that the Fed will seek another rate hike before the year is out, it should be minor. The funds rate could be boosted by perhaps 0.25 percent to 0.50 percent in 2016 and the same in 2017, but both inflation and employment appear to be coming in under the Fed’s expectations. With global economic growth lower than expected earlier in the year, the Fed will more likely maintain a ‘wait-and-see’ position in the short term. We still believe that the Fed is more than likely to weigh the effects of each move it makes before adding any additional friction to current (if unspectacular) economic growth trends.
- Foreign investment in the United States.
Global economic and political uncertainty continues to drive capital to the United States. International capital flows into U.S. real estate assets will continue—and increase. The U.S. property market is the most stable and transparent in the world, with higher relative yields and price appreciation potential, making it an easy investment choice. And, while slowing growth in China and much of Europe may dampen currencies and incomes over there, there is still abundant non-U.S. capital looking for placement and very strong demand for U.S. assets, as 2015 proved with record inflows. In 2015, foreign purchases of U.S. real estate assets rose to more than $87 billion over the 12 months ending in December, according to the Association of Foreign Investors in Real Estate (AFIRE), with China, Canada, Norway and Singapore all riding the wave. That volume is up from just $4.7 billion in 2009, according to research firm Real Capital Analytics. Among members of AFIRE, a substantial percentage expect to increase investment in the U.S. in 2017.
- Volatile Energy Markets.
Energy market volatility has already affected certain regional economies (Houston, North Dakota) and producer nations (Saudi Arabia, Venezuela). Last year saw a dramatic drop in oil prices, and the drop continued into early 2016, followed by substantial volatility through mid-year. Increased production and reduced demand due to slowing global growth led to the decline which saw oil prices fall from $110 per barrel to a 13-year low $27 per barrel in early 2016, with recovery to just $43/bbl in July.
*National Real Estate Investor