The strong and growing demand for commercial real estate in 2015 carried into the new year. Commercial property transactions totaled $139 billion in January, up 15.3 percent over January 2015. Indeed, the CRE market appears to have gained momentum recently, as total sales over the past three months were 22.2 percent above the prior three months, according to data from Reit.com. The demand has boosted the construction of new properties. According to CoStar’s value-weighted commercial property price index, reported valuations rose 11.6 percent over the 12 months through January 2016, roughly in line with appreciation trends over the past three years. Reit.com also indicated that consumer spending increased 0.4 percent in January.
In September, The S&P Dow Jones Indices and MSCI had given real estate its own unique class, separating it from the gang within the financials sector. According to CNBC, the parting of ways comes as real estate as a sector has outperformed the S&P 500 with S&P’s REIT industry index up 24 percent annually since the bull market began in 2009, versus 18 percent for the benchmark. This new classification includes all real estate investment trusts (REITs) except for mortgage REITs, which now remain classified under financials. With eight years of low rates fueling a commercial real estate boom, reining it in now might keep the United States economy safer in the long run, Boston Fed President Eric Rosengren chief stated.
“Eight years of extremely low interest rates have pushed commercial real estate prices up rapidly, and they might also decline rapidly if economic conditions change,” Rosengren had commented on the event hosted by the Shanghai Advanced Institute of Finance. “It could “make a recession worse than it would have been had policymakers normalized interest rates more rapidly. He also highlighted that price inflation, the other half of the Fed’s monetary policy calculus, remains below the central bank’s 2 percent goal.
“Economic fundamentals remain strong and point to continued U.S. office expansion in 2016, supported by a strong domestic job market. The Federal Reserve’s decision to raise interest rates most likely will not affect capital flows into the commercial real estate sector” said Mr. Havsy. ”Recent changes in the Foreign Investment in Real Property Tax Act, and the extension of the EB-5 program should help to increase the flow of foreign capital into U.S. commercial real estate, while strong economic fundamentals will maintain asset valuations despite rising interest rates.”