Outlook Remains Bright for Commercial Real Estate Despite Price Plateau

Washington, D.C. – September 12, 2017 (nar.realtor) Commercial real estate price growth in large markets is expected to flatten over the next year, but strong leasing demand and investor appetite in smaller markets should keep the sector on solid ground, according to the latest National Association of Realtors® quarterly commercial real estate forecast, https://www.nar.realtor/reports/commercial-real-estate-outlook.

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Backed by the ongoing stretch of outstanding job creation in recent years, national office vacancy rates are forecast by Realtors® to retreat 1.1 percent to 11.9 percent over the coming year. The vacancy rate for industrial space is expected to decline 1.1 percent to 7.8 percent, and retail availability is to decrease 0.4 percent to 11.4 percent. Even as new apartment completions bring more supply to many markets, the multifamily sector will still likely see a vacancy rate decline from 6.6 percent to 6.1 percent.

Lawrence Yun, NAR chief economist, says the U.S. economy is on stable footing and is chugging along at a decent but unspectacular pace. “A very healthy labor market and stronger confidence and spending from both consumers and businesses boosted economic expansion to a solid 3.0 percent last quarter,” he said. “There’s legs for more of the same growth to close out the year, which bodes well for sustained interest in all types of commercial space.”

According to Yun, the appetite for commercial property is high, but investment activity does appear to be entering the maturation phase of the current cycle. The investor shift away from large markets to smaller ones is creating a divergence in sales activity. In the second quarter, large markets saw a 5 percent annual decline in sales, while Realtors® reported a sales boost of 4 percent in small markets.

“While inventory shortages are still driving prices higher in most markets, shrinking cap rates and the higher interest rate environment are expected to lead to a plateau in price growth over the next year, especially for Class A assets in large markets,” said Yun. “As a result, investors will continue to look to small and tertiary markets for properties that have the best opportunity to provide stability and generate solid returns.”

Led by the industrial and multifamily sectors, Realtors® continue to report that leasing fundamentals for the four major commercial sectors are strong. Last quarter, the considerable appetite for industrial space — primarily from ecommerce and trade — resulted in distribution warehouses and logistic centers driving close to 70 percent of new construction leasing. Although 225.4 million square feet of additional space is currently in the pipeline, vacancy rates are still expected to trend downward as supply slowly catches up with demand.

In the apartment sector, the pace of new construction is finally slowing in many markets after considerable building in recent years. However, rising household formation and the supply and affordability barriers to homeownership will continue to keep vacancies low and cause rents to maintain their trajectory of outpacing incomes.

“The economy is healthy for the most part, but headwinds abound in the short term,” said Yun. “A temporary slowdown in areas severely impacted by hurricanes Harvey and Irma, geopolitical tensions abroad and any minor correction in the financial markets could temporarily knock the economy slightly off course in coming months.”

NAR’s latest Business Creation Index (BCI), which launched in August 2016, showed ongoing positive developments for smaller commercial businesses in local communities. Over half of Realtors® have reported an increase in business openings and fewer closings every month since December, with food and beverage and retail making up the bulk of new businesses.

NAR’s latest Commercial Real Estate Outlook1 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.

The NAR commercial community includes commercial members, real estate boards, committees, subcommittees and forums; and NAR commercial affiliate organizations — CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

Approximately 70,000 NAR members specialize in commercial real estate brokerage and related services including property management, counseling and appraisal. In addition, more than 200,000 members are involved in commercial transactions as a secondary business.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.

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1. Additional analysis will be posted under Economists’ Outlook in the Research blog section of Realtor.org in coming days at: economistsoutlook.blogs.realtor.org.

The next commercial forecast and quarterly market report will be released November 15 at 10:00 a.m. ET.

Realtors® Report Finds 11 Percent Increase in Commercial Member Income, 19 Percent Increase in Sales Transaction Volume

Washington, D.C. – August 2, 2017 (nar.realtor) Commercial real estate markets continue to improve, with Realtors® specializing in commercial real estate reporting both an increase in member’s gross income and sales volume, according to the National Association of Realtors® 2017 Commercial Member Profile.

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The annual study’s results represent Realtors®, members of NAR, who conduct all or part of their business in commercial sales, leasing, brokerage and development for land, office and industrial space, multifamily and retail buildings, as well as property management.

“There has been an uptick in Realtor® members who choose to specialize in commercial real estate at the same time as commercial professionals report improvements in the market and their business activity,” said 2017 NAR President William E. Brown, a Realtor® from Alamo, California. “A stronger commercial market is a good indicator of a growing economy, so the outlook is positive for commercial members in the year ahead.”

The median gross annual income for commercial members in 2016 was $120,800, an increase from $108,800 in 2015. Brokers and appraisers tend to report the highest median annual incomes, while sales agents report the lowest among licensees. Those with less than two years of experience reported a median annual income of $31,500 in 2016, down from $43,400 in 2015; members with more than 26 years of experience reported a median annual income of $162,200 in 2016, down from $165,400 in 2015.

Commercial members completed a median of eight sales transactions in 2016, a decrease of one since 2015. A quarter of commercial members reported having one to four transactions, and 27 percent reported having more than 20 transactions.

While the number of transactions decreased slightly in 2016, the sales volume increased again this year. The median sales transaction volume in 2016 among members who had a transaction was $3,500,000, an increase from $2,931,000 in 2015. Only 7 percent of commercial members reported not having a transaction at all, which decreased from 8 percent in 2015.

The median years of experience in real estate increased to 24 years in 2017, up from 20 years in 2016, as did the median years of experience of members in commercial real estate – up from 15 years in 2016 to 19 years in 2017.

Forty-seven percent of NAR’s commercial members are brokers, and 30 percent are licensed sales agents, consistent with last year. Seventeen percent of commercial members have a broker-associate license while appraisal license holders account for 5 percent, also consistent with last year.

The median age of commercial members remained the same as last year, at 60 years old. Almost three out of four commercial members are male, identical to last year’s results. Men reported being active in any real estate capacity for a median of 25 years and in commercial real estate for a median of 20 years, the same as last year. Women have been active in real estate for a median of 19 years (up from 14 years last year) and in commercial real estate for a median of 15 years (up from 11 years last year).

Commercial members who manage properties typically managed 82,000 total square feet, representing 15 total spaces, up from 50,000 square feet and 17 spaces in 2015. Those who manage offices typically managed 25,000 total office square feet, representing seven total offices, up from 20,000 office square feet and five offices last year.

Thirty-three percent of commercial members were involved in international transactions in 2016, down 2 percent from 2015. Eighteen percent of commercial members reported an increase in international transactions, while only 1 percent had a decrease.

Sixty-five percent (up from 60 percent in 2016) of respondents are members of any of several commercial affiliated institutes, councils, or societies. These commercial organizations include the CCIM Institute, the Institute of Real Estate Management, the Counselors of Real Estate, the Realtors® Land Institute and the Society of Industrial and Office Realtors®.

In June 2017, NAR invited a random sample of 64,147 Realtors® with an interest in commercial real estate to fill out an on-line survey. A total of 1,926 responses were received for an overall response rate of 3.0 percent. All information in this report is representative of member characteristics in 2017 while sales and lease transaction values and income are characteristic of calendar year 2016.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Media Contact:

Cole Henry
(202) 383-1290
Email

Realtors® Survey: Led By China, Foreign Investment in U.S. Commercial Real Estate on the Rise

Washington, D.C. – June 6, 2017 (nar.realtor) One-fifth of surveyed Realtors® practicing in commercial real estate closed a sale with an international client in 2016, and as foreign investors flock to smaller-sized commercial properties in secondary and tertiary markets, many Realtors® are confident that increased sales and leasing activity will occur in 2017.

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This is according to the 2017 Commercial Real Estate International Business Trends survey released today by the National Association of Realtors®, which analyzed cross-border commercial real estate transactions made by Realtors® during 2016. Most Realtors® who specialize in commercial real estate reside in smaller commercial markets where the typical deal is less than $2.5 million.

Similar to NAR survey findings on foreign purchases of residential real estate in recent years, China was the top country of origin in both buying and selling commercial real estate in 2016, and Florida was the top destination of choice for international clients. NAR’s 2017 Profile of International Activity in U.S. Residential Real Estate is scheduled for release this summer.

Lawrence Yun

Lawrence Yun

Lawrence Yun, NAR chief economist, says the appetite for U.S. commercial real estate property was strong from foreigners last year and shows little signs of slowing in 2017.

“Multiple years of steady job growth and the strengthening U.S. economy – albeit at a modest pace – makes commercial property a safe bet for global investors looking to diversify their portfolios and generate returns outside their country of origin,” he said. “While Class A asset prices in many large markets have surpassed pre-crisis levels, Realtors® in many middle-tier and smaller markets stand to benefit from the increased interest from foreign and domestic commercial property investors.”

Added Yun, “Forty percent of Realtors® expect an increase in foreign buying clients this year. The healthy labor markets and lower property prices in smaller markets are poised to make up a larger share of activity.”

Of the 69 percent of Realtors® who indicated they completed a commercial real estate transaction last year, 20 percent reported closing a deal for an international client. Realtors® completed a median of one buyer-side international deal and two seller-side international transactions. The typical buyer-side sales price was $1,000,000, and the median seller-side price was $550,000.

Additionally, 22 percent of Realtors® said they completed a lease agreement on behalf of a foreign client. The median gross lease value for international lease transactions was $105,000, with most space typically under 2,500-square-feet.

Nearly two-thirds of commercial foreign buyer and seller clients were non-resident foreigners. The top countries of origin for buyers were China (17 percent), Mexico (14 percent) and the United Kingdom and Venezuela (both at 7 percent), while sellers were typically from China (17 percent) or Brazil, Canada, France and Mexico (all at 10 percent).

Florida and Texas were the top two states where foreigners purchased and sold commercial property last year, with California being the third most popular buyer destination and Michigan ranking as the third top state where foreigners sold real estate.

The survey also found that foreign buyers of commercial property typically bring more cash to the table than those purchasing residential real estate. Sixty percent of international transactions were closed with cash, while NAR’s 2016 residential survey found that exactly half of buyers paid in cash. For those not using all cash, 34 percent of commercial deals involved debt financing from U.S. sources. An overwhelming majority of buyers either purchased commercial space for investment purposes or acquired it for business use.

“Nearly half of Realtors® reported that they experienced a greater number of international clients looking to buy commercial space over the past five years,” said Yun. “Economic expansion has slowly chugged along since the downturn, but in comparison to the rest of the world, the U.S. remains one of the most attractive and safest bets for investors. There’s little evidence this will change anytime soon.”

NAR’s second quarter Commercial Real Estate Outlook, released last month, offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.

The NAR commercial community includes commercial members, real estate boards, committees, subcommittees and forums; and NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

Approximately 70,000 NAR members specialize in commercial real estate brokerage and related services including property management, counseling and appraisal. In addition, more than 200,000 members are involved in commercial transactions as a secondary business.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.

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Media Contact:

Adam DeSanctis
(202) 383-1178
Email

Realtors® Have a Positive Outlook for Commercial Markets in 2017

Washington, D.C. – May 19, 2017 (nar.realtor) While challenges face commercial real estate markets, Realtors® specializing in the sector should have confidence that growth will continue. That’s according to speakers at a commercial economic issues and trends forum at the REALTORS® Legislative Meetings & Trade Expo.

NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets; the panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.

George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. “During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue,” he said.

Unemployment has declined to 4.4 percent and consumer confidence is at its highest point in 15 years. As the economy improves, the commercial real estate market has continued to improve as well, said Yun. “A rising interest rate environment is likely to halt commercial price growth or even cause a minor decline; that outlook is supported by the expanding economy and the over 2 million jobs gained in the past year,” he said.

Looking at the global market, Ratiu explained that global commercial investors have hit the pause button on investments, which in the first quarter of 2017 decreased nearly 20 percent year-over-year; however, certain U.S. markets are seeing good global cash flow with $76 billion flowing to the U.S. “Overall global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains,” he said.

With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the U.S. market this year. “Over the past five years, a near majority of Realtors® experienced an increase in the number of international clients. We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market’s gradual recovery,” said Yun.

One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.

“Realtors® are seeing evidence of markets being impacted by regulators’ increased scrutiny of banks’ balance sheet allocations to commercial real estate loans,” said Ratiu. “Considering that 64 percent of Realtor® clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37 percent of Realtors®’ markets, a four percent increase from last year.”

John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors. “Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend,” he said.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.