Real Estate Capital Scoreboard® – January, 2018

Chicago, Illinois, January 1, 2018 – Investors welcome 2018 with tempered economic expansion, favorable demographic trends and comparatively low interest rates. Many expect commercial real estate values to soften, but few expect reversals. Incredible growth over the past couple of years create fears of market corrections. Investing emphasis continues to focus on prudent property-sector plays as follows:

“The Unstoppable Sector!” – Investment and development opportunities runs unabated for industrial and distribution properties, as supply chain management serves rapidly expanding e-commerce needs. This sector remains one of the few development opportunities fueled by “spec” construction.

“The Peaking Sector?“ Multifamily property development may have reached the highest prices, but investment fundamentals are still solid. The most direct housing competitor, for-sale homes/condos, are extremely supply-constrained, forcing many potential homeowners to continue renting. Moreover, renters will be tempted by some upcoming bargains this year, as many markets are temporarily plagued by an oversupply of new-construction inventory. In the long run, development niches can be found by serving pent-up demand due to migration and growing population/employment bases in Sunbelt areas.

“The Recovering Sector?” Except for the highest quality centers, prices flirt with record-low levels. Surviving centers well-positioned within infill locations are supplementing successful brick-and-mortar retailers with entertainment and food services components. Additionally, more customer services such as free pickups and returns of online orders and layaways help drive more store visits. Rent will remain flat or rise modestly as owners seek to replace failing retailers with fresh tenants. Look for percentage rent clauses to diminish, as new leases will rely more upon base rents due to internet sales accounting issues.

“The Caution Sectors…” Office and lodging properties are on investors’ watchlists. Office properties serving pedestrian and transit-friendly locations should bode well. Office uses thoughtfully integrated within mixed-use projects will survive as well. Only bargain-pricing will drive car-centric, suburban deals. After nearly a decade of sustained growth, the lodging industry may slow down. Occupancy rates remain high, but are threatened by Airbnb, less foreign travel and new-construction.

The Real Estate Capital Institute’s® director, John Oharenko, notes, “Capital markets absorbed a lot of upbeat news translating to record-breaking stock market behavior. After tax reform, absorbing the upcoming Fed rate hikes, everyone is waiting for what’s next?”

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