FOUR MAJOR COMMERCIAL REAL ESTATE SECTORS EXPERIENCED POSITIVE RENT GROWTH
Now that all the 1Q17 real estate and economic data has been posted and analyzed, it appears as though 2017 year to date is holding steady. All four major sectors experienced positive rent growth in the first quarter according to Reis, Inc. as apartments were up 0.2%, office was up 0.4%, industrial was up 0.6%, and retail was up 0.4%. These growth rates are slower than similar first quarters in recent years, but they still represent growing market demand levels. According to data from the National Council of Real Estate Investment Fiduciaries Pricing, growth and appreciation slowed and the index was up 1.5% in 1Q17. CoStar, who’s equally-weighted national price index grew 4.8%. In regards to overall pricing performance smaller properties are dominating larger ones. The CoStar value-weighted index, which is dominated by larger properties, fell -2.8% over the same time period. This trend has been growing since the start of the year.
NEW SUPPLY REMAINS WELL BELOW RATES
Many of those who are reviewing the slowing pricing data and overall rate of effective rent growth are asking “is this a top?”. The best is answer is to wait to draw any conclusions. New supply of nearly all property types remains well below rates and some are even close to having an oversupply. As a result, sustained declines in real estate pricing or net operating incomes are highly unlikely at this point. The employment market, which historically drives demand for commercial real estate, is as healthy as it has ever looked. The Bureau of Labor Statistics reports an official unemployment rate of 4.4% which matches pre-2008 recession lows. Further, the “underemployment rate” (known as U-6, which includes marginally attached workers and part-time workers seeking full-time employment) has fallen to 8.6%, which is also close to pre-recession lows. Optimism by business leaders has resulted in increased hiring which, according to the Conference Board, grew to the highest level since 2004 as measured by its CEO Confidence score which reached 68 in the first quarter. This score is up from 65 which was the score at the end of the year. (Any reading above 50 indicates optimism.) The survey results of CEOs reveal there is a continued desire to hire in 2017, but finding qualified workers may be a challenge.
ECONOMY POISED FOR GROWTH
The first quarter, which objectively was slower than 2016 readings, may not be indicative of the rest of 2017 and beyond. Arguably, the election result and corresponding rise in stock prices and interest rates was not forecast in 2016. As a result, it is possible that investment activity and price growth of commercial real estate slowed in 1Q17 for no better reason than buyers paused to assess what would happen to the capital markets given the changing landscape. While the new administration has yet to offer clear policy guidance, the overall assessment of the economy is that it is still poised and positioned for growth as of May 2017. In fact, many economists who predicted first quarter GDP would be slow, (the first reading was 0.7% growth according to the Bureau of Economic Analysis), have also predicted a late surge that could bring annual GDP growth to 2.5% or higher. This is why stock prices, and especially REIT prices, have remained relatively steady for most of 2017. The overall market is still optimistic and there is no reason change that view for commercial real estate.