2016 Commercial Real Estate Market Outlook

As we progress through the start of a new year, I am pleased to share my thoughts on the robust 12 months past and to offer my outlook for the commercial real estate market in 2016. Before I do, I would be remiss if I did not thank the SVN Advisors, staff, and fellow brokers for their contributions to driving our market forward in spite of changing times. I know that I speak for all SVN Advisors and staff when I wish you a prosperous year ahead.

The Year Ahead in the Commercial Real Estate Market

Uncertainty Breeding Opportunity

After several years of increasing domestic economic expansion and an ever-recovering and ever-growing real estate market, 2016 opens with the return of global economic uncertainty as China’s economic growth moderates, energy prices decline significantly, and geopolitical threats such as ISIS, pose a consistent threat to Europe and the rest of the world. While it remains unclear how today’s macroeconomic conditions will impact commercial real estate markets, there are two scenarios. The first is that global market weakness will impact domestic financial markets, the second is that market impacts remain moderate and commercial real estate remains stable and continues to grow due to strengths in core fundamentals. We believe that the second scenario is more probable given the unique opportunities being posed by forces – like demographic shifts – that are proceeding independently of macroeconomic trends.

Manhattan - commercial real estate market
Manhattan, NY

As for the commercial real estate markets themselves, 2015 was an amazing year. Real Capital Analytics reported a total of $533 billion in sales representing a 23% gain over 2014, and the second highest level of investment volume over time behind the peak $573 billion in activity seen in 2007. Further, the Moody’s/RCA CPPI has given an initial estimate of 12% year over year price appreciation in 2015. These trends are more likely than not to persist throughout 2016 for several reasons. First, global pressures will have two effects:  One, keeping interest rates low (despite the best intentions of the Federal Reserve) and keeping foreign money flowing to the United States, a decent amount of which will flow to real estate. Second, fundamentals are strong – in fact, many markets in almost all property type segments experienced rising lease rates and falling occupancies for most of 2015 and are forecast to continue such growth. Third, new supply remains balanced with demand growth and thus oversupply seems unlikely. The lack of increasing new supply given the growth of rental rates amidst falling vacancies can largely be attributed to rising construction costs and relatively tight lending standards for new development.

What happens in the broader United States macro economy is far more difficult to predict. First, the decline in oil and energy prices is absolutely going to cause highly localized and specific harm to those sectors and in turn cause some level of harm to the real estate markets dependent on energy production, such as those in Texas and the Midwest. Historically, oil price declines acted like a tax break or stimulus package for consumers and businesses and the overall economy thus prospered; since the United States has significantly increased its production of oil and energy following the pre-recession oil price spikes, the effect is less certain today. High price markets like those found in the Northeast and California and parts of Florida are likely to benefit the most from energy price declines as it lowers transit and utilities costs and could boost employment via the stimulus effect.

Overall, we expect that the United States economy will grow more slowly in 2016 than 2015 while still remaining positive and thus avoiding recession. Therefore, we do not see any major risks to the commercial real estate markets as long as fundamentals remain relatively strong.

Investment Outlook

commercial real estate market - chicago
Chicago, IL

Commercial real estate investors who made acquisitions during the downturn are now reaping the benefits of taking such risks. Despite, or in fact, because of these significant gains, many investors and market participants are now openly opining on the possibility of a new downturn in the real estate asset cycle. We do not find such arguments to be very compelling for several reasons. First, many of the causal conditions present before the 2008 economic turmoil are not present in 2016 and are not likely to appear in the near-term horizon. The most meaningful indicator of a potential bubble or overpricing of commercial real estate is the spread between cap rates and underlying treasury rates. According to RCA, cap rates averaged 6.5% nationwide during 2015, while the 10-year treasury rate averaged in the low 2% range for most of 2015 and early 2016. This implies a spread of over 4% (or 400 basis points). Today’s spreads are significantly higher than those observed pre-crash where they averaged slightly below 200 basis points and even below 100 basis points for class A assets in top markets according to the commercial real estate economics researchers at the Lakemont Group. In summary, the market is not presenting the same risk/return profile observed before the 2007 peak of pricing. Further, debt availability is far more constrained post crisis with total leverage utilization down significantly (in fact, the percentage of all equity transactions in many markets is staggering) and therefore the risk of default is relatively low for most investors and deals. Thus, we believe pricing in commercial real estate markets does not represent a new bubble or other significant source of risk.

This conclusion is further strengthened by our belief that interest rates will not experience significant upward pressure in 2016. The energy sector declines and overall global pressures will likely start impacting GDP and employment statistics by the end of the first quarter of 2016.  The likely result will be the Federal Reserve slowing or even pausing further rate increases in 2016. Debt markets should remain open and active in 2016 as they did in 2015. If debt costs do not rise and fundamentals remain stable or growing (even if at slower rates than in 2015), it is not logical to expect price declines. In fact, we expect modest price appreciation for most markets.

Top Markets for Property Sales in 2015

(Ranked in terms of total dollar volume)

  1. Manhattan – $55.9B
  2. Los Angeles -$27.6B
  3. Chicago – $22.6B
  4. Dallas – $19.5B
  5. Atlanta – $16.9B
  6. Boston – $16.4B
  7. Seattle – $14.9B
  8. San Francisco – $14.3B
  9. San Jose – $12.5B
  10. Phoenix – $12.1B
Source: Real Capital Analytics

The list of top markets for commercial real estate sales in 2015 appears relatively similar to lists for the past 5 years with the new additions of Phoenix and San Jose. These markets attract institutional capital from private equity, REITs, and foreign buyers and have been the most competitive to find deals, especially with attractive yields. Overall, given the increasing level of global macroeconomic uncertainty, we expect these and related top tier markets to gather an increasing share of commercial real estate investment activity in 2016 as money moves to areas of perceived lowest risk.

Top Growth Markets for Property Sales in 2015

(Ranked in terms of YOY percentage increase in sales volume)

  1. DC/Virginia Burbs – 121%
  2. Baltimore – 71%
  3. Orange County – 70%
  4. Northern New Jersey – 69%
  5. Seattle – 68%
  6. Orlando – 68%
  7. Portland – 61%
  8. Central California – 60%
  9. Inland Empire – 58%
  10. Phoenix – 54%
Source: Real Capital Analytics

The above list of markets may present some of the best opportunities for growth and price appreciation given their relative strength. Capital is starting to rotate to these markets and further price increases may potentially follow. There will likely be expansion in cap rate spreads between primary and secondary markets in 2016, especially if foreign capital flows increase as predicted and those funds seek assets predominantly in only the largest markets. Thus, yield-seeking investors will likely find the best opportunities in the non-top tier markets (such as most of those on the list above).

Miami - commercial real estate market
Miami, FL

Beyond market, property sector is equally important in terms of forecasting investment performance. According to RCA, the apartment sector has been the top performer, up 38% from the peak (defined as Q4 ’07), followed by office, up 18% from the peak. Retail and industrial have lagged at -1% from peak and up 3% from peak respectively but performed well in recent years. We find it impractical to give overall guidance for property sectors on a nationwide basis and encourage investors to work with Advisors who are knowledgeable about each sector in their respective market as finding the best performer can be challenging. Industrial properties offer a prime example of such quandaries – industrial real estate in energy markets should face decreased space demand as that sector contracts in 2016. By contrast, industrial distribution facilities in areas of high population growth (like Florida) may over-perform as retailers shift distribution from stores to warehouses as online sales continue to dominate.

Trends to Watch

Perhaps the most discussed trend in commercial real estate in recent years has been the Millennials, the age cohort who are changing work and living arrangements across the nation. A relatively less covered demographic trend of greater size and perhaps importance is the aging population. According to data from the U.S. Census Bureau and analyses by the Lakemont Group, the overall population in the United States is forecast to grow by 11.55% in the next 15 years while the population above the age of 75 is forecast to grow 69.21%. In fact, those over 75 years old will represent almost 10% of the population by 2030 (those above 65 will be over 20% as well). While many real estate market participants correctly use these statistics to justify the need for more senior housing, there are actually many other real estate  opportunities to service this growing segment of the population. Market rate apartments with features and locations this demographic wants, can use, and can afford is one such example. Properties to house medical services and activity retail is another. We encourage investors to think long-term when making acquisition, disposition, and asset management decisions. This is one long-term trend that could shape demand for many property types for decades into the future.

Concluding Thoughts

2016 has started with higher levels of volatility in United States equity markets as a result of justifiably significant fears of global economic pressures causing falling demand domestically. While some investors are taking a fearful stance, we see a different outcome. It is probable that global uncertainty will serve to keep interest rates low and allow for growth of fundamentals in the commercial real estate markets and in the broader domestic economy. Furthermore, even in the event of a domestic economic slowdown, the global uncertainty could lead to lower interest rates and even greater inflows of foreign capital, supporting the domestic commercial real estate market (the current risk / reward proposition of U.S. investment is unbeatable).

Commercial Real Estate Market - Los Angeles
Los Angeles, CA

If such occurs, it is likely for 2016 to be another strong year for commercial real estate transaction volume, net operating income growth, and even price appreciation; however, expect all to grow at a slower rate in 2016 than in 2015. Investors and property owners should be aware that today’s commercial real estate economy has little in common with previous downturns. As such, we believe that the risk and return profile of commercial real estate is still attractive in 2016 and is likely to remain so for at least the near-term horizon.


Follow Kevin Maggiacomo on Twitter: @Maggiacomo.

[bctt tweet=”We believe that the risk and return profile of commercial real estate is still attractive in 2016. #CRE “]

Game-Changing Trends in Design and Collaboration

Each year, at our Sperry Van Ness® (SVN) National Conference, I talk to our commercial real estate advisors and business owners about game-changing trends. Game-changers occur when people are doing things (working, playing, living) differently than they used to just a few years ago. This year, we have four categories: Communication, Design, Collaboration and Distribution.

Trends in Design and Collaboration

The following video features the second portion of my 2015 talk on trends. Watch the video and read the takeaways below.

Main Takeaways in Design Trends:

1. Mobile first, mobile only. Tech engineers are no longer adapting desktop software for tablets and smartphones. Instead they are designing straight to mobile.

2. Different devices require different design elements. Desktop software can accommodate a longer attention span than something designed for a tablet, phone or watch.

3. Cybersecurity will be a key element and consideration of every new design.

4. The mass adoption of mobile technology has opened the door for innovators to bypass existing infrastructure. Uber, Airbnb, Bitcoin and Apple Pay are examples of innovative businesses that circumvented traditional infrastructure.

Mobile technology has massively altered design. Engineers are designing for shorter and shorter attention spans and developing systems that don’t rely on existing infrastructure. In underdeveloped countries, the combination of mobile adoption and lack of existing infrastructure, i.e. phone lines and banking systems, has sped up mass adoption of new business models. In developed countries, however, we are seeing slower adoption of alternative currencies (Bitcoin, Apple Pay) and lawsuits levied against new business models (Uber, Airbnb). The key for new technology to achieve mass adoption and acceptance is: access, affordability and accountability. As discussed in the video, the aforementioned Bitcoin, Apple Pay, Uber, and Airbnb are caught in the accountability stage for now.

The expansion of technology also comes with new risks. As we move towards the Internet of Things where our watches communicate with our thermostats (see Nest) as well as our banks, security will continue to become a bigger and bigger issue. New technologies will therefore be required to incorporate security protocols into all design elements.

Main Takeaways in Collaboration Trends:

1. One form of collaboration is crowdsourcing. In the commercial real estate industry we are seeing the crowdsourcing of investment funds (Fundrise, Realty Mogul) and in the case of Comstak, the crowdsourcing of lease data.

2. At SVN, we have been leaders in collaboration and here are two examples:

a. Crowdsourcing of knowledge. Our service and product councils bring together experts around specific asset classes and services, who partner on transactions and share knowledge both online, on calls and in person at our national conferences.

b. Crowdsourcing of demand. The SVN National Sales Call, where our advisors feature new properties they are marketing, is revolutionary in allowing participation by outside brokers, clients and potential clients. This is due to our founding principle that no one advisor, local firm or national company knows all the potential buyers for a property. Only when you drive up demand by exposure to the entire marketplace does a client achieve the best value for their property.

At Sperry Van Ness International Corporation, we are watching these trends to see how they affect the commercial real estate industry. Our goal is to capitalize on these trends so that our advisors are using the most powerful tools to the benefit of their clients.

To view the full speech please visit our YouTube page.

The Millennial Effect on Business Communications

Each year, at our Sperry Van Ness® (SVN) National Conference, I talk to our commercial real estate advisors and business owners about game-changing trends. Game-changers occur when people are doing things (working, playing, living) differently than they used just a few years ago. This year, we have four categories. Communication, Design, Collaboration and Distribution.

Trends in Communication

The following video features the first portion of my 2015 talk on trends. Watch the video and read the takeaways below.

Main takeaways in communication trends:

  1. It’s here: the generational tipping point. The oldest Millennials are now 35, which means by 2020, they will be 40 and it will be their workplace in which we are working. This is already changing how we communicate in business.
  2. We have entered a time where generational expectations of response times in business are mismatched. Millennials expect immediacy while Boomers are more comfortable with an hour or even a day.
  3. Texting has become a standard and accepted form of communication in many businesses.
  4. Every new platform now emphasizes pictures. Facebook keeps making pictures bigger than words, Twitter had to adjust to this reality to remain relevant. Instagram and Snapchat put pictures front and center rather than any text. Even texts contain emoticons and emojis. If you don’t know the difference between the last two … watch the video!
  5. Millennials and Gen Z also use different platforms for different types of communications. It’s not about blending the platforms together into a superplatform; it’s about accepting that there are multiple systems and platforms for communication.

In summation, the way we communicate in business is going to change drastically within the next 5 years as the Millennials grow into leadership roles and Generation Z enters the workforce. We will see more and more communications platforms being used within single organizations, each with a different purpose. These will include document sharing platforms and visual conferencing apps that will not just replace in-person meetings, but one-on-one telephone conversations as well. Email itself needs reinvention to remain relevant. Programs like Google Inbox are already attempting to do so, because as soon as we can easily share documents via texts and visual conferencing apps, email will lose some of its luster.

At Sperry Van Ness International Corporation, we are watching these trends to see how they affect the commercial real estate industry. Our goal is to capitalize on these trends so that our advisors are using the most powerful tools to the benefit of their clients.

To view the rest of the speech please visit our YouTube page.

5 Trends That Will Affect Everyone's Business

The following is a write-up of the speech given by Diane Danielson, COO, of Sperry Van Ness International Corp. at the 2014 Sperry Van Ness National Conference in San Antonio, Texas.

1. There are lots of different kinds of smart … and you probably have them all in your office.

For the first time in history we have up to four generations all working in a single office. This means that we have four completely different frames of reference for every issue, project and solution. When harnessed in the right way, this can yield truly innovative results; but it can also mean a lot of miscommunication in the short-term.

The chart below can help put the situation into proper perspective. The first thing you should notice is that the number of Millennials (also known as Gen Y) dwarfs the Generation X’ers, and eclipses the Boomers. So, if my fellow Gen X’ers (a/k/a the “Sandwich Generation” because we are often taking care of our parents and kids at the same time) ever felt ignored and outnumbered, you weren’t imagining things.

1925-1945* Silent Generation 50 million** Neil Armstrong
1946-1964 Baby Boomers 76 million Jobs/Gates (PCs)
1965-1979 Generation X 41 million Page/Brin (Internet)
1980-2000 Millennial (Gen Y) 80 million Zuckerberg (Mobile)

*Generational breakdowns follow the Pew Internet Research Project’s breakdowns.
**Exact numbers are hotly debated but within +/- 5 million.

How do you increase the productivity of an intergenerational office? By understanding the basis for the different viewpoints. For example, consider how the four generations were introduced to the computer.

  • The Silent Generation experienced the era where computers were something NASA used to put men like Neil Armstrong on the moon.  They were scientific tools used by governments and research universities to further discovery and explore new worlds.
  • It wasn’t until Baby Boomers Steve Jobs and Bill Gates came along, that computers became personal for use at the office and at home.  For both the Silent Generation and the Boomers, the computer was a powerful machine that could process enormous amounts of data.
  • Gen X’ers Sergey Brin and Larry Page, founders of Google, and Wikipedia founder, Jimmy Wales, were the ones who helped usher in the Internet as our “go to” research tool. For their generation, the computer became the gateway to user generated content and endless information.
  • Finally, Mark Zuckerberg and his Millennial cohorts transformed the internet into a communication source that we could take with us wherever we go.

Four different viewpoints, yet they reflect cumulative knowledge that complements and builds upon each other.

Many of us will have at a minimum 2 or 3 of the above generations in our offices. A team or company culture that respects, learns from, and is able to manage the different viewpoints and knowledge base will ultimately be the most productive.

2. Millennial life choices will affect us all.

As noted in the above chart, there are 80 milllion Millennials. Like any generation, they have their  unique traits. The only difference  is that even if only 1/3rd of Millennials do “something,” that is equal to nearly 60% of Generation X, in other words a majority. We can’t afford to not pay attention. In particular, here are a few major trends that we are seeing from Millennials with far reaching effects on businesses.

Millennials are in no rush to learn to drive.

This might seem strange for those of us who couldn’t wait to get behind that wheel at age 16. For many of us, a driver’s license meant freedom. But for this generation, it’s not as compelling. Below are a few of the reasons:

  • They are broke. Recession, unemployment, and student loans make owning a car out of reach for many in this generation.
  • Their overprotective parents drive them everywhere.
  • They can Facetime, xBox, Snapchat and Instagram with friends without having to leave their home: their freedom is the Internet.
  • They can experience the thrill of driving through virtual reality video games.

How does this affect businesses? This could be a tough situation for car manufacturers and dealers as well as the businesses dependent on them like commercial real estate. Not only will they sell less cars, they will need less cars on their lot. Unless they put a Starbucks in their showroom, they’ll be getting less foot traffic and test drivers. Even when this generation gets around to buying cars, they will do everything short of smelling the leather online through virtual show rooms. (Although, that can likely be accomplished too, as there is now a new alarm clock bacon app for iPhones.)

Millennials are living at home longer and delaying marriage

The rise of the stay at home Millennial is similarly driven by the economy and the burden of student debts. Add to this the fact that more Millennials are attending college than any generation before, and they are understandably delaying marriage and the natural progression of having kids and moving to the suburbs.

For more visit: http://www.pewsocialtrends.org/2014/03/07/millennials-in-adulthood/

When these non-driving Millennials eventually move out, they are relocating to urban areas where they don’t need cars because they have public transportation or car and ride-sharing services like Zipcar and Lyft. This is why we will see suburban areas attempting to emulate the benefits of city living, and of all the suburbs, it will be the “urban ring” areas that will experience the most stability.

In the short-term, before the Millennials all move out, we will see a rise in “adaptive” housing, where home improvements are not made for resale but so extended families can live together. Currently 22% of households have more than two adult generations living in them, a level not seen since the end of World War II.

You can read more on how demographic trends are affecting housing in Leigh Gallagher’s The End of the Suburbs.

3. Not Open, but Adaptive Office Space

Let’s put an end to the open versus closed office floor plans debate. It’s not one or the other; it’s both.  The space that will work for most companies is going to have to be adaptive. However, it’s doesn’t adapt to a position, or an individual.  Office space needs to adapt to the workflow.  At different parts of the day, individuals could be working on teams, need a whiteboard, require quiet or private space or simply a change of venue.  Today’s workspaces need to be fluid and allow for transitions and flexibility, especially with a multi-generational workforce.

4. We Live and Work in a Multiplex 

Remember the days when our desks were clean and the computer off to the side? Now our desks are littered with screens. Here’s a screenshot of my home office desk on a recent weekend. The only screen that is missing is my iPhone, which I had to use to take the photo.  Why so many screens? Different devices have different uses. While my iPad mostly gets used for binge watching my favorite shows when working on weekends, I also use it to Facetime or Skype with my son or colleagues.

It seems I’m not alone. A recent survey by Facebook for Business found:

  • 60% of online adults in the US use 2+ devices/day
  • 25% use 3 devices
  • >40% of online adults start an activity on one device only to finish it on another.

We did our own survey of Sperry Van Ness® advisors at our National Conference and found that 80% of our advisors use 3 or more devices in a single day.

Now we are adding wearable technology like Google Glass as an additional screen. It’s likely our fully developed adult brains will not be able to adapt well to the multi-tasking required by life in a multiplex, but it’s possible that future generations’ brains will evolve in a way that they will be better able to process multiple feeds and the flow of information from device to device.

5. Quantitative v. Qualitative

We now live in a society where we measure everything.  Why? Because what gets measured gets done. Take the Fitbit story.  FitBit is a bracelet that tracks everything from steps taken in a day to optimal sleep patterns. Fitbit uses technology and your network to keep you accountable and promote optimal behavior.  The FitBit philosophy is simple:

  • Every day steps add up to impact.
  • Stay connected, stay motivated.
  • Make health a habit one day at a time.

This FitBit philosophy is something we can all take with us into our businesses  You simply determine what you need to measure in order to produce the outcomes you want … and stick with it.  In other words, it’s the same philosophy as Moneyball. Find the stats that matter most and you can turn the right team, no matter what generation, into winners.