What to Expect in Commercial Real Estate for 2015
2014 was the year for commercial real estate growth. Multifamily sector soared to new records, industrial demand outpaced supply, and retail transaction price were up significantly in various regions of the United States. So, while there may not be a magical crystal ball that can tell us how commercial real estate will fair in 2015, here are a few potential trends according to ULI’s new book, The Investor’s Guide to Commercial Real Estate.
- Continued low supply. New supply is at a historic low in part because market rents generally have not justified new construction and because financing has remained constrained. This leaves enormous potential in the property sectors to push occupancies and rents.
- Raising the Risk. While investors taking risks is nothing new, it has only been in recent quarters that investors have been willing to accept some additional risk to achieve higher yields. There has been new activity is not only secondary markets but to tertiary markets as well.
- Multifamily Domination. The multifamily market sector leads the recovery, with almost 60% of IRR markets experiencing material expansionary activity. Multifamily transaction volume has reached pre-recession levels, outstripping office transactions for the first time in ten years, as real estate investment trusts (REITs) and pension funds have fed a fierce appetite for the multifamily sector. The pace is unlikely to slow anytime soon. Apartment demand has been—and is expected to be—robust, supercharged by the shock waves of the recession and by strong demographic trends that are only beginning to manifest.
- Improvement for Industrial. Demand for industrial space has been growing. Economic recovery and an upward trajectory in consumer spending, on furniture and electronics especially, have led to the absorption in many major markets. Cap rates in the traditional industrial space compressed much faster than cap rates for flex industrial product. The squeezing of the national average in the traditional industrial sector caused cap rates to reach a new all-time low. Flex industrial rates are also approaching all-time lows.
The outlook for 2015 is that commercial real estate is set in motion for a continuous upward trend amongst most industries, with multifamily going to continue to lead the way!