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NEW YORK CITY — The renovation of existing properties across all commercial real estate sectors rather than new construction is driving growth and has helped balance supply and demand, according to Peter Linneman, chief economist with NAI Global.
“As the U.S. economy continues to improve, we are seeing a return to stability, especially with core properties with investors looking for high-quality assets,” said Jay Olshonsky, president of NAI Global, during a recent webcast focusing on the economic outlook.
Linneman noted that there is a strong industrial recovery underway led by increased demand for warehousing for products sold online, resulting in healthy vacancy levels that will continue to fall.
Multifamily construction is rebounding, but is still below normal levels, and an upswing in renovations is driving capital expenditures. Underproduction from the past several years resulting in a prolonged shortage will keep rents above average, but below maximum, according to Linneman.
In the office sector, construction and renovation projects are at an all-time low, but renovations that were deferred during the recession are back on track, even though jobs have yet to return to pre-recession levels. As a result, vacancy rates have seen a slower decline, but are expected to continue to fall as the economy improves. Office rents are above average only in cities where jobs have recovered, including Dallas, Houston, Philadelphia, Los Angeles, Chicago, San Francisco, Boston, Washington D.C. and New York City (downtown and midtown).
The outlook for the retail sector is slightly less optimistic, with no new net supply and shrinkage of total inventory. Retail rents remain well below average, particularly in Atlanta, Houston, Boston, Chicago, Austin, Seattle, San Diego, Washington D.C., Los Angeles and San Francisco. Although hotel construction projects fell significantly nationwide except for New York City, new owners are investing in existing properties to undertake deferred renovation projects. Occupancy rates indicate a strong recovery is underway.
NAI Global’s forecast emphasized that future loan defaults could bring additional opportunities for investors. “We need to look at 2015-2018 as the real period of projected defaults,” said Linneman.
Most CMBS loans that were underwritten in 2005 through early 2008 occurred when underwriting was more lax for 10-year loans, he emphasized.
“We’ll have to see significantly more growth in order for these loans to be refinanced, and this could result in more product across all sectors becoming available through defaults in 2016–2017.”
Linneman concluded, “The U.S. commercial real estate market today is doing what we expect it do in an era of political and capital market uncertainty where we are seeing very little new construction. However, when we have more clarity than uncertainty, we could see stunning economic growth reminiscent of the 1970s-80s and post-World War II.”
Founded in 1978, Princeton, N.J.-based NAI Global is a network of owner-operated commercial real estate brokerage firms. The company was acquired in 2012 by C-III Capital Partners.
— Staff reports