Despite recent volatility in the international stock markets, commercial real estate performance remains high, according to a recent report by Marcus & Millichap.
The recent devaluation of China’s currency, coupled with the collapse of the Shanghai Stock Exchange, struck U.S. equity markets, driving down the S&P 500 by nearly 10 percent in one week and pushing the S&P’s Volatility Index to its highest level since 2011.
Commercial real estate, however, the report says, continues to outperform due to increased investment, a tightening unemployment rate and generational trends.
According to Marcus & Millichap’s special report, the U.S. economy has added nearly 1.5 million jobs through June of this year, and falling gas prices and rising wage pressure will continue to increase discretionary income.
Additionally, rising consumption and emergence of Internet retail will boost industrial demand for storage and supply-chain management in major hubs and local markets. Vacancy rate nationwide for industrial properties has reached its tightest level since 2000, according to the report, contracting to 6.9 percent on steady quarterly absorption in excess of 50 million square feet.
Office vacancy, too, edged lower to 15.3 percent in the second quarter, as the sector benefited from still-limited construction. The retail vacancy rate nationally improved to 6.4 percent as limited construction supported broad-based tightening, the report says, while the multi-tenant vacancy rate has contracted to 7.8 percent.
All of this increased investment is due to competitive yields in commercial real estate that benefit from the low interest rate environment. Inflation has remained in check, according to Marcus & Millichap, due to the modest pace of the growth cycle, reduced oil costs and the strong dollar preventing overheating. Because inflation remains in check, the report says, the Federal Reserve has maneuvering room and may delay raising interest rates until December or possibly even 2016.
Other indicators of growth in commercial real estate, despite international stock market volatility, include the fact that more than two-thirds of Millennials live in rental households, retail sales are now 20 percent higher than their pre-recession peak and developers are expected to complete 250,000 multifamily units in 2015.
Despite the volatility caused by market turbulence in China, its risks on U.S. economic performance are minimal, according to the report. Only 7.3 percent of U.S. exports go to China, leaving plenty of room for commercial real estate performance to continue to climb.