Expect a strong year for commercial real estate in 2017

Sustained by improving job growth and strong demand for multifamily housing, commercial real estate has been steadily recovering in recent years. Looking ahead to 2017, growth is expected to flow into the smaller markets, according to a commercial real estate forecast session at the 2016 Realtors Conference & Expo that took place last week.

During the session, Lawrence Yun, chief economist of the National Association of Realtors, and K.C. Conway, senior vice president of credit risk management at SunTrust Bank, expressed confidence that commercial real estate activity should remain on an upward trajectory, but with more uncertainty given the likelihood of a rising interest rate environment in 2017.

Yun explained during his remarks that the commercial real estate sector is on firm ground in spite of the numerous global and domestic headwinds that continue to keep U.S. economic growth in a headlock. He predicts that given the slow growth economic environment, instability overseas and the probability of a rate hike by Federal Reserve at the end of the year, investors are expected to take a cautious approach in the months ahead. He also indicated this would likely lead to a modest decline in commercial property prices, especially in Class A assets in larger markets.

"Prices in smaller markets should continue to climb with strong tenant demand and declining supply supporting growth," said Yun. "As job creation continues, commercial real estate and vacancy rates will be stable across the country."

Conway's remarks centered on the key commercial real estate sectors, investments and capital market trends. He anticipates that the conditions supporting expansion in commercial real estate will remain strong as long as the Federal Reserve remains dovish on interest rates.

"Housing and consumer spending are the two components buoying the economy," Conway said. "If the Fed increases short-term interest rates, both of these components will be affected, which could potentially lead to a recession."

To capture the current state of local economic conditions from Realtors®, NAR Research recently introduced its Business Creation Index (BCI). The new quarterly report offers insight from commercial Realtor® practitioners on whether businesses are opening or closing by industry, population density and sub-region. Indicating slowing business openings, 44 percent of respondents said they had seen an increase in business openings in October, which was down from 49 percent in September.

"While the global economy remains in trouble with high debt ratios, the general state of commercial real estate in the U.S. remains strong due to high multifamily starts and renters occupying quickly," concluded Conway.

The National Association of Realtors®, "The Voice for Real Estate," is America's largest trade association, representing more than 1.1 million members involved in all aspects of the residential and commercial real estate industries.