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June 28, 2017

Experts explain why they expect another solid year

Experts explain why they expect another solid year

By Darcie Lunsford

Welcome to 2016. It should feel a lot like 2015.

This year is forecast to deliver another solid performance for the commercial real estate sector.

According to the Urban Land Institute Real Estate Consensus Forecast, a semiannual report that surveys 48 of the nation’s leading real estate economists and analysts, a majority of real estate indicators are trending better than their 20-year averages; only equity real estate investment trust returns, single-family housing starts, and retail vacancy and rent growth are not.

Commercial property transaction volume, which has been on the rise for six straight years, is forecast to hit
$510 billion nationally this year. That is its highest level since 2007, when $574 billion in commercial properties traded.    

The forecast also shows that property prices will continue to climb across the nation, but at a more modest 6 percent growth rate, compared to the 10 percent price increase of 2015. Vacancy rates are predicted to continue their year-over-year decline in the office, retail and industrial sectors.     

Rents for office and industrial spaces are forecast to grow 4 percent year-over-year, while retail rents are predicted to grow a more modest 2.5 percent. Apartment vacancy, however, is expected to rise slightly this year compared to last, due largely to a steady deluge of new units being delivered. That slight bump in vacancy – up to 4.8 percent from
4.5 percent in 2015 – will not be enough to topple year-over-year rent growth, which is predicted to net multifamily owners 3.5 percent more this year.

By most accounts, commercial real estate experts say the skies should remain generally clear for commercial real estate, both nationally and in South Florida, through 2018. “I think 2016 will be another good year, but perhaps at a slightly slower pace than 2015,” says Rod Loschiavo, a senior vice president at Jones Lang LaSalle in Fort Lauderdale. “It is tough to pick the catalyst that will cause the next downturn.”

Loschiavo, who specializes in representing corporations in procuring office space in South Florida, says larger tenants that enter the marketplace this year in search of 30,000 square feet or more of office space will find limited options. He also says tenants can generally expect “upward pressure on rents, as the multitude of new building owners endeavor to justify the lofty prices paid for the buildings purchased the last two years – augmented by constrained supply of new product.”

Ken Krasnow, executive managing director of Colliers International in South Florida, predicts that the crush of tenant demand for office could finally spur new office development regionwide. In the industrial sector, he says pricing should level off in Miami-Dade County while still increasing in Broward and Palm Beach counties. Palm Beach County, which has seen virtually no new industrial construction in the current recovery, should be ripe for development in 2016.

“We still have two to three years of strong overall growth and activity,” Krasnow says, adding that the next downturn “will not be as severe or prolonged as in the past. If population growth slows dramatically, it could foreshadow an earlier downturn.”

Sharon Dresser, president of High Street Retail USA in Miami, says that the global cooling, paired with the strengthening dollar and devaluation of currency in other countries, will temper buying both in the retail sector as well as the condo sector. “Remember retail follows housing,” she says. 

But that won’t stop new retailers and fashion designers from flowing into South Florida this year, Dresser says, adding that we could see more retail headquarters opening up in the Miami core. She predicts we could see a retreat in retail as early as 2017. “I don’t have a crystal ball, but I believe we could see a downturn in the next 12 to 18 months,” she says. “Pricing has been skyrocketing, so the severity of the downturn will depend on the staying power of the people who have paid a premium for their properties and if they paid cash or financed.” 

Freelance writer Darcie Lunsford is a former real estate editor of the South Florida Business Journal. She is the senior VP for leasing at Butters Group and is avoiding a conflict of interest in her column by not covering her own deals.

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