Will 2017 be the year commercial real estate, CRE, takes off? The signs, frankly, are mixed. It’s an important question because the answers have a significant impact on whether it’s a good idea for companies to buy, lease or rent, depending on when the market becomes more favorable.
The forecast in some area depends on where you are. In southern Florida, for example, demand outstrips the supply of CRE, which means that CRE development will likely take off this year there. But in other places, demand for CRE isn’t optimistic. There is a mismatch between supply and demand in many areas, driven by labor shortages and delays in the issuance of permits.
Breaking ground on new CRE construction is an important financial decision. It can take at least seven years to even out the upfront costs of a purchase.
To help you decide, here is a roundup of pros and cons on the CRE building outlook this year.
Pros
1. Regulations Ease
The new administration of Donald J. Trump is business-friendly, with an easing of regulation. Less regulation can ease the permitting and building process, depending on region, state and municipality. The easing of Dodd-Frank regulations means banks may be more willing and able to lend, which is an important factor as well.
2. Foreign Demand Continues Strong
For some time now, demand from overseas investors for real estate has been very high. In 2009, overseas investors put in $4.7 billion. In 2015, it had risen to over $87 billion, led by investors in China, Canada, Norway and Singapore. Members of the Association of Foreign Investors in Real Estate (AFIRE) expect to invest more in the U.S. this year.
3. Consumer Spending Likely to Increase
Consumer spending is likely to increase this year for two reasons. First, the unemployment level is low, under 5 percent. That’s proof to most people that the economy is out of the recession woods. It raises the consumer confidence level, which, in turn, makes people more prone to spend. Second, volatile oil prices will likely lead to lower gasoline and oil prices this year.
A drop in gasoline, for example, could save an aggregate of $50 billion to $75 billion about $400 to $650 for each household. Increased consumer spending is positive for businesses, and thus for CRE building.
Cons
1. Interest Rates to Continue Rising
The U.S. Federal Open Market Committee raised rates a bit in December 2016. That move, and its signaling that it intends to hike them several times in 2017, may put a damper on real estate across the board. Yes, they are still historically low. But getting CRE mortgages in a period of rising rates may not be something builders are overly keen to do.
2. Economic Growth Is Just Moderate
Despite the rise in the employment rate and consumer confidence, the economy is expected to expand moderately this year, with a gross domestic product increase of 2.5%. It’s still not a great economy. CRE builders may hold back this year, waiting to see if the Trump Administration and other factors result in a more robust economy.
3. Technological Innovation Likely to Keep Marching Forward
To be successful, CRE builders are increasingly having to plan their construction with technological innovation in mind. The Internet of Things, IoT, the ability of smart machines to talk to each other, is more and more important, as are innovations that ensure green and sustainable design and cybersecurity.
Green design, especially, is very popular with Millennials. The pace of technological innovation could mean that a delay in building might be the prudent course. The pace of technology will only keep on rising.
Renting or Leasing as a Solution to a Mixed Environment
When weighing these three pros and cons, keep your individual situation in mind. Carefully consider the economic and regulatory situation in the nation at large, but also in the region, state and municipality where you plan to build.
One solution might be renting or leasing until you decide to build. Renting or leasing costs less upfront than building. During the seven years it would take to build, you might be working toward breaking even in a new property, you could be concentrating on growing your business and making it vibrant. Focusing on customer service might be better at this point than having to think about CRE.
Renting or leasing is a solution that gives you the property you need, without the risk of making a choice to build, when three years down the road, not now, might be the optimal time.
The outlook for whether CRE construction will take off this year is mixed. On the pro side, there’s a friendlier regulatory climate in the White House, robust foreign investment and rising consumer confidence. On the con side, we are in a rising interest rate environment, economic growth is just moderate and the pace of technological innovation might make the most state-of-the-art building outmoded in less than a year.
Comments(0)