U.S. property markets still robust but approaching top of cycle.
Recent shifts in U.S. property markets include a greater dispersion of investment dollars throughout the country as well as slowing price gains and flat to rising capitalization rates in many metros. Still, real estate capital markets continue to benefit from strong property fundamentals, low interest rates and strong demand from investors, particularly offshore sources.
Overall, we expect commercial real estate sales to remain healthy in 2017 and into 2018, as demand remains strong and many investors have ample stockpiles of capital at their disposal. But rising interest rates and record prices in many markets seem likely to deter some buyers, to moderate volumes and to push more activity into secondary markets — a trend that gained momentum last year.
- Sales volumes last year fell short of the near-peak level reached in 2015 but still were among the strongest ever logged, particularly for single-asset transactions.
- Multifamily is now firmly the preferred property type, displacing offices, which long held the top spot. Apartments have gained on the strength of favorable demographic trends and shifts in lifestyle choices, while offices have lost some appeal as tenant demand has been below par in this cycle.
- Industrial is gaining at the expense of retail, reflecting the impacts of e-commerce. However, warehouse transactions have been limited by a paucity of quality product offered for purchase.
- Investment momentum is shifting from primary to secondary metros, and to a lesser extent, from central business districts into inner suburban markets. Blame sticker shock in reaction to elevated pricing in top markets.
- Overall, appreciation is slowing and moderating returns. Operating fundamentals are still generally improving, if more gradually, generating solid income returns — but total returns will continue to slide as cap rates flatten or rise.
- Foreign investors continued to invest heavily in U.S. property markets in 2016 and early 2017, but exhibited greater preference for trophy assets in the best markets relative to their domestic counterparts. China more than doubled its investment in the U.S. last year, while Canada and Singapore pulled back. But new constraints on Chinese investment abroad may cut their U.S. demand.
- We expect foreign capital sources to maintain or increase their presences in U.S. property markets in 2017, as returns are expected to remain relatively attractive on a global basis. Broader tax exemptions for foreign investors adopted late last year should encourage further offshore investment in the U.S.