COMMERCIAL REAL ESTATE OUTLOOK: 2018.Q3 - National Association of REALTORS - CORFAC International
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National Association of REALTORS® COMMERCIAL REAL ESTATE OUTLOOK: 2018.Q3
Commercial Real Estate Outlook: 2018.Q3 Download: www.nar.realtor/reports/commercial-real-estate-outlook ©2018 | NATIONAL ASSOCIATION OF REALTORS® All Rights Reserved. Reproduction, reprinting or retransmission in any form is prohibited without written permission. Although the information presented in this survey has been obtained from reliable sources, NAR does not guarantee its accuracy, and such information may be incomplete. This report is for information purposes only.
COMMERCIAL REAL ESTATE
OUTLOOK
NATIONAL ASSOCIATION OF REALTORS®
2018 LEADERSHIP TEAM
President
Elizabeth J. Mendenhall , ABR, ABRM, CIPS,
CRB, GRI, ePRO, LCI, PMN
President-Elect
John S. Smaby
First Vice President
Vince E. Malta
Treasurer
Thomas A. Riley, CCIM, CRB
Immediate Past-President
Bill E. Brown
Vice President
Colleen A. Badagliacco, CRB, CRS, ePro,
GRI, SRES
Vice President
Kenny Parcell, ABR, BB, CRS
Chief Executive Officer
Bob Goldberg
COMMERCIAL REAL ESTATE
OUTLOOK
CONTENTS
1 | Economic Overview………………………………………………………………………………… 5
2 | Commercial Real Estate Investments…………………………………………………….. 8
3 | Commercial Real Estate Fundamentals…………………………………………………… 13
4 | Outlook……………………….………………………………………………………………………….. 15
COMMERCIAL REAL ESTATE
OUTLOOK
GEORGE RATIU
Gross Domestic Product Director, Housing & Commercial Research
gratiu@realtors.org
The economy expanded at a stronger pace of 4.1
percent in 2018 Q2 (first estimate), the strongest GAY CORORATON
expansion since 2014 Q3 (4.9 percent). Growth Research Economist
strengthened due to stronger consumption, scororaton@realtors.org
exports, and government spending while
investment spending rose at a slower pace.
Exhibit 1.1: Real GDP Private non-residential fixed investment spending
6 (% Chg Annual Rate) rose 7.3 percent, a slower pace compared to the
first quarter (11.5 percent), as investments in
4 industrial equipment contracted, at -2.2 percent.
The strongest expansions were in structures (e.g.,
2 buildings), at 8.5 percent, and information
processing equipment, at 10.2 percent.
0
Private residential investment contracted 1.1
2013-Q3
2018
2012-Q1
2012-Q3
2013-Q1
2014-Q1
2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
percent in 2018 Q2. The number of building starts—
-2 another indicator of residential investment — slightly
Source: BEA declined to a seasonalized annual rate of 1.168
million units in July 2018, down from 1.185 million
Private consumption spending—which accounts units one year ago. Labor, land, financing, and raw
for 69 percent of GDP— expanded at a stronger material costs are cited by home builders as the
pace of 4.0 percent in 2018 Q2, the strongest main headwinds facing residential construction.
pace since 2015. Compared to the pace of
change in the first quarter, spending rose at Exhibit 1.2: GDP - Real Consumer Spending
stronger pace for all types of consumer goods, & Business Investments
except for gasoline/fuel/oil/other energy. The
(% Chg Annual Rate)
Conference Board’s Consumer Confidence Index
also indicated an improvement in consumer Consumer Spending
confidence, with the index at 127.4 in July 2018, 40.0 Non-residential Private Fixed Investments
up from one year ago (120).
20.0
On the other hand, private fixed investment
spending expanded at a slower pace of 5.4 0.0
2006-Q4
2006-Q1
2007-Q3
2008-Q2
2009-Q1
2009-Q4
2010-Q3
2011-Q2
2012-Q1
2012-Q4
2013-Q3
2014-Q2
2015-Q1
2015-Q4
2016-Q3
2017-Q2
2018-Q1
percent as non-residential investment rose at a
-20.0
slower pace compared to the growth in Q1 and
as residential investment spending contracted. -40.0
Source: BEA, SAAR, Bil.Chn.2009$
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 5
COMMERCIAL REAL ESTATE
OUTLOOK
Both exports and imports rose at a stronger pace in Employment
2018 Q2 compared to the pace in Q1. Exports
expanded by 9.3 percent, while imports rose at a Employment conditions remain healthy. During the
more modest pace of 0.5 percent, resulting in a 12-month period of August 2017‒July 2018, there
smaller deficit in exports of goods and services. were 2.4 million payroll jobs added, more than the
2.2 million jobs that were added in the same 12-
month period one year ago. The economy has been
Exhibit 1.3: Real Exports & Imports (%
steadily adding employment since October 2010.
Chg Annual Rate)
Exports Imports Exhibit 1.5: 12-Month Payroll
40 Employment (Change, '000)
4000
20
2000
0 0
-20 -2000
-4000
-40
-6000
2007-Q3
2015-Q4
2006-Q1
2006-Q4
2008-Q2
2009-Q1
2009-Q4
2010-Q3
2011-Q2
2012-Q1
2012-Q4
2013-Q3
2014-Q2
2015-Q1
2016-Q3
2017-Q2
2018-Q1
-8000
2009-Apr
2011-Aug
2008-Feb
2008-Sep
2013-May
2009-Nov
2011-Jan
2012-Mar
2015-Feb
2015-Sep
2016-Apr
2016-Nov
2018-Jan
2017-Jun
2006-Dec
2007-Jul
2010-Jun
2013-Dec
2014-Jul
2012-Oct
Source: BEA, SAAR, Bil.Chn.2009$
Federal and state/local consumption and Source: BLS
investment spending rose modestly by 2.1 During the 12-month period of August 2017–
percent (1.5 percent in Q1). Federal spending July 2018, employment expanded in all
rose 3.5 percent while state and local spending sectors, except information services (-21,000)
increased 1.4 percent. Government spending and utilities (-3,000). Retail trade, which has
has been a weak source of growth compared to lost jobs in the past, generated 96,000 jobs.
private consumer and investment spending and
exports. Exhibit 1.6: Payroll Employment:
12-Month Change ('000)
Exhibit 1.4: Real Government Government
Spending (% Chg Annual Rate) Leisure/Hospitality
Educ./Health
Federal State and Local Prof./Bus. Services
15.0 Financial Activities
10.0
Information
Utilities
5.0 Transp./Warehousing
Retail Trade
0.0
Wholesale Trade
-5.0 Manufacturing
Construction
-10.0
Mining/Logging
Q1/2006
Q4/2006
Q3/2007
Q2/2008
Q1/2009
Q4/2009
Q3/2010
Q2/2011
Q1/2012
Q4/2012
Q3/2013
Q2/2014
Q1/2015
Q4/2015
Q3/2016
Q2/2017
Q1/2018
-100 0 100 200 300 400 500 600
Source: BLS
Source: BEA, SAAR, Bil.Chn.2009$
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 6
COMMERCIAL REAL ESTATE
OUTLOOK
The West and South regions have Inflation and Interest Rates
experienced the strongest gains in non-farm
employment. In July 2018, employment With sustained growth, inflation has trended up. In
increased at the fastest pace from year-ago July 2018, prices for all items (CPI) rose 2.9 percent
levels in Utah, Nevada, Idaho, Texas, from the levels one year ago. Core inflation, which
Washington, and Colorado, with employment measures the change in prices other than food and
growing at above three percent. Employment energy, rose to 2.4 percent. The Federal Open
increased in all states except Alaska. Market Operations Committee (FOMC) seeks to
Nationally, non-farm employment rose two keep inflation at two percent when setting the
percent in July 2018 from the level one year federal funds rate target. FOMC has raised the
ago level, federal funds target range twice this year, to a range
of 1.75 to two percent in June 2018, an increase of
50 basis points since January 2018. With the higher
target, the 30-year fixed rate for mortgages rose to
an average of 4.53 percent in July 2018 (3.97
percent in July 2017).
Exhibit 1.9: Inflation
All Items All Items, Less Food and Energy
6.0
4.0
2.0
0.0
-2.0
-4.0
Jul/2005
Jul/2016
Jun/2006
Apr/2008
Jun/2017
Nov/2001
May/2007
Sep/2003
Nov/2012
May/2018
Jan/2000
Dec/2000
Mar/2009
Aug/2004
Feb/2010
Jan/2011
Dec/2011
Sep/2014
Aug/2015
Oct/2013
Oct/2002
The labor market continues to tighten. The
unemployment rate dropped below four
percent, to 3.9 percent in July 2018. The Source: BLS
unemployment rate has hovered at four
percent since April 2018. Exhibit 1.10: Interest Rates
Federal Funds Rate (Midpoint)
Exhibit 1.8: Unemployment 10.0000
12 30-Year Fixed Rate for Mortgages
10 8.0000
8 6.0000
6
4.0000
4
2 2.0000
0 0.0000
2008-Sep
2012-Sep
2006-Sep
2007-May
2009-May
2010-Sep
2011-May
2013-May
2014-Sep
2015-May
2016-Sep
2017-May
2006-Jan
2008-Jan
2010-Jan
2012-Jan
2014-Jan
2016-Jan
2018-Jan
Jan/2018
Jan/2000
Jan/2001
Jan/2002
Jan/2003
Jan/2004
Jan/2005
Jan/2006
Jan/2007
Jan/2008
Jan/2009
Jan/2010
Jan/2011
Jan/2012
Jan/2013
Jan/2014
Jan/2015
Jan/2016
Jan/2017
Source: BLS Source: FRB, Freddie Mac
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 7
COMMERCIAL REAL ESTATE
OUTLOOK
Commercial space is concentrated in large After the two-year decline in sales volume,
buildings, yet large buildings are a relatively small investments in LCRE markets posted increases in
number of the overall stock of commercial buildings. both the first and second quarters of this year.
Based on Energy Information Administration data
approximately 72 percent of commercial buildings Exhibit 2.1: CRE Sales Volume ($2.5M+)
are less than 10,000 square feet in size.1 An
Individual Portfolio Entity
additional eight percent of commercial buildings are
$200
less than 17,000 square feet in size. In short, the
Billions
commercial real estate market is bifurcated, with the $180
majority of buildings (81 percent) relatively small
$160
(SCRE), but with the bulk of commercial space (71
percent) in larger buildings (LCRE). $140
$120
Likewise, commercial sales transactions are
measured and reported based on deal value. $100
Commercial deals at the higher end—$2.5 million
$80
and above—comprise a large share of investment
sales, and generally receive most of the press $60
coverage. Smaller commercial transactions tend to
$40
be obscured given their values. However, these
smaller properties comprise the backbone of daily $20
economic activity—e.g. neighborhood shopping $-
centers, warehouses, small offices, supermarkets,
15Q2
07Q1
07Q4
08Q3
09Q2
10Q1
10Q4
11Q3
12Q2
13Q1
13Q4
14Q3
16Q1
16Q4
17Q3
18Q2
etc. Given the importance of these buildings to local
communities, and REALTORS®’ active roles in Source: Real Capital Analytics
serving these markets, this report focuses on
illuminating trends in both large and small markets.
Large Cap Commercial Real Estate Markets
The first half of the year confirmed the maturation of
the current real estate cycle. Investors have become
more disciplined in the acquisition process, as rising
interest rates are squeezing the spread between
cap rates and long-term bonds. In addition, faced
with declining sales, sellers have been adjusting
their price expectations and have started to close
the noticeable pricing gap of the past two years.
1Smith and Ratiu, (2015), "Small Commercial Real Estate Market,"
National Association of REALTORS®
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 8COMMERCIAL REAL ESTATE
OUTLOOK
Investment volume in the large cap space reached Office properties accounted for almost one-in-four
$236.1 billion in transactions by the midpoint of this transactions during the quarter, with $28.8 billion in
year, a 4.1 percent advance compared with the sales. However, office investment volume faltered,
same period in 2017, according to Real Capital with a 17 percent decline. The sector seemed to be
Analytics (RCA). Deal volume proved mixed across undergoing a rebalancing, with Central Business
property types, with momentum shifting further District properties experiencing waning interest,
toward industrial and apartment properties in both while suburban office properties regained their
major and secondary markets. attractiveness.
Apartment sales accounted for the largest share of The retail sector closed $20.7 billion in sales during
transactions—29 percent—with $34.5 billion in the second quarter, an increase from the same
closed transactions, based on RCA data. However, period in 2017. However, the advance was mostly
the second quarter of the year saw apartment deal driven by Unibail Rodamco’s acquisition of the
volume post a seven percent decline year-over- Westfield portfolio, as single asset sales mirrored
year. investor concern over the general direction of the
retail space. Industrial properties remained on a
strong upward trend, with sales totaling $18.2 billion
Exhibit 2.2: Sector Momentum - Major vs in the second quarter, up 17 percent from the prior
Non-Major Metros year.
15% Exhibit 2.3: Commercial Property Price
NMM
Apartment Indices
NCREIF Green Street Advisors
10% 6MM
Real Capital Analytics Federal Reserve
Price (RCA CPPI) YoY Chg
NMM Office - Industrial
Sub 6MM
350.0
6MM OfficeApartment
-
Sub
NMM 300.0
5% NMM Hotel
Industrial
NMM Office -
CBD 250.0
6MM Hotel
NMM Retail 200.0
6MM Retail
0%
150.0
100.0
-5%
50.0
-40% -20% 0% 20% 40%
Volume YoY Chg (trailing 12-month) 0.0
Source: Real Capital Analytics
2006-Q1
2001-Q1
2002-Q1
2003-Q1
2004-Q1
2005-Q1
2007-Q1
2008-Q1
2009-Q1
2010-Q1
2011-Q1
2012-Q1
2013-Q1
2014-Q1
2015-Q1
2016-Q1
2017-Q1
2018-Q1
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 9COMMERCIAL REAL ESTATE
OUTLOOK
Prices in LCRE markets advanced 6.5 percent year- Other commercial real estate price indices posted
over-year in the second quarter of 2018, according mixed trends. The Green Street Advisors
to RCA’s Commercial Property Price Index. All Commercial Property Price Index—focused on large
property types posted higher prices during the cap properties—was virtually flat, with a 0.4 percent
quarter, with the apartment and industrial properties gain on a yearly basis during the second quarter, at
recording higher comparative gains of 11.6 percent a value of 126.3. The GSA index has flattened for
and 6.5 percent, respectively. the past several quarters. The National Council of
Real Estate Investment Fiduciaries (NCREIF) Price
Exhibit 2.4: NCREIF Property Index Returns— Index increased 8.5 percent on a yearly basis during
2018.Q2 the second quarter, accelerating from the prior
quarter’s 7.1 percent gain.
NATIONAL 1.81%
OFFICE 1.54% Cap rates spent the first half of the year continuing
on a sideways trend, in a narrow range of 6.7-6.8
INDUSTRIAL 3.58%
percent, according to RCA. Apartments continued
RETAIL 1.32% experiencing slight cap rate compression, with an
APARTMENT 1.54%
average of 5.5 percent in the second quarter.
Industrial transactions also posted a minor decline in
Source: National Council of Real Estate Investment Fiduciaries cap rates, at an average of 6.4 percent. Office and
hotel sales saw increases in average cap rates,
while retail deals retained an average rate of 6.5
percent in the second quarter, on par with last year.
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 10COMMERCIAL REAL ESTATE
OUTLOOK
Small Cap Commercial Real Estate Markets Exhibit 2.6: Sales Prices (YoY % Chg)
The second quarter of the year marked a slowdown Real Capital Analytics CRE Markets
in investment volume gains in the small cap space. REALTOR® CRE Markets
Commercial real estate sales in SCRE markets
increased by 0.5 percent from the same quarter in 15.0%
2017. The slight advance stood in contrast to the 4.9
percent average second-quarter increase typical of 10.0%
the previous five years.
5.0%
The figure may portend a broader slowdown,
mirroring the LCRE markets trend, with a two-year 0.0%
lag. The shortage of available commercial inventory
2014.Q1
2008.Q4
2009.Q3
2010.Q2
2011.Q1
2011.Q4
2012.Q3
2013.Q2
2014.Q4
2015.Q3
2016.Q2
2017.Q1
2017.Q4
remained ranked as the top concern for -5.0%
REALTORS®, likely impacting deal volume. Almost
half of respondents to a market survey ranked tight -10.0%
inventory as the number one issue affecting their
markets.
-15.0%
Exhibit 2.5: Sales Volume (YoY % Chg) -20.0%
Real Capital Analytics CRE Markets
-25.0% Sources: National Association of REALTORS®, Real Capital Analytics
REALTOR® CRE Markets
The inventory squeeze continued exerting upward
200%
pressure on prices in SCRE markets, to the tune of
a 5.1 percent yearly advance in the second quarter
150% of this year. In turn, the pricing gap between buyers
and sellers proved the second highest ranked
concern for commercial practitioners, reported by
100% about one-in-five members.
Capitalization rates in SCRE markets moved
50% sideways in the second quarter of 2018, at an
average of 6.8 percent. Compared with the prior
year, cap rates declined 46 basis points.
0%
2016.Q2
2008.Q4
2009.Q3
2010.Q2
2011.Q1
2011.Q4
2012.Q3
2013.Q2
2014.Q1
2014.Q4
2015.Q3
2017.Q1
2017.Q4
-50%
-100% Sources: National Association of REALTORS®, Real Capital Analytics
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 11COMMERCIAL REAL ESTATE
OUTLOOK
International transactions remained a fixture in year at 2.6 percent, and rose to 2.9 percent by
REALTORS®’ CRE markets in the final quarter of August of this year. As the Federal Reserve is
the year, accounting for 12.0 percent of responses expected to continue raising the short-term rate,
to a survey. The average international sale price longer termed bonds should continue feeling upward
was $2.5 million in the second quarter of the year. pressure. The upward trajectory of 10-year
Indicating a likely preference for safety of capital Treasuries, coupled with a flat cap rate movement,
over returns, the average cap rate for SCRE has begun to narrow the spread between the two. In
international deals was 6.7 percent. the second quarter, the spread dropped below 400
basis points, a noticeable decline from the over 570
Longer-dated bond yields advanced over the first basis points registered in 2012.
half of 2018. The Treasury 10-year note started the
Exhibit 2.7: Cap Rates - 2018.Q2 Exhibit 2.8: CRE Spreads: Cap Rates to 10-
Yr. T-Notes (bps)
RCA Markets REALTOR® Markets
8.0% RCA Cap Rates REALTORS® Cap Rates
1200
7.0%
1000
6.0%
5.0% 800
4.0% 600
3.0% 400
2.0%
200
1.0%
0
0.0%
11Q3
13Q1
10Q1
10Q3
11Q1
12Q1
12Q3
13Q3
14Q1
14Q3
15Q1
15Q3
16Q1
16Q3
17Q1
17Q3
18Q1
Office Industrial Retail Apartment
Sources: National Association of REALTORS®, Real Capital Analytics Sources: National Association of REALTORS®, Real Capital Analytics
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 12COMMERCIAL REAL ESTATE
OUTLOOK
Large Cap Commercial Real Estate Markets
The commercial fundamentals in LCRE markets translated into a net of 4.5 million square feet of
continued to provide solid performance during the retail space absorbed during the second quarter,
second quarter of 2018, benefitting from strong according to CBRE. The figure was slightly lower
economic tailwinds. While demand maintained than the first quarter, as store closures continued to
course, market metrics were more nuanced across affect the mall landscape. Retail construction activity
the core property sectors. declined to the lowest level since the first quarter of
2012, as completions totaled 7.0 million square feet.
The second quarter of 2018 witnessed solid demand The retail availability rate moved sideways, at 6.5
for office space, driven by continued employment percent in the fourth quarter, as asking retail rents
gains in office-using industries. Net absorption of reached $17.37 per square foot, a 5.1 percent
office spaces totaled 15.5 million square feet during increase year-over-year.
the quarter, according to CBRE. On the supply side,
completions remained strong, with over 10 million An improving employment environment and growing
square feet of new space finished during the population continue to favor demand for housing.
quarter. According to CBRE, a majority of newly- With residential pricing remaining strong and a
finished space was preleased, as tenants continue market influenced by tight inventory, the apartment
to seek quality work accommodations. Reflecting sector continued to experience favorable conditions
the demand-supply balance, the office vacancy rate in the second quarter of the year. Net absorption of
slid to 13.0 percent. The asking rent for office space multifamily space totaled 249,000 units over the 12
nationally averaged $32.58 per square foot, a 1.3 months ending in June 2018, according to CBRE.
percent increase from a year ago. Construction of multifamily properties maintained
momentum, with 276,000 units delivered over the
Boosted by strong consumer spending and trade, same period. The national vacancy rate inched up
the industrial sector experienced another quarter of 10 basis points from a year ago, to an average of
gains in fundamentals. Industrial net absorption 4.7 percent. Apartment effective rents rose 2.0
totaled 58.8 million square feet during the second percent year-over-year, to an average of $1,685 per
quarter, according to CBRE data. The solid demand month during the quarter.
outpaced new deliveries, even as new supply rose
7.5 percent from the second quarter of 2017.
Completions totaled 48.9 million square feet, leading
to a decline in the vacancy rate, to 4.4 percent.
Industrial asking rents advanced in the second
quarter to $7.11 per square foot, a 5.5 percent year-
over-year increase, and the highest level since
1989.
As the unemployment rate and rising wages have
buoyed consumer optimism, retail spending
registered a noticeable gain. Some of that spending
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 13COMMERCIAL REAL ESTATE
OUTLOOK
Small Cap Commercial Real Estate Markets
Commercial fundamentals in REALTORS®’ markets Vacancy rates reflected the mixed conditions of the
notched a quarter of gains, following a softer first core property types. The office and industrial
quarter. Leasing volume advanced by 5.9 percent vacancy rates declined 30 basis points and 140
from the preceding quarter, as demand for space basis points, respectively, from a year ago. Retail
remained solid in small cap markets. New properties experienced higher vacancies, averaging
construction rose by 2.2 percent from the prior 12.0 percent in the second quarter. Multifamily
quarter, as developers in SCRE markets faced spaces contended with rising supply, which pushed
rising construction costs. Leasing rates increased by vacancy rates up 30 basis points, to 6.1 percent.
1.8 percent, as concessions declined 2.8 percent.
Exhibit 3.1: REALTORS® Fundamentals Exhibit 3.2: REALTORS® Commercial
Vacancy Rates
New Construction Leasing Volume
Office Industrial Retail
15%
Multifamily Hotel
10% 30.0%
5% 25.0%
% Change, Quarter-over-quarter
0%
20.0%
2009.Q2
2010.Q1
2010.Q4
2011.Q3
2012.Q2
2013.Q1
2013.Q4
2014.Q3
2015.Q2
2016.Q1
2016.Q4
2017.Q3
2018.Q2
-5%
15.0%
-10%
10.0%
-15%
-20% 5.0%
-25%
0.0%
2018.Q1
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3
2014.Q1
2014.Q3
2015.Q1
2015.Q3
2016.Q1
2016.Q3
2017.Q1
2017.Q3
-30%
Source: National Association of Realtors®
Tenants in REALTORS®’ markets remained Source: National Association of Realtors®
focused on smaller footprints. In the second quarter,
the ‘5,000 square feet and below’ segment
accounted for 75.0 percent of activity. The ‘5,000 –
7,499 square feet’ segment accounted for 5.0
percent of activity during the quarter, similarly to the
‘10,000 – 49,999 square feet’ segment’s 6.0
percent. The ‘50,000 square feet and above’
segment comprised 4.0 percent of total activity.
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 14COMMERCIAL REAL ESTATE
OUTLOOK
Economy
NAR forecasts economic output to expand at a
stronger pace of 3.0 percent in 2018. This forecast 2016 2017 2018 2019
factors in the increased consumer and investment Annual Growth Rate, %
spending arising from the tax changes under the Real GDP 1.6 2.2 3.0 2.7
Tax Cuts and Jobs Act, which includes a reduction Nonfarm Payroll Employment 1.8 1.6 1.7 1.5
in the corporate tax rate from 35 percent to 21 Consumer Prices 1.3 2.1 2.9 2.7
percent. Payroll employment is projected to Level
increase 1.7 percent for the year, which would Consumer Confidence 100 121 127 125.0
push the unemployment rate down to 3.9 percent. Percent
Inflation is expected to accelerate to 2.9 percent, Unemployment 4.9 4.4 3.9 3.9
as the economy continues to reach its full capacity Fed Funds Rate 0.4 1.0 1.8 2.6
and as oil prices continue to recover. NAR 3-Month T-bill Rate 0.3 1.0 1.9 2.5
forecasts the prime rate to hit 4.9 percent and the Prime Rate 3.5 4.1 4.9 5.6
30-year government bond rate to move up to 3.2 10-Year Gov’t Bond 1.8 2.3 3.0 3.5
30-Year Gov’t Bond 2.6 2.9 3.2 3.7
percent for the year. NAR expects monetary policy
to continue to tighten in 2019, but at a cautious
Source: National Association of REALTORS®
pace.
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 15COMMERCIAL REAL ESTATE
OUTLOOK
Commercial Real Estate
Exhibit 4.2: Commercial Real Estate Vacancy Forecast (%)
2017.Q2 2017.Q3 2017.Q4 2018.Q1 2018.Q2 2018.Q3 2018.Q4 2019.Q1 2019.Q2 2019.Q3 2019.Q4 2020.Q1 2017 2018 2019
Office 12.7 12.7 12.0 12.7 12.4 13.2 13.2 13.1 13.0 12.8 12.8 12.7 12.8 12.9 12.9
Industrial 9.1 8.9 7.8 7.4 7.7 7.5 7.4 7.2 6.9 6.7 6.5 6.7 8.8 7.5 6.8
Retail 10.4 12.1 11.4 12.0 12.0 12.0 12.1 12.1 11.9 12.1 12.3 11.7 11.8 12.0 12.1
Multifamily 5.8 5.3 5.0 5.5 6.1 6.3 6.4 6.3 6.4 6.5 6.6 5.4 5.5 6.1 6.4
Source: National Association of REALTORS®
With economic output and employment trends
continuing on an expansionary path, commercial
fundamentals are expected to exhibit solid demand
and increasing cash flows. Vacancy rates will likely
provide mixed results, with multifamily undergoing
growing availability from an expanding supply
pipeline. Office and retail properties will likely see
vacancies move sideways, while industrial spaces
will find rent growth advancing at a steady pace.
On the investment side, rising interest rates will
continue to add upward pressure on investment
yields. The Federal Reserve has indicated that it is
committed to unwinding its balance sheet and, as
consumer prices rose by close to 3.0 percent in
August, will continue with several rate increases in
2018 and 2019. Most analysts are expecting
another two rate hikes this year, and three-to-four
next year.
For commercial investments, the trends have
already shown in pricing. Cap rates seem to have
found a floor, and for some property types, have
already begun to turn upward. In SCRE markets,
price gains will likely continue during the latter half
of 2018, mostly due to the inventory shortage.
However, the momentum is moderating, and
beginning to converge toward that of LCRE markets.
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 16COMMERCIAL REAL ESTATE
OUTLOOK
The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade
association, representing 1.3 million members, including NAR’s institutes, societies and
councils, involved in all aspects of the real estate industry. NAR membership includes brokers,
salespeople, property managers, appraisers, counselors and others engaged in both residential
and commercial real estate. The term REALTOR® is a registered collective membership mark
that identifies a real estate professional who is a member of the National Association of
REALTORS® and subscribes to its strict Code of Ethics. Working for America's property owners,
the National Association provides a facility for professional development, research and
exchange of information among its members and to the public and government for the purpose
of preserving the free enterprise system and the right to own real property.
NATIONAL ASSOCIATION OF REALTORS®
RESEARCH GROUP
The Mission of the NATIONAL ASSOCIATION OF REALTORS® Research Group is to produce
timely, data-driven market analysis and authoritative business intelligence to serve members,
and inform consumers, policymakers and the media in a professional and accessible manner.
To find out about other products from NAR’s Research, visit
www.nar.realtor/research-and-statistics
NATIONAL ASSOCIATION OF REALTORS®
RESEARCH GROUP
500 New Jersey Avenue, NW
Washington, DC 20001
202.383.1000COMMERCIAL REAL ESTATE OUTLOOK | 2018.Q3
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