Commercial Real Estate Investments In 2016

From SVN, Commercial Real Estate Advisors, comes the 2016 Commercial Real Estate Outlook: Commercial real estate investors who took risks during the downturn to make acquisitions are now seeing the benefits. Because of these significant gains, many investors and market participants are now warning others of the possibility of a new downturn in the real estate asset cycle. These arguments can be dispelled for several reasons. First, the tumultuous conditions from the past are not present this year and are not likely to return within this term. Cap rates and underlying treasury rates are the closest indication of any bubble or overpricing in the commercial real estate market. "According to RCA, cap rates averaged 6.5% nationwide during 2015, while the 10-year treasury rate averaged in the low 2% range for most of 2015 and early 2016. This implies a spread of over 4% (or 400 basis points)." The market is not presenting the same risk/return profile observed before the 2007 peak of pricing. Further, debt availability is far more constrained post crisis with total leverage utilization down significantly, the percentage of all equity transactions in many markets is staggering, and the risk of default is relatively low for most investors and deals. Pricing in commercial real estate markets does not represent a new bubble or other significant source of risk.

"This conclusion is further strengthened by our belief that interest rates will not experience significant upward pressure in 2016. The energy sector declines and overall global pressures will likely start impacting GDP and employment statistics by the end of the first quarter of 2016. The likely result will be the Federal Reserve slowing or even pausing further rate increases in 2016. Debt markets should remain open and active in 2016 as they did in 2015. If debt costs do not rise and fundamentals remain stable or growing (even if at slower rates than in 2015), it is not logical to expect price declines. In fact, we expect modest price appreciation for most markets."