Jobs, oil, interest rates and inflation. These are just a handful of the topics discussed by experts from Marcus & Millichap as factors influencing the company’s 2016 U.S. Office & Industrial Investment Forecast. Here’s what these experts identified as five trends to watch this year for office and industrial real estate:
- International headwinds and risks of global slowdown and contagion. Although the current growth cycle is beyond the average of 60 months (the U.S. GDP is entering its seventh year of growth), recovery and growth cycles can extend up to 10 years. Declining oil prices are placing additional stresses on the market, yet falling gas prices are a net positive for the economy. U.S. economic outlook is positive; concern is forming over the impact of the overall global economy.
- Job creation is steady and broadening. The nation is entering its 65th month of continuous employment growth, and a slight slowdown is anticipated this year (dropping from 2.7 million jobs to 2.5 million). While job numbers rise, wage growth is lagging. Office-using employment comprises half of the job creation, just slightly down from the high point of this cycle.
- Limited construction in office and industrial. Based on the 2016 Forecast, office completions are only at two-thirds of what they were prior to the recession. It’s given the sector a big opportunity to recover and drive vacancy rates back down. Office vacancies hover at 14.5 percent at the start of 2016, which is driving up rents. A decline of space per employee has impacted absorption rates, even with job growth. Office construction remains highly concentrated in Houston, San Jose, Dallas/Ft. Worth and New York. Industrial construction is at two-thirds of the last cycle despite e-commerce’s impact and the greater demand for urban-located fulfillment facilities. Dallas/Ft. Worth, Inland Empire, Atlanta and Houston are seeing the highest industrial completions.
- Transaction activity is pushing to new highs. Growth in transactions has been steadily accelerating since the end of the recession; at this point, office transactions are at 22 percent above the peak of the last cycle although pricing is slightly down. Growth is driven by solid fundamentals and increased capital, due to investors looking for alternative places than Wall Street to put their money. How long will this continue? Growth extends into both secondary and tertiary markets.
- Cap rate compression. Cap rates reversing course and heading upwards are far from a foregone conclusion at this point. Tightening vacancies and climbing rent growth continue to support pricing appreciation for office moving forward. Downtown markets and suburban markets are 8.5 percent and 3.5 percent, respectively, below peak of the last cycle, but both are getting solid lift off of the trough of the market in 2008-2009.
For more facts, figures and outlooks, tune in to the archived webinar on the Marcus & Millichap website (sign-in required), hosted by Al Pontius, Senior Vice President, Commercial Property Groups, and featuring John Chang, Marcus & Millichap Research Services, and Bill Hughes, Marcus & Millichap Capital Corporation.
Kathryn Hamilton is Vice President for Marketing and Communications at NAIOP Corporate.