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CRE Update: Is Your Institution Prepared for Future Trends?

Barbara Byrne Denham, Senior Economist, REIS, Inc. shared the latest outlook on office, apartment, industrial, and retail real estate throughout the country during RMA’s most recent offering of the Risk Readiness Webinar Series. Denham presented forward-looking views on economic conditions, identified which market fundamentals most impact the business, and provided tactical insights to properly position your institution’s (CRE) portfolio in the current low rate environment present in capital markets.

Denham provided a macroeconomic overview indicating that a recession is not imminent in 2020. The Fed has likely stopped lowering rates for now. After growing 2.1% in Q3, the economy is expected to grow at a slower rate in Q4 and hold steady in 2020. The yield curve has normalized, but that doesn’t mean the market has erased its foretelling of a recession. The market is still reacting more to uncertainty than to hard data. CRE debt levels and originations remain stable.

Apartment cap rates should also hold steady. The apartment market has been the number one sector in which to invest for the past five years and continues to maintain consistent vacancy and rent growth.

Office, retail, and industrial cap rates could increase depending on the metro area. The national office market has not performed as strong in this expansion as it had in others. There is far less new construction in this expansion, as firms are leasing fewer square feet per employee.

Retail sales enjoyed steady growth through September 2019. Rent growth remained flat with an average growth rate just under 2%. The largest areas for new leases in 2018 and 2019 include grocery, home/houseware, and fitness, revealing a shift in consumer spending to more service-oriented providers.

Denham indicated that trade is affecting the industrial sector but not as dramatically as expected. Trade has been flat this year and there is caution about growth because of the ongoing trade war between the U.S. and China.

Flex R&D vacancies recovered slightly; effective rents rose by .7% in Q3. Warehouse/distribution vacancies continued the trend upwards with marked deterioration in effective rent growth over the past year.

There has been a continuing deceleration of self-storage occupancies because of so much new construction. Supply growth may ease as soon as next year with vacancy rates rising.

GDP and employment continue to have stable growth rates ten years into this expansion. Although growth hasn’t been robust, Denham believes this is preferable because it is more sustainable.

If you missed the live webinar, you can purchase a recording here.