Commercial real estate experts gaze into 2017 crystal ball

Posted on January 23, 2017

Commercial real estate may sound like a yawn, but the bottom line of that business affects every person — and every person’s bottom line affects it.

That’s how the CCIM Institute played it Thursday at its annual Southwest Florida Real Estate Outlook Conference in downtown Fort Myers. No chest beating about deals, just rapid-fire insights into the economic road ahead by a panel of national and local experts ranging from a Federal Reserve analyst to an office designer.

Here are their top takeaways on where we are and are likely to be heading in 2017.

How’s the economy?

Lifetime wealth is at an all time high, says Lawrence Yun, VP of research at the National Board of Realtors. But it’s not because 15 million jobs have been created since the Great Recession after eight million jobs were lost.

Nor is it because home values have recovered or nearly recovered in many places, though that helps.

The wealth data reflects the growth in the stock portfolio of 10 percent of Americans who’ve invested $100,000 or more.

“When wealth rises, 10 percent are rising while 90 percent aren’t feeling it,” Yun said to explain our election results.

The middle class is stalled. Businesses must spend more to un-stall it, Yun believes.

“When corporate profit rises, businesses used to recycle it back into the economy. Now they’re sitting on a pile of cash,” he said.

Federal Reserve data shows capital orders are way down.” Change — what Yun calls ‘animal spirit,’ a psychological shot in the arm — might stimulate the spending we need.

Are we ‘bubblicious?’

Private equity real estate investor Tom Barrack thinks so. Yun and Atlanta-based Federal Reserve analyst Brian Bailey say no.

“But I think there is some justification to say we are in early bubble stage in the commercial space,” Yun said.

The reason: commercial prices grew 60 percent in five years, faster than the housing market. That means people are bidding up the properties — whose rents might not pencil out the high cost. So unless rents can be ratcheted up dramatically, we may be in a bubble, he says.

Tax reforms aren’t all good news

Tax reform in 2017 could reduce the amount of mortgage interest you could deduct if you’re a property owner, Bailey said. It could also repeal the ability to defer capital gains or losses when you sell a property – called 1031 – making it harder to re-invest the profits in buying another asset.

And it could reduce the value of tax credits that encourage investors to support development ventures in exchange for being able to use it as a tax deduction.

Where’s the money coming from?

Foreign investment has come on heavy and fast, reports Bailey; from $5 million to $11 million in investment in 2011, to $80 million or more in 2016.

That could be a very rough estimate because even the Federal Reserve can’t get tax havens to cooperate with sharing their data, he says.

International and real estate investment trust monies are buying up trophy properties not only in major cities, but also in tertiary markets like Southwest Florida, while local community banks are providing money for the smaller buys.

“A question in my mind is that if the money flows in rapidly enough, it can cause pricing distortions,” Bailey said.

What going on at banks?

They’ve tightened their underwriting in the past five months, experts said. As the big banks lend less, smaller community banks have picked up some of the slack. A loosening of Dodd-Frank restrictions – the 2010 Wall Street reform act meant to prevent another financial free-fall – would benefit community bank lending and commercial real estate.

Overall there’s been no growth in loan balances since 2006, Bailey said. Construction and development loans dropped substantially. Hot spots: anything that’s rented or leaded.

An apartment divide

Apartments have become split, Bailey says. There’s a huge supply of luxury product, but developers tell him affordable housing isn’t profitable to do. He sees class B apartment projects – updating older complexes – filling some of the need in 2017.

Technology changes everything

Technology gave us Airbnb – the largest hospitality company n the world without owning a room – and Uber, the largest transportation provider without owning a fleet of cars.

The CCIM panel credited e-commerce with the disruption of shopping malls – a 1.1 million square foreclosed mall was famously auctioned off for $100 recently on the Pittsburgh courthouse steps – and with the soaring demand for warehouse space to house products sold online for distribution.

Technology is changing the way offices are built, and even reducing parking requirements for medical offices that deliver more services via telemedicine, panel members said.

Interest rate forecast

A Federal Reserve employee can be expected to dodge the question on what’s ahead for interest rates, which Bailey apologetically did. But Yun ventured this:

“The Fed will raise rates in three more rounds in 2017, and maybe a couple of rounds in 2018.”