Commercial Investment Real Estate

JUL-AUG 2017

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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COMMERCIAL INVESTMENT REAL ESTATE 28 July | August 2017 Retail Availability Rates Sources: 2005–2016 (Q4), CBRE; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in October 2016) projected 10.6% and 10.7%, respectively, for 2017 and 2018. 2007 2006 2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 7.4% 8.1% 9.0% 12.9% 10.2% 11.7% 12.5% 11.0% 10.7% 10.1% 10.0% 10.1% 10.8% 12.6% 12.9% Actual Forecast 20-Year Avg. (9.8%) Office Vacancy Rates Sources: 2005–2016 (Q4), CBRE; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in October 2016) projected 12.6% and 12.8%, respectively, for 2017 and 2018. 2007 2006 2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 13.6% 12.5% 12.5% 16.0% 12.9% 14.9% 15.4% 14.0% 13.1% 12.6% 12.5% 12.6% 14.1% 16.5% 16.4% Actual Forecast 20-Year Avg. (13.5%) The Reckoning for Retail E-commerce has been a major disrupter for the retail sector. Despite strong consumer spending, a fresh wave of store closings and retailer bankrupt- cies have occurred during the past 12 months, with more ahead in the second half of the year. "We are over-retailed, and we have some concepts that are obsolete," Jones says. The land underneath stores, such as Sears and J. C. Penney — and argu- ably even Macy's — is more valuable without those stand-alone stores, he adds. However, some bright spots exist in the sector, along with a bigger gap that is emerging between winners and losers. Many malls are adapting to the changing dynamics by introducing new anchors, such as restaurants and more entertainment. Outlets and value-priced retail concepts, such as T.J. Maxx and Nordstrom Rack, are outperform- ing their department store rivals. Retailers also are restructuring and trying to fine-tune strategies that combine both online and brick-and-mortar sales, along with a supply chain that allows them to deliver goods to customers fast and cost-effectively. "No. 1, I think a lot of the negative chatter about retail is overblown," Levy says. "And No. 2, this talk creates tremendous opportunities for people going into the space now, because most institutional-grade real estate is performing very well." New construction has remained limited, which has helped absorb the excess space still in the mar- ket. Since peaking at 12.9 percent in 2011, retail vacancies have been steadily declining with a fore- cast for rates to reach 10.1 percent by year-end. Vacancies are expected to remain relatively flat in 2018 and 2019, while annual rent growth will con- tinue to hover between 2 and 2.5 percent through 2019, according to the ULI Forecast. Potential Pitfalls Many factors have contributed to the prolonged real estate cycle. The real estate market has been taking its cues from the slow, steady pace of growth in the economy. Regulatory pressures also have kept lending and development in check. "The economy looks favor- able and is moving forward on a measured pace and capital markets have been disciplined," Riggs says. Interest rates are one of the wild cards ahead. "We know that the Federal Reserve wants to raise short- term rates, but it will do it at a very careful pace and try not to be disruptive to the economy," Riggs says. But outside of the Federal Reserve's control is the 10-year Treasury note, which has been lower for a longer period than anyone has expected, he says. Another wild card is the new Trump adminis- tration and the success — or failure — it has in moving key policies forward, which economists are watching closely. Policies such as tax reform, reduced regulation, and infrastructure spending could boost economic growth. The likelihood of that happening, however, is very difficult to handicap at this point, especially after the Trump administration did not succeed in its initial bid to pass healthcare reform early in the year, according to Severino. "As long as we don't get some kind of idiosyncratic shock to the economy or the economy ends up disap- pointing in some major way, I still think there is room to run in this cycle before we have to start worrying about things turning against us," Severino adds. Beth Mattson-Teig is a business writer based in Minneapolis.

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