Here is what economists and bank executives had to say about which real estate sectors will enjoy a resurgence in the coming year, which mistakes investors should be wary of and how to stay ahead of the market in 2016.
1) The office sector might be the next one to “break out,” now that the multifamily boom seems to be stabilizing, according to Victor Calanog, chief economist and senior vice president with New York City-based research firm Reis. This trend, however, will be heavily slanted toward office buildings in Central Business Districts (CBDs) rather than suburban properties, which can’t generate as many replacement tenants if an existing tenant leaves.
2) Foreign investors are not as intrigued as they once were by office and retail properties in CBDs. Instead, many are going after warehouse distribution facilities in smaller markets, a property type that’s benefitting from the rise of e-commerce. “These folks have figured out what’s sexy is yield,” said Jim Costello, senior vice president with research firm Real Capital Analytics.
3) However, buyers going into secondary markets for more attractive yields should be meticulous about their due diligence. “We look to concentrate our activity in primary markets,” said Steven M. Kenny, East region executive for Bank of America Merrill Lynch. “We’ve seen some softness in secondary markets in our portfolio.”
4) The U.S. economy is in a slow growth period, with both Calanog and Costello noting that 2.00 percent GDP growth in the coming year would be an optimistic scenario. That being said, even if there is a downturn, it’s not likely to be as severe as the last one. When investors buy today “we’re looking at income-producing real estate,” Calanog said. “Our clients don’t have blinders on.”
5) Don’t expect to see banks financing a lot of construction projects in the near-term, according to Peter G. D’Arcy, commercial real estate segment head for M&T Bank. Matthew E. Galligan, president of the real estate finance group at CIT, noted: “We’re a little concerned about construction… and starting to pull back a little bit in that regard.
6) Steven Kenny also cautioned that all that ample private equity capital that’s flooding the commercial real estate market right now might disappear once the market will start showing cracks. Bank balance sheets are sizeable enough to withstand some issues with real estate loans, he explained, which may not be the case with less traditional money sources. “As non-bank portfolios begin to show signs of stress, it will be a very fickle source of capital.”
7) Peter D’Arcy’s advice for his fellow lenders was this: “The fact that the fundamentals are so strong right now is a warning in itself. Risky loans are made in good times.”