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Will property prices continue to go up in 2016? A Morgan Stanley report grabbed the industry’s attention recently when it proclaimed that the U.S. commercial real estate universe will experience zero growth in prices in the year ahead. Morgan Stanley researchers reasoned it was unlikely net operating incomes (NOIs) would continue rising at the pace needed to guarantee price growth in an environment of economic uncertainty. (They did point out there would be bifurcation in price appreciation between best and worst assets and certain geographic markets).
But is “flat price growth in 2016” a consensus forecast among commercial real estate economists and researchers? Not quite. We surveyed six industry experts and while their forecasts ranged considerably, only a few were in line with the one offered by Morgan Stanley. Here are their rough projections for 2016:
“We are still forecasting price appreciation in 2016, and it’s going to be on the order of somewhere about 4.0 and 5.0 percent,” Circ says, adding that the figure will likely be lower than the 7.5 percent recorded in 2014 and approximately 6.5 percent in 2015. “One of the reasons we believe that property prices will continue to rise is because we are seeing further improvements in NOI essentially across all property types, with maybe some caveats to properties in the multifamily sector, and we are seeing pretty strong rent growth rates. So income is still going to rise.”
“The remaining side to pricing is obviously cap rates. Cap rates are very low across the property types, especially for class-A building in class-A locations. The is still some room for cap rates to compress in some secondary markets, so price growth will be positive, but it won’t be accelerating any more, it’s decelerating. There is probably more risk to cap rates than to NOIs. Cap rates could rise because we’ve seen some widening in the spreads and there could be a shutdown in international [capital] inflows to this country. The low oil prices are making it more difficult for money from the Middle East to invest anywhere and Norway is also a country that’s very oil-dependent. And then Chinas has been a tremendous source of money, but it’s obviously a very regulated economy and the Chinese government could [limit] the outflow of money” as it tries to stabilize domestic economy.
“If price trajectories follow projected 2016 business plans of major sources of finance, it is likely to be flat,” Calanog notes. “There is, however, an optimistic possibility than in a world of volatile equity markets and low interest rates, commercial real estate in the most liquid markets will benefit from cash seeking yield and relatively stable income patterns. If so, expect price increases to benefit the usual suspects—marquee properties in gateway markets.”
“The Morgan Stanley analysts have got it wrong! Commercial real estate prices will not be flat for 2016,” says Torto, who notes that his forecast figure is for average NOI growth for all property types. “First, I expect to see NOI growth this year and, with what I believe will be a relatively steady cap rate, higher NOI levels will lead to some price growth. While other industries are in earning recession, I do not think that is true for commercial real estate and will not be true for commercial real estate unless the economy goes into a recession in 2016, which I do not expect.”
In addition, Raymond notes that this cycles recovery in commercial real estate prices “is driven by equity and not debt. Debt levels and costs have been benign, while equity has poured into U.S. commercial real estate from around the globe. The reason equity has favored commercial real estate has a lot to do with long-term structural changes in the role of real estate in a financial portfolio.”
“We don’t see prices flattening in 2016, but we certainly see a slowdown,” says Cochrane. “We wouldn’t be surprised if we saw price appreciating going from the mid-teens to mid-single digits in terms of growth rates. Job growth is still pretty strong across a broad range of industries, so there [should be] growing demand for office space, continues demand for logistics space as the demand for goods rises.” With consumer confidence showing strength and consumer spending expected to increase as the year progresses, the retail sector should benefit as well, Moody’s team says.
“Obviously we are looking at a little bit of a range here, but probably somewhere on the order of 5.0 to 8.0 percent for the entire commercial real estate universe,” adds Kamins. “Within that, we anticipate that if you take out multifamily, the growth will be a little bit stronger. In the multifamily sector, the growth will be on the lower end, if not a little bit below that range.”
“According to PREA Consensus Forecast Survey released in December, the average forecaster is expecting appreciation of 3.5 percent for the U.S. national commercial property market in 2016, less than half of last year’s realized appreciation,” MacKinnon says. “With forecasts of only a slight rise in cap rates, the expected appreciation is really on the back of improving fundamentals and growing NOI. Forecasters expect the highest appreciation in office and the lowest in retail.”
“We expect commercial real estate values to be lower a year from now,” McCulloch says. "Order of magnitude, 0-10 percent.”
"Asset values may appear 15 percent overpriced vs. corporate [bonds] and REITs, but other factors should be considered. These are, on balance, more positive than negative today, and include still healthy operating fundamentals and capital stacks that are conservative vs. 2007. Plus, U.S commercial real estate still looks attractive for foreign investors looking for preservation of capital."
