Moderate commercial market expansion expected for rest of 2016

Property values, price gains seen surpassing 2007 peaks

Despite various global and domestic hurdles hindering economic growth, steady job gains and stable leasing demand should help keep commercial real estate activity expanding in 2016.

In a report by the National Association of Realtors, commercial real estate activity is forecast to gradually grow this year with demand for space holding steady across all commercial sectors.

While commercial property values and price gains are expected to flatten after surpassing 2007 peaks in some major markets, investors will still benefit from the strong income flows generated from new and existing leases.

The report, "Expectations & Market Realities in Real Estate -- Navigating through the Crosscurrents," was prepared by the NAR in association with Situs Real Estate Research Corporation and Deloitte.

The fifth annual joint report draws on the three organizations' respective research and expert analysis and offers an objective outlook on commercial real estate through forecasts and commentary on the current economy, capital markets and commercial real estate property markets.

A research-based assessment of the office, industrial, apartment, retail and hotel property sectors is also provided.

"Historically low interest rates, especially in treasuries, combined with commercial real estate's stable prices and value make this asset an attractive investment," says Ken Riggs, president of Situs RERC. "This year, the commercial real estate market should moderate, which could stabilize prices."

Vacancies are expected to continue to decline slightly this year for all property types, except in the apartment sector, where they are forecast to increase modestly by the end of the year as more new project completions come onto the market.

Continued job growth, demand exceeding supply and limited new construction (outside of multifamily) should lead to rising rents and steady investor returns, which overall will shift away from capital appreciation as price growth levels off in many markets.

Continuing on the same slow trajectory seen for many years, the U.S. economy is facing headwinds from a rising dollar, financial market volatility and geopolitical concerns. Still, it is forecast to grow at a rate of 2%-3% this year, which is stronger than most global economies and enough to generate around two million net new jobs over the next year.

Deflationary pressures related to low gasoline and energy prices are expected to diminish by mid-year, in part because of robust growth in apartment rents.

"Supported by solid hiring in most parts of the country, the demand for ownership and rental housing will continue to increase in 2016 despite another year of meager economic expansion," said Lawrence Yun, NAR chief economist.

"While supply shortages will weigh on housing affordability and push home prices and rents higher, the housing sector will keep the U.S. economy afloat and lead the residential investment component of GDP growth by up to 10% this year," Yun said.

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