Real Estate Experts Predict Stability in 2018 for Residential, Commercial Sectors Despite Headwinds

John Jordan | January 2018

NEW YORK—A comprehensive report issued today by the National Association of Realtors, Deloitte and Situs RERC predicts the residential and commercial real estate property markets will remain strong this year, despite continued political instability in our nation’s capital, as well as other market specific negative influencers.

Situs RERC, Deloitte and the National Association of Realtors released their annual collaborative forecast report: “Expectations & Market Realities in Real Estate 2018 – Stability in a Risk Environment” on Jan. 31. The 62-page report reviews 2017 commercial real estate trends in the economy, capital markets, residential and commercial real estate and property markets and also provides joint perspectives for real estate in 2018.

Some of the key takeaways from the report includes the prediction that housing prices will continue to rise faster than wages as demand outpaces supply that the report indicates is caused by a shortage of qualified labor, rising material costs and what industry analysts believe are government policies that do not do enough to encourage home building.

For the commercial real estate sector, “many of the concerns that arose during the prolonged negotiations about tax reform did not come to pass,” the report states. “In 2018, there will likely be only modest changes for real estate investors.” The report predicts that while commercial real estate returns are likely to decline this year, the overall market should remain stable.

The report offers a bullish forecast on the office market due to its stable performance that is attractive to foreign investors. The report’s forecast on suburban office markets should be welcome news to commercial property owners and investors in the Hudson Valley. “Specifically, suburban office is expected to outperform CBD (Central Business Districts) from a risk-adjusted return perspective because it’s often easier to adjust suburban space to new consumer and employee preferences,” the report’s authors predicts.

“Backed by continued strength in the labor market and the new tax bill’s expected short-term boost to the economy, the outlook for the CRE (commercial real estate) sector looks strong in 2018,” states NAR Chief Economist Lawrence Yun, PhD. “Low unemployment is expected to push wage growth higher, which in turn will ramp up consumer spending and elevate demand for both renting and buying real estate. However, rising interest rates pose a small threat to weaker housing affordability this year, and may put downward pressure on CRE property prices.”

Ken Riggs, president of Situs RERC, says, “Amid the ongoing US political drama that is expected to continue in 2018, the stable income component with modest appreciation from CRE provides an attractive choice in the uncertain future of alternative investments such as stocks and bonds. Risk-adjusted returns for CRE are favorable to other asset classes over the long term and provide investment diversification.”

“In 2018, expect generally stable performance and values, across most US markets and major commercial real estate asset types, as we move further into a mature market cycle,” adds Matt Kimmel, principal at Deloitte Transactions and Business Analytics LLP.

Other prognostications from the Expectations and Market Realities in Real Estate report include the belief that there will be ample available capital as commercial real estate continues to be viewed as the best investment option compared to stocks, cash and bonds as more and more investors fear that the stock market cannot continue its bullish run forever.

The industrial sector will be especially strong and will continue to be a top investment option in 2018. The report specifically cites warehouse, fulfillment center and delivery services uses as hot sectors due to the growth in the e-commerce and manufacturing industries.

The retail sector will likely remain volatile in 2018 with high street and grocery anchored-neighborhood/community centers performing well, while strip centers and traditional big box retailers continue to face strong headwinds from “experiential retail” and e-commerce.

The hotel market is expected to slow down from its historic expansion as the report’s authors note that foreign investment in the sector is slowing down and occupancy rates are leveling off.

The hot multifamily market is also showing signs of at least slowing down somewhat as the abundance of new apartment construction should keep rents flat. However, “tax reform might make homeownership less attractive and therefore continue the appeal of renting rather than owning a home,” the report speculates.

John Jordan
Editor, Real Estate In-Depth