Commercial real estate prices should even out by 2020, according to the chief economist of the National Association of Realtors.
Dr. Lawrence Yun was one of the speakers at the commercial economic issues and trends forum at the Realtors Legislative Meetings & Trade Expo.
“We may see commercial real estate prices rise for the next year, but I expect them to even out in 2020,” Yun said. “Capital gain returns have grown from 90% with the rise in property prices. We can attribute the growth in commercial building investment spending to job additions and rising occupancy of buildings.”
The biggest challenges facing the industry continue to be the lack of inventory, the cost and regulation of construction and at least for the retail sector, the effects of growing e-commerce.
“I do not foresee any economic recession in the short-term, with gross domestic product expected to grow 2.5% in 2019 and with the unemployment rate at 4.0%,” Yun said. “A strong economy will continue to reinforce the growth in commercial real estate, particularly the multifamily and industrial real estate markets.”
The multifamily and industrial properties continue to be the best performing asset classes, given the low apartment vacancy rates in many metropolitan areas and with e-commerce driving the demand for industrial real estate. Cap rates for multifamily and industrial properties are trending at 5% to 6%, while hotel cap rates are at 8%.
Apartment vacancy rates are very low in many metro areas such as Boston (2.9%), Denver (3.4%), San Jose (3.4%) and Los Angeles (3.8%), pushing up rents in areas like Los Angeles and Atlanta by 5% to 6%.
The growth of e-commerce, which now accounts for about 10% of retail sales (from less than 1% in 2000), continues to drive demand for industrial real estate, for warehouses and last-mile distribution centers.
Transportation and warehousing jobs rose 176,000 in April 2019 from a year ago, while the retail sector lost 49,000 jobs.