The commercial real estate market, just like residential markets, is subject to cyclical highs and lows. As recently as the first quarter of this year, the commercial real estate market was the receiver of positive trends that carried over from 2015. No more than two months into 2016, prices in the commercial real estate market were up 93% from where they were after the financial crisis in 2010.
That said, investors are left wondering whether or not these positive trends will last into 2017.
How Employment Affects Commercial Real Estate
To understand the commercial real estate market and its subsequent trends, it is important to become familiar with one of the industry’s most significant indicators: employment. Historically, the employment rate is one of the best indicators for identifying the health of the commercial real estate market. Not surprisingly, the employment rate at its most simple level points to a need for commercial real estate space.
Today’s strong employment numbers are reason to celebrate. According to one report, the U.S. is experiencing the longest consecutive string of monthly job gains on record. The report states an average of 200,000 jobs were added to the economy every month for the last five years. If that wasn’t enough, claims for unemployment have declined to their lowest level in nearly half a century.
Because employment numbers are encouraging, experts and industry leaders remain even more excited for what is on the horizon. If for nothing else, the coming of age for millennials will witness even more people enter the professional workplace. It is safe to assume an influx of young professionals should boost demand within the commercial real estate market.
The Impact of Foreign Investors
Congress recently decided to lessen the tax burden on foreign commercial real estate investors. Because of this, don’t be surprised if growth within the commercial real estate market continues. Industry leaders and those familiar with the commercial real estate market believe the foreign incentive could bring the industry an additional $20 to $30 billion a year.
Looking for global uncertainty is another good indicator of the health of the U.S. commercial real estate market. You can expect more foreign investors, especially from China, to offset their current financial situation with a healthy investment in U.S. commercial real estate properties. The U.S. property market is starting to hit its stride, and foreign investors have found it to be a ‘safe haven’ for their money, as it’s currently one of the best investments to mitigate risk. With investors ready to turn the page on the second half of 2016, it is safe to assume the first half of the 2017 year will witness more foreign investments in the U.S. commercial real estate market.
Alternative Lenders are Fueling Competition
Alternative lenders, generally speaking, are able to make more exceptions to the rules than traditional lenders like banks. Alternative lenders dealing in asset-based lending may be more flexible in regards to criteria like credit approvals. Where traditional lenders may be solely focused on property or projects located in busy popular cities, an alternative lender may be the answer for other property locations.
As just one example, alternative lenders are filling in gaps by providing new construction financing, enabling borrowers that may not fit the criteria required by a bank. By doing this, alternative investors are helping grow new commercial development projects and bigger businesses that may eventually partner with commercial banks for different services. Borrowers today therefore have more options of who partner with including alternative lenders, traditional lenders or a collaboration of the two. This added access to financing is helping to further fuel the commercial real estate market.
A Positive Trend
With the combination of a high employment rate, an influx in foreign investors, and alternative lenders, the outlook for the commercial real estate market with 2016 coming to a close looks very promising. The question we should be asking is how to maintain this high level of performance into 2017 and how long will it last? Like previously stated, trends in CRE are cyclical, what goes up must come down eventually, but hopefully it won’t come crashing down.