2017 Executive Summary
As the world economy comes to grips with a new political landscape in the U.S., and commercial real estate steps deeper into a more mature cycle, executives sensibly elevated their positive outlook regarding the economy, supply, demand, and performance, according to the 2017 Real Confidence™ Executive Survey. Regardless of the forecasts, real estate leaders understand that this year will be inundated with political risk, as well as economic and monetary policy risk, as a new administration attempts to stay true to campaign promises and expectations that will weigh on future outcomes.
Altus Group, in partnership with the National Association of Real Estate Investment Trusts® (NAREIT) and the National Council of Real Estate Investment Fiduciaries (NCREIF), polled real estate executive decision-makers, responsible for hundreds of billions of dollars daily, to rate their 2017 outlooks on a range of topics. Each question asked them to rate their 2017 confidence level, from a scale of 0 (no confidence) to 100 (absolute confidence), on whether a topic would or would not occur. Additionally, they were asked to allocate $1 billion to a variety of commercial real estate investment options, including property sectors and subsectors.
Economic growth, employment, and confidence may be all beneficial to real estate investors, but demand will be the ultimate key to success. This year, Real Confidence introduces a new area of discussion, the Young Professionals Demand Survey, into the online publication. This sample was asked an assortment of demand questions covering their thoughts on employment opportunities, wage expectations, e-commerce, social resources, and home buying. Some of these results have been worked in various articles with our executive thoughts to offer a different perspective, while others provided more than enough insight to produce additional content.
The survey exposed even more confidence in the commercial real estate industry than executives felt in 2016, but expressed concerns in fundamentals as the market moves further into a long-running cycle. Confidence for rent gains, increases in occupancy and credit availability was reduced compared to last year’s outcomes. Apprehensions in these real estate characteristics rationalize executives’ projections of having no to limited confidence that real estate values will achieve double-digit returns. Similar to the 2016 survey, double-digit performance was the lowest scoring value of all Real Confidence questions, but even 5% lower in comparison.
The spotlight this year will be on industrial assets, as executives allocated the most capital to the sector, in both REITs and private equity options, according to the 2017 Real Confidence™ Executive Index. The sector was also projected, by over 58% of participants, to complete the most development. Total real estate development forecasts weren’t as positive, as confidence values projected no increases in development this year and no additional construction spending.
The appeal for commercial real estate investing continues, though, as an abundance of domestic and foreign capital continue to search for opportunities. Survey participants greatly decreased their confidence that a bubble is forming in prime markets, expressing optimism that deals can still be done. However, San Francisco remains the top market to potentially experience a price correction by the close of this year. Forecasts of slowing transaction volume might aid any value changes. As economic growth and the future are examined, investors continue to be risk-averse showing limited interest in secondary, tertiary and even more so in alternative investments, according to Real Confidence results.
Even as the U.S. economy may be about to experience significant changes as a new administration enters, our broader economic outlook questions all registered higher values compared to the 2016 survey. According to Real Confidence executive opinion, the strength of the U.S. and global economy both looked promising and scored better, each up over 8%. Consumer confidence has strengthened, although volatility lingers as President Trump delivers a rush of executive orders on policies with respect to trade, taxes, and regulation attempting to bring them all to life. The outcome of these promises is complicated; nevertheless the current economic reaction has remained positive. For 2017, the bulk of executives foresee more economic growth, as real gross domestic product (GDP) expectations are expected to surpass the 10-year average and fall within the 2% to 3% range.
Employment gains have been the light of the economy since the end of the Great Recession. Since over 8 million workers lost employment during that period, almost 15 million have started a new paying career, changed their occupation, or possibly regained their lost work. For 23 consecutive quarters the growth trend has continued, and as economists speaking of reaching full employment, another 1.9 million are expected to be added over the next four quarters. Real estate executives’ survey results are similar, as over 71% predict 2017 employment gains reaching 150,000 to 200,000 per month.
Despite a slow, but steady, economy and a robust job market, wage growth has remained a consistent problem post-recession. Wage gains displayed some life near the end of 2016 but started 2017 not meeting expectations. Regardless, survey results indicate confidence that wage increases will exceed last year and slightly outpace inflation. The Federal Reserve has announced a willingness to increase policy rates at a faster pace in 2017, which could lead to further strengthening of the U.S. dollar. Survey participants agree that interest rate hikes are coming in 2017, posting the study’s highest Real Confidence value. The majority of projections expect a total increase of 50 basis points, followed by others that expect a total jump of 75 basis points.
Real estate demand remains active with an abundance of capital, but interest in the types of real estate and how it will be used continues to shift. For example, many retail owners have to address tenants who can no longer compete with e-commerce while warehousing fulfillment and distribution center needs flourish from the online movement. Expectations of economic change will be the leading topic around the world and within the real estate industry. New leaders are attempting to put plans in place to stimulate change and produce a positive outcome for the economy. Time will tell the outcome; nonetheless investors are very much aware the U.S. is still a popular market for real estate investing.