Economists Weigh In: Which Asset Class Looks Best For 2016?
With real estate high-rollers and bankers alike seeing recession storm clouds (and tidal waves) on the horizon, we went to top economists for their take on what commercial real estate asset class they're bullish on for 2016. Here's what they said.
Pick: Retail
"I'm anticipating that the best performing sector in 2016 will be retail, followed closely by multifamily and then industrial with office last. I'm feeling positive about retail because as the economy recovers, consumer spending and wholesale factory activity will increase at a faster pace than last year.
"Multifamily as second in performance will show real growth this year but at a slower pace than previous years. All together 2016 should continue to achieve higher levels of activity than expected but not spectacularly so. And the confidence levels should increase as well."
Pick: Office
"To answer this question, I need to set out some criteria, and there are lots to pick from. I choose which property type has strongest demand/supply balance, i.e., where demand is stronger than supply for 2016, where this is the case I would expect to see market rents to be rising. The national CRE market is such that rents are rising for all property types in 2016, but the better property types have overall stronger rents.
"On this criteria, nationally and for 2016, I would say that office property types would be strong for 2016, followed closely by multifamily. Both types will have strong expected rent growth in 2016 in the 4% range, with office properties doing better in 2016 than in 2015, while multifamily properties will do well in 2016, but not as well as in 2015. Both types have markets where rent gains are double digit for 2016, in my opinion, and also, market where rents will falter in 2016."
Pick: Office
“Apartment properties came through the Great Recession fairly unscathed, but are witnessing increased availability from a wave of new supply. Industrial and retail have certainly improved over the past few years, but are likely to be hampered by slowing global trade and weak consumer spending. With employment growth driven by professional and business services, demand for office space is likely to continue growing.
"The decline in office vacancies—from a recession high of over 18%—has accelerated during 2015. The slow initial decline in the post-recession period—at least compared with the other property types—was due to both high unemployment but also companies’ sharp focus on space efficiency gains.
"As we approach diminishing returns on efficiency gains, companies will have to increase their space as their payrolls grow. As the improvements in fundamentals will drive vacancies lower and cash flows higher, investors will continue finding office assets attractive. For 2016, I view the office sector as the one with a solid upside.”
Pick: Multifamily
"It is challenging to be bullish about any sector in 2016, given how many market participants are hunkering down for a volatile year, defining optimism as 'if only we could manage performance like 2015.' Still, multifamily should be a relatively safe bet with healthy rent growth, despite a large influx of new supply and an expected rise in vacancies. Look to some office markets for accelerating net absorption, a pattern we saw in 2015. And if you’re looking for niche sectors that have strong demographic support less likely to be buffeted by short-term financial volatility, self-storage and student housing are particularly promising."
Pick: Industrial
"Industrial—and I’m not just saying that because I cut my teeth as an industrial researcher with Union Pacific in Omaha. I like industrial for several reasons: The growth of online retailing is restraining demand for shopping centers and expanding demand for logistics and distribution properties. The rapid changes in domestic and global supply chains (Panama Canal, shifting currencies, the changing fortunes of emerging markets, the race for same-day delivery) open up new opportunities for industrial. Vacancy ended Q1 at 6.4%, a 15-year low, while the average rent of $5.73/SF, NNN is up 4.1% from a year ago and up 16.1% from the recessionary bottom.
"Investors, including offshore buyers, are recognizing the embedded value in industrial real estate. Think of the massive portfolio sales that have occurred recently, e.g. GLP at $8.1B and Industrial Income Trust at $4.6B. Lastly, some of the nation’s trendiest office and residential submarkets occupy 19th- and early 20th-century industrial districts—Chicago’s West Loop, Boston’s Seaport District and S.F.’s South of Market. It points to the value of many older industrial properties and the land they occupy."
