Commercial Sectors to Eke Out Modest Growth

Multifamily and industrial properties will continue to lead growth among commercial real estate sectors as the economy makes moderate gains through the end of the year and into 2017, NAR Chief Economist Lawrence Yun said at the 2016 REALTORS® Conference & Expo in Orlando on Friday.

A crowd gathers to hear NAR Chief Economist Lawrence Yun deliver his outlook for commercial real estate sectors at the REALTORS® Conference & Expo in Orlando, Fla., on Friday.

Speaking at a commercial economic forum, Yun said he expects rental rates in the multifamily sector to rise a modest 3 percent a year through 2018, fueled by young households who see solid job growth but aren’t yet ready to buy. Industrial properties — already one of the strongest sectors — are expected to see solid 4 percent growth in rental rates and little change in vacancies over the next two years.

Retail and office space, which are battling online commerce and telecommuting trends, will see slower growth in rental rates of about 2 percent to 2.5 percent.

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Yun said the country is likely to maintain positive economic growth over the next two years, although it is likely to be sluggish: barely more than 2 percent in 2017, and maybe a little higher than that in 2018. Tepid business spending is mainly what’s holding back growth, Yun added, because other types of spending, including consumer and government spending, are still strong.

Inflation will largely stay in check, thanks to low gas prices, but expect it to rise from 1.2 percent this year to 2.5 percent over the next two years because gas prices will continue to drop. That means the inflation rate will no longer offset rising medical costs, rents, and college tuition.

Look for the Federal Reserve to raise its short-term interest rate in December 2016 — and then possibly twice more in 2017.

K.C. Conway, senior vice president of SunTrust Bank, who also spoke at the forum, is more pessimistic about the country’s economic growth prospects. He said growth is already starting to slow and could dip into recession at the end of the year. If so, the United States would join other big economies, such as the European Union, in seeing negative growth. Even China, which says its growth is at 6 percent, could see it slow to as low as 3 percent based on indicators that aren’t included in the country’s official figures, Conway said.

Because of weakness in the U.S. economy, Conway said, the Fed might raise its short-term rate only once (in December) and then not at all in 2017 because increases could hurt the two sectors of the economy that are still doing well: home sales and personal consumption.

Both Yun and Conway said the economy is hurt by the lack of new housing construction, which is keeping prices high and forcing young households to delay home purchases. At the core of the inventory problem are regulations that make it hard for banks to increase their construction lending to builders. Easing those restrictions for community banks, Yun said, would help unleash badly needed financing for builders without putting the banking system at risk, since large, systemically important financial institutions would still be subject to stringent capital rules.

—By Robert Freedman, REALTOR® Magazine