The commercial real estate market is always changing. Because of this, it is important to be able to identify the trends most relevant to today that will allow for staying ahead of the curve.
Right now, there are three prevalent areas that should be kept under a magnifying glass.
Retail and Industrial sectors
Let’s break down the important aspects of these areas and understand why they are going to be so important in 2018.
The Federal Reserve is currently in a transition state with a new chairman set to take his sit this year. This change is leaving a lot of people with some uncertainty about the interest rate plan going forward. The plan before this change was to continue raising interest rates, will this continue to be the plan? What will happen with the prevalent low inflation rate?
As of December, the benchmark lending rate rose by a quarter percentage point, to a target range of 1.25% to 1.5%. At the December policy meeting, the plan was for three more rate hikes to occur in 2018, which would be following the three 2017 rate increases.
The Federal Open Market Committee is expecting a growth in job markets to come to a slowing progression, but states monetary policy would help keep the market strong.
If the pace of inflation accelerates, just like it did back in December, rate hikes will be more justifiable and likely, however is inflation continues at its current, sluggish, rate then additional rate increases may be further than expected. So what would happen in either scenario?
If the interest rates do not budge like initially expected in 2018, there would be a benefit the cost of borrowing, and the value of properties could be expected to remain stable, while all other aspects are equal.
On the opposite side however, if there is not an increase in rates, a bubble may form and begin to remove lender incentives to tighten lending standards, resulting in the notion that the economy is lacking in strength and bode bad for the commercial real estate industry.
Despite the recent tax laws being made to seem beneficial to businesses due to the lower corporate tax rate, there could very well be a negative impact felt across the U.S. and foreign bank accounts that do business involving commercial real estate lending.
The effects of these new tax laws could have adverse affects on multinational companies which could include European banks that are highly active in U.S. commercial real estate financing. The means by which these companies would be effected are through the base erosion and anti-abuse tax, or BEAT, which imposes a tax on payments between the U.S. and foreign affiliates of the same corporations. This occurred through the desire of keeping an incentive here in the U.S. to keep the profits local rather than shifting to countries with lower tax rates.
There is also a storm brewing across seas to the U.K. involving Brexit and the potential changes that will result in the U.S. because of it. Brexit may prove to be an adverse obstacle by restraining overseas lending by banks exposed to losses.
Retail and Industrial sectors
2017 held some retail records that weren’t very good. This was in part due to the tripled rate of store closing announcements, totaling about 7,000. Another aspect involved in these records was the increase in bankruptcies reaching over 600 reported in the retail sector alone.
Cushman & Wakefield warn that there is more to come in the 2018 year. The commercial real estate firm expects store closings to jump by the very least, 33%, resulting in more than 12,000 and along with that resulting in another 25 major retailers filing for bankruptcy.
Focusing in on Walmart, they have since the new year rang in, shut down 63 Sam’s Clubs stores across the U.S. and attempted to control the flow of this information with announcing wage increases and employee bonuses.
Some of the stores that used to be Sam’s Clubs locations are being transformed into e-commerce distribution centers, which is a key point in the effects of retail on commercial real estate. As e-commerce grows, there will be a correlation in the needs of retail sector’s. Retail isn’t leaving anytime soon, however there is a shift into the industrial real estate, an increasing need for things like warehouses and distribution centers which are taking over the retail industry by storm more and more each year.
There has been a lot of talk about the industrial segment of commercial real estate is top-ranked for 2018 due to it’s out-performance across the board.
Rate hikes, impacts of tax changes and Brexit affects, as well as roller-coaster retail are all something expected in 2018 to be a prominent factor in the commercial real estate market. Keep an eye out on the current events of these topics and you will keep ahead of the curve.
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