What to consider about commercial real estate in the years ahead

December 23rd, 2016 7:13am
Commercial construction should perform well next year.

Commercial real estate has remained stable throughout 2016 and looks to do so in the years to come as well. While notably different than the residential market, the commercial sector does face similar headwinds in the future, even if the outcomes remain unclear.

For one, population growth and demand for new construction continues to place pressure on prices. Additionally, various state and local level regulations have hampered contractors' and developers' ability to break ground on projects as quickly as they would like.

Here are a few more factors CRE professionals need to keep in mind prior to making big decisions next year:

How will a new administration approach real estate?
President-elect Trump has signaled he intends to restrict the number of new regulations federal agencies put forth, as well as relax some of the existing requirements businesses in various sectors must comply with. This should be welcoming news for those in the housing industry, especially developers who frequently run up against strict zoning, labor and efficiency restrictions.

Likewise, Trump intends to push forward on his $1 trillion infrastructure spending program which would, on the surface, inject capital into the nation's economy and provide investors with the confidence and backing to dive into more projects. Trump's plan would revitalize crumbling roads, bridges and waterways, all of which would impact neighboring real estate values and future cost estimates. Construction crews will likely see an uptick in work as well.

How much more expensive will real estate loans be?
With the Fed's recent 0.25 percent rate hike, markets have come to terms with the fact that 2017 and 2018 will likely bring additional increases.

Forbes contributor Ely Razin noted higher rates are a good sign the economy is performing well and that analysts believe it will continue to do so for the foreseeable future. On one hand, higher rates inevitably mean real estate loans become more expensive, especially those used for commercial purposes. However, once factoring in deregulation measures, potential economic stimulus and the demand for new construction, commercial developers may not be all that hampered by small percentage point rate hikes.

It is worthwhile to point out that commercial loans are accompanied by stricter lending requirements because they are invariably viewed as more risky in the eyes of creditors. Residential interest rates may still be historically low, but commercial borrowers typically pay higher rates on each loan and are virtually guaranteed to have to put down at least 20 percent as an initial payment. This is not to mention the horde of additional business documents and paperwork commercial borrowers must submit - overall, the lending process will skew more difficult for commercial professionals relative to residential loan seekers.

Will global economic patterns have domestic effects?
Outside of the immediate effects of the presidential election and Fed policy, there are also a host of international factors that may impact commercial real estate up ahead.

For instance, Razin pointed out China has been strategically de-leveraging from U.S. markets in 2016 after years of scooping up more and more commercial and residential properties. Part of this is due to a slowing Chinese economy combined with declining interest in foreign investments.

This may be attributed to China no longer seeing as much value in U.S. property, or it could simply be the Chinese government monitoring foreign business deals more closely.

Additionally, global oil prices are expected to rise exponentially in 2017 due to expensive, Western shale producers jumping back into the oil market and OPEC settling on a deal to curb production, thereby forcing prices up. This has had the effect of making transportation more expensive and leaving consumers with less money in their pocketbooks - could this translate to less enthusiasm for real estate?

Lastly, as Brexit continues to be worked out, the potential for unintended global consequences is high. Will European markets react negatively? Will currency values fluctuate?

Will drone regulations impact commercial construction?
A less-discussed topic of late has been the use of commercial drones. Amazon has pioneered drone delivery of packages, yet as the National Real Estate Investor reported, there is a minefield of unanswered questions pertaining to the future agency and legality of drones.

Unmanned devices have already proven useful in providing aerial photography of real estate for cheap, as well as giving prospective buyers a virtual tour of a property without having to physically be present. However, if drones' reach expands in the skies, regulators will have to set boundaries for aircraft to ensure safety.

This could mean mandating drones only be used in certain areas or at certain times of day. It could also force commercial developers to construct smaller buildings, or ones that have noise-reduction components and materials. And if people aren't eager to work or do business in locales that are noisier or flooded with unregulated aircrafts, then the demand for new construction in those areas may dry up.

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