What the experts say: 2016 trends for US commercial property

32 views · Updated on

Investments into US commercial property ran at $463.6 billion in 2015, 25% higher than the previous year, according to international real estate services giant JLL.

The most popular segments were offices, warehouses and multifamily residential buildings. Furthermore, JLL forecasts that commercial property sales in the USA will continue growing with investment volumes exceeding $500 billion in 2016.

	2015	2016 (forecast)
Investment volume, USD billions	463.6	510.0
Annual dynamics, %	025.1	010.0

Moreover, in 2015 foreign investments reached a historical peak of $71.7 billion which was 2.5 times higher than in 2014. In fact, overseas investors made up 15.4% of all commercial property buyers in America last year, with a marked preference for industrial property (41% of all investments). This trend is expected to continue in 2016.

-> International buyers looking for “safe havens” in 2015

Promising segments

According to a survey conducted by PwC among American investors, the most promising sub-segments are fulfilment centres and industrial warehousing property. This comes as no surprise, considering that industrial warehouse investments attracted a record-breaking investment of $64.4 billion in 2015 according to JLL research. At Tranio, we expect this trend to continue as the market for online retail grows in popularity.

Ranking	For investment	For construction
01	Fulfillment centres	Warehouse industrial
02	Warehouse industrial	Fulfilment centres
03	Medical offices	Medical offices
04	Flats — moderate income	Flats — high income
05	Flats — high income	Limited-service hotels
06	Limited-service hotels	Flats — moderate income
07	Neighbourhood /community shopping centres	Student housing
08	CBD office space	CBD office space
09	R&D facilities	R&D facilities
10	Student housing	Neighbourhood/community shopping centres
11	Full-service hotels	Affordable flats
12	Affordable flats	Full-service hotels
13	Suburban office space	Single-family homes
14	Single-family homes	Suburban office space
15	Retail parks	Retail parks
16	Regional malls	Regional malls

Long-term rental flats and hotels also have good prospects. However, demand for office space and retail property is expected to decline, favouring residential property instead.

According to PwC, a majority of American real estate investors want to buy industrial warehousing property (54%) and sell off high-yield residential apartments (53%) in 2016.

Top property local property markets

The most promising market for US commercial property investments this year is the Dallas–Fort Worth metroplex in Texas (TX) thanks to its developed labour market and economy, as well as its favourable business environment. San Francisco and Los Angeles also make the top ten investment and construction markets, while Manhattan and Miami ranked only 15^th and 19^th respectively in the PwC survey.

01	Dallas-Fort Worth, TX	11	Raleigh/Durham, NC
02	Austin, TX	12	San Jose, CA
03	Charlotte, NC	13	Boston, MA
04	Seattle, WA	14	Orange County, CA
05	Atlanta, GA	15	Manhattan, NY
06	Denver, CO	16	San Diego, CA
07	Nashville, TN	17	Phoenix, AZ
08	San Francisco, CA	18	Minneapolis/St. Paul, MN
09	Portland, OR	19	Miami, FL
10	Los Angeles, CA	20	San Antonio, TX

San Francisco is widely believed to be overheated but still expected to grow. Buyers are especially optimistic about hotel and residential property investments there. Los Angeles on the other hand is considered to have good potential for multifamily residential units and retail property.

Manhattan has somewhat lost its edge with domestic investors due to strong international investment competition that is pushing market entry thresholds out of reach. The PwC survey respondents are optimistic about the Miami market and retail in particular.

-> Foreign investor’s guide to commercial property in Miami

Industrial/Warehouse
	Los Angeles	Miami	New York	Orlando	San Francisco
Yields, % 2016 forecast	4.00–5.00	4.75–5.25	4.75–5.75	6.50–7.25	4.00–5.00
Annual lease rate, USD/sq m Q4 2015	86	74	67	55	164
Vacancy rate, % Q4 2015	2.2	4.7	6.8	8.0	6.4
Buy-to-let residential
Average property price, USD January 2016	568,000	290,400	612,400	148,800	1,130,400
Price dynamics, % Jan 2016 y-o-y	8.4	6.3	8.9	12.0	14.3
Price forecast, %	2.5	−2.2	3.1	4.0	3.1
Rental price, USD/month Jan 2016	2,671	2,110	2,320	1,244	4,406
Yields, % 2016 forecast	5.21–7.55	6.91–8.78	3.83–3.68	15.61–16.48	5.81–6.21
Hotels
Yields, % 2016 forecast	6.6	6.5	6.0	8.1	5.9
RevPAR, USD 2015	78.67
ADR, USD 2015	120.04
Occupancy rate, %	65.6
Office
	Los Angeles	Miami	New York	Orlando	San Francisco
Annual price dynamics, % Q4 2015	14.4	—	9.1	—	11.0
Rental price, USD per sq m per year Q4 2015	403	505	915	225	816
Annual rent dynamics, % Q4 2015	9.2	6.1	2.9	5.7	7.8
Yields, % 2016 forecast	5.00–6.00	4.50–6.00	3.25–3.75	5.50–7.00	3.00–4.00
Vacancy rate, % Q4 2015	19.6	12.2	8.8	13.6	5.9
Retail
Rental price, USD per sq m per year Q4 2015	392	350	338	245	343
Yields, % 2016 forecast	5.50–6.00	5.50–6.00	5.00–5.50	6.50–7.00	5.00–5.80
Vacancy rate, % Q4 2015	5.9	6.4	6.3	7.9	4.3

Where to buy and sell property in 2016

The majority of investors surveyed by PwC believe that it is worth buying office space and retail property in Brooklyn (NYC), Austin and Los Angeles and residential property in Orlando, Los Angeles and San Francisco this year. The markets where it is time to sell property are Manhattan and Nashville.

-> Foreign buyer’s guide to residential property in New York boroughs 2016

Property type	Where to buy	Where to sell
Office space	Brooklyn (NYC), Minneapolis, Portland, Austin, Atlanta, Los Angeles	Chicago, Manhattan (NYC), San Francisco, Seattle, Boston, San Jose
Retail property	Brooklyn (NYC), Miami, Austin, Portland, Los Angeles, Boston	Manhattan (NYC), Dallas, Washington, D.C.
Industrial warehouse	Seattle, Chicago, Northern New Jersey, Minneapolis, Indianapolis	St. Louis, Baltimore
Hotels	San Diego, Tampa, San Francisco, San Jose	Nashville, Orange District, CA; Los Angeles, Minneapolis
Residential property	Orlando, Minneapolis, San Diego, Los Angeles, San Francisco	Manhattan (NYC), Northern New Jersey, Columbus, Nashville

Factors that could disrupt market trends

A base rate increase by the Federal Reserve would make lending more expensive, leading to a decline in demand for residential property. Even if this were to happen, Ernst & Young analysts expect that investor demand for commercial and residential property would remain strong as long as economic factors are favourable (GDP growth, growing employment, etc.).

The strengthening of the US dollar could put foreign investors out of the market. In 2015 the dollar rose against the ruble, euro and British pound sterling, making real estate more expensive for overseas buyers with assets in other currencies. At the same time, many investors consider the United States to be a reliable market that offers the chance to diversify their investment portfolio and protect their capital from risks at home (i.e. China, Russia, Middle East).

High-risk markets are gaining attention amid price growth acceleration and strong investor competition in Manhattan, areas of Los Angeles and Silicon Valley. This is gradually pushing buyers towards cheaper markets with high yields but also higher associated risks. Tranio advises caution when dealing in peripheral locations.

Yulia Kozhevnikova, Tranio