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What the experts say: 2016 trends for US commercial property

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 15th and 19th 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

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

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