DES MOINES, IA - Principal Real Estate Investors, one of the largest institutional real estate managers in the United States, released its annual outlook for commercial real estate. The report details the key themes expected to drive the U.S. commercial real estate market in 2016, including stronger economic growth in the United States and continued accommodative monetary policy.
From the report: “We expect the U.S. economy to move along at a pace that is by historic standards disappointing, but relative to other developed nations, quite attractive and still beneficial to commercial real estate as a whole.”
The report goes on to detail the following areas of interest for commercial real estate investors in 2016:
Economic Growth Stuck In Neutral – The U.S. economy seems unable to break out of its disappointing pace of growth that has kept real GDP growth range bound between 2.0% and 2.5%, below the historical pace achieved during previous recoveries. Although the labor and housing markets are performing well, muted corporate and consumer spending along with an array of global concerns – from China to sharply lower commodity prices – are acting as governors on economic growth.
Fed Signals Cautious Way Forward – For investors, the pace of tightening when the Federal Reserve (Fed) does begin the long awaited reversal of its historic zero interest rate policy (ZIRP) will be of extreme interest. In other words, they will want to know “how fast and how high.” It seems very probable, given the continued uncertainty around the economic outlook, that the Fed is likely to keep a gently upward cycle of monetary tightening.
More Mixed Capital Markets – For risk assets including commercial real estate, a change in monetary policy may be a double-edged sword. On one hand, tightening will mark the ending of an historic period of monetary policy that has provided powerful capital market tailwinds for risk assets. On the other hand, it will signal the Fed’s increased confidence in the underlying economic environment and intensify the focus on earnings growth as the key driver of valuation.
Risks And Opportunities Lie In Balance – Our forecast calls for continuing strength in real estate fundamentals within an uncertain macroeconomic and capital markets environment. Real estate should benefit from excellent demand fundamentals and very strong investor appetite for the asset class. However, declining capital market tailwinds and full valuations in some markets will mean that same store net operating income (NOI) growth will be a large determinant of value creation going forward.
Uncertain Economic Outlook/Capital Markets Favor Selectivity – Investors are recommended to display greater selectivity be it by market, property type or strategy. The broad “beta” play on commercial real estate may not be as productive as selecting targeted strategies. As such, we recommend a neutral weight to debt and the equity quadrants. However, within each, we tilt towards modestly higher risk strategies - preferring high yield debt in non-gateway markets, value-added/opportunistic private equity and selective new issue CMBS.
The report concludes: “Looking ahead, our assessment of the capital market environment is perhaps less benign than it has been in the past because it remains unclear how investors will react to a change in monetary policy. While we are confident that monetary policy will remain accommodative, capital market tailwinds are likely to start fading. Demand fundamentals, however, are as strong as can be - providing for a constructive view on earnings growth to be a driver of total returns going forward. Although 2016 may not be the “Goldilocks” scenario that 2015 was, it should have enough for those investors who view the glass half full.”
Access the full outlook here: 2016 U.S. Commercial Real Estate Outlook