Rewards for wait watchers are mixed. Stock market reaction to the election results continues to surprise many pundits. OPEC’S recent announcement to cut production has further bumped the securities market. BREXIT and hard lining trade talk project an uncertainty on exports. Strong dollar and broader currency fluctuations further complicate global trade outlook. FED rate action at the December meeting and the rippling impact domestically and overseas are hard to scope and scale. First half 2016 has been smooth, gradual and mixed. Third quarter 2016 recorded further economic strength and less mixed data. Most think 2017 will start with newly established platform highs. .
Commercial real estate markets are benefiting from sustained moderate economic expansion. Many local high growth markets will experience turbulence as pipeline additions are delivered in 2017 and 2018. Traditional measures of local trends in rent, occupancy and pricing portend cyclical adjustments in submarket inventories during 2017 and 2018. Local property markets require primary research for diligence and underwriting. Even with the plethora of digital data sources, property markets are experiencing continuing velocity and volume in deals and demand conditions which can be misinterpreted in aggregations. Because property markets are showing cyclical symptoms and this expansion of almost ten years is long in historic terms, pundits are sprinkling the forecasts with terms like recession and contraction. Not to be ignored, these forecasts are still somewhat loosely described. And global market activity is getting harder to predict even in the short term. With OPEC, Russia, China, UK and EU dealing new hands, the complexity and lack of predictability is significantly increased.
Commercial real estate markets have already experienced dramatic cost increases in labor and materials. FED action on rates at the December meeting will further secure increasing costs of capital. Reconciling costs for new construction with sustainable economic performance is already challenging. Competition for existing properties has forced pricing into stalling ranges in many geographic submarkets because of risks of sustainable performance. Peaking is broadly used to describe property prices in commercial markets. However, revisions in inventory like adaptive reuse, upgrading and other value add strategies are still rewarding. And the economic outlook for 2017, regardless of the length of this expansion, appears to favor further play, less waiting and watching, or folding.
Economists seem to have a tendency to avoid cycles. Commercial real estate professionals cannot afford to do so. Keep on trucking.
Happy New Year and Very Best for 2017.
David Kirk, CRE, MAI, FRICS, is principal and founder of Kirk & Company, Real Estate Counselors, Boston.