A Commitment to Excellence: Valbridge at Chicago's Annual NAIOP Meeting
February 22, 2018
Valbridge execs recently attended Chicago’s NAIOP commercial real estate forecast meeting
Valbridge executive, Anthony Mulé | Chicago Metro, attended the seventh-annual meeting of the National Association of Industrial and Office Properties (NAIOP), the Commercial Real Estate Development Association. The NAIOP meeting attracted more than 300 industry professionals eager to gain insights from top industry professional Mark J. Eppli on predictions, trends and growth sectors of commercial real estate for the coming year.
Eppli, a Robert B. Bell Sr. Chair in Real Estate, Professor of Finance at Marquette University, and co-author of best-selling texts on real estate development, framed his outlook for the 2018 year around one question: Is the current commercial real estate environment sustainable or is it on the verge of a bubble?
Leaning toward sustainability… for now
At this point in time, trends are pointing toward sustainability. As discussed, that should hold true for at least the next year, especially throughout the industrial sector, with the possibility of it bleeding into the year after that. Beyond that, commercial real estate trends look to be a little less optimistic – at least at this point in time.
One reference Eppli cited: investment speculation is notably low.
Eppli detailed that although commercial real estate prices have gone up 6.2 percent annually over the past 10 years, it’s partly due to compensation needed from declines brought on by the Great Recession. In addition, he made clear that the hike is barely half of the 11.2 percent annual increase throughout the five years leading up to 2007.
At this point, the economy’s undergone 102 months of recovery since the Great Recession. Furthermore, the country anticipates breaking the record of 120 months come mid-2019. Though it marks the largest expansion in the nation’s history, the bounce-back has come with a modest average annual GDP growth rate of 2.1 percent.
"It doesn't look we have had an unsustainable speculative run-up in commercial real estate, especially when you start to compare it to other metrics," Eppli said.
Where things are looking up
Luckily, it’s not all doom and gloom. One encouraging sign discussed during the meeting includes the fact that the California Public Employees’ Retirement System (CalPERS) has increased the commercial real estate portion of its investment allocation, from 9.3 percent in 2002 to 13 percent this past year.
"That's a big number…they will lead the industry" as an influential force, Eppli said.
Global private equity has also been modest, with $110 billion being placed last year. In addition, there is $136 billion of “dry powder” (or money that investors are looking to invest) in this category, also up from the previous year ($120 billion).
The financial upturn
We don’t want you to be confused – relative to other financial assets, commercial real estate is doing quite well. In fact, banks are likely to install more money into the industry in 2018 than this past year, said Eppli.
In the past, banks have been known to loan money more freely when the market is strong and recoil when the market sours, thus increasing volatility. This time around, banks tightened up "when they didn’t need to," said Eppli, in part because of constraints, like the High Volatility Commercial Real Estate (HVCRE) regulation that took effect three years ago.
Another distinction between the GDP growth in recent years, and the growth that occurred preceding the Great Recession: this go-around hasn’t been fueled by debt.
Currently, the U.S. is relishing in the longest period of employment growth in history, averaging 196,000 new jobs per month. The unemployment rate is also at its lowest point in 16 years. The low rate enables continued employment at a job with the expectation of higher wages, as well freedom of movement from job to job.
However, one factor that will impede economic growth, he noted, is the Presidential administration’s immigration policy. As it develops, it is definitely something the industry will want to keep a close eye on.
The worry regarding inflation
Industry officials say inflation poses a bit of worry.
Compensation rate growth is being kept in check to about 2.5 percent, but Eppli noted that the increasingly millennial-dominated workforce will allow for the younger generation to negotiate higher salaries in the near future.
He emphasized two overarching, significant positives:
- Continued confidence among consumers
- The promise of lower corporate and personal tax rates
- Could help bring money back into the U.S. from foreign investments that American companies have made
- Could further fuel consumption
On the negative side:
- The Federal Reserve raised the interest rate three times in the past year
- Again, expectations that it will continue to rise
Though we will definitely face some obstacles in the coming year, the current industry forecast shows a focus on sustainability that will extend through 2019. Valbridge is honored to be able to participate in this extremely important and ever-beneficial forecast discussion on a yearly basis.
As your national commercial real estate property advisors, we understand that knowing the true value of something is more important than ever, and can be more difficult to discern — especially in today’s highly scrutinized regulatory environment. But that’s our specialty at Valbridge Property Advisors, and that’s where you’ll see the difference.
By attending events like these, we vow to stay in-the-know and on top of the latest industry trends. We promise to be your industry resource. And beyond contractual duties, we promise to be a resource for our clients. Always.
**Photo source, Flickr.