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Uncertainty About CRE Cycle, Higher Interest Rates Lead to Drop Off in CRE Deal Volume

At this year’s Trigild Fall Lender Conference, Peter Muoio, Ph.D, executive vice president/chief economist at Ten-X, shared his outlook for the economy, capital markets and real estate. We’ve summarized some of his findings below:At this year’s Trigild Fall Lender Conference, Peter Muoio, Ph.D, executive vice president/chief economist at Ten-X, shared his outlook for the economy, capital markets and real estate. We’ve summarized some of his findings below:

According to Muoio, we are approaching the longest economic expansion in modern history, and the cycle’s longevity is in itself starting to have an impact on the way commercial real estate investors are thinking.   “Preliminary third quarter deal volume is down – about 35 percent from a year ago,” Muoio said, a slump he attributes to a pricing gap between buyers and sellers. At this point in the cycle, “buyers and sellers are not looking at each other in the same way.” An uncertainty over “how long the expansion can persist along with higher rates are key reasons behind the drop-off in deal volume since last year and the sideways movement of pricing.”

Amidst the turbulence, the labor market remains a key generator of economic expansion, said Muoio. The drivers of the macro expansion are “jobs, jobs, jobs.”  Of which there is no shortage. “We have been adding jobs at a healthy pace,” he said.  “A robust labor market translates into increased spending. Consumer confidence is elevated, and consumers are spending at a record high.” 

Muoio also addressed the outlook for specific market segments – including retail, multifamily, industrial, hospitality and CRE  — and touched on various trends and hot button issues which are impacting these sectors, highlights include:

  • Low homeownership rates continue to support rental households, but the appetite for renting may be waning. 
  • Brick and mortar retail outlets are getting eaten alive by e-retail, resulting in shrinking store footprints and store closures.
  • E-retail is growing at a rate of growth 11 percent annually, and overall department store sales are down 37 percent since 2001, with recession like levels of closures. People are spending differently and tend to spend on experiences, not products.
  • The flow of people into rentals is down per household. We are at the back end of apartment cycle with a diminishment in demand plus increase in supply. Increased development will cause a rise in vacancies, as supply additions outpace absorption. This will be exacerbated in the event of a downturn.
  • Many apartment markets are holding up, but the sector is transitioning into the later stage of the cycle.
  • On a positive note: the current number of millennials living at home represents an untapped demand source, sustaining long-term prospects.
  • Changing space patterns are having a huge impact on the office segment. Modern floor plans are trending toward condensed desk layouts and less onsite storage – decreasing space per worker.
  • Interestingly, mobility is key. Highly walkable suburban office pricing is stronger that somewhat walkable and car-dependent pricing. 
  • Strong office markets have compensated for those barely out of the downturn, but many markets now face increase supply.
  • Driven by the rise in e-commerce distribution centers and cannabis legalization, industrial demand picking up.
  • Fundamentals remain healthy for hospitality sector, as growing room demand mitigates the effect of new supply at a national level.
  • Airbnb and other home sharing site continue to be a big threat for the hospitality industry, and could impact implicit supply, pricing power and business travel.

Media Contact:
Bonita Paysour Bonita.Paysour@trigild.com 858-242-1153