Although we anticipate short-term interest rates to experience an upward trend, most other market conditions that influenced the real estate finance industry in 2015 are likely to continue to be evident in 2016. Importantly, the ongoing gradual increase in short-term interest rates infers that members of the Federal Reserve Board Open Market Committee are generally positive about current and future economic conditions and job growth.
Many factors will influence the availability of real estate finance capital and the condition of real estate markets. For example, variations in the homeownership rate affect rental housing demand. New single-family construction in 2015 was at the highest level since 2007; economists expect continued growth in new home sales in 2016. However, growth in the homeownership rate could be subdued, if not flat, over the next few years. Conversely, ongoing demand for multifamily rental units will be powered by strong demographic trends, including household formation, full employment and wage growth. It would not be surprising if the supply of new rental housing units exceeds demand in certain markets. Moreover, it is important to underscore the continuing shortage of affordable rental housing. Solving the affordable housing crisis is a complex challenge that requires the attention of the real estate industry.
The vacancy rate for retail properties continues a multi-year slow decline. Most retail markets across the United States are experiencing gradual growth. Ongoing retail market stability and growth will depend on consumer confidence; after all, consumer spending continues to be the most significant backer of GDP growth. Over a longer time horizon, significant growth in Internet retail sales is apt to have a negative impact in demand for retail real estate assets.
Acceleration of GDP growth, which is anticipated to be positive in 2016, should bode well for the industrial real estate sector in the United States. Unlike the retail real estate market, demand for distribution space should grow with increasing online purchasing volumes. Given the current economic conditions, industrial real estate should enjoy strong performance in 2016.
The U.S. office property market has experienced a gradually declining vacancy trend during the past five to six years. The anticipated outcome of stable economic growth is a sustainable demand for office space. Ongoing positive net absorption and positive rent growth in the office market will depend on continuing job growth.
Consistent with the positive trends in the real estate markets, there are ample and diverse capital sources. Although the price of capital is likely to increase in 2016, we can anticipate readily available lending sources for real estate assets.
All of these positive trends will be moderated in a significant way by the dramatic increase in regulations controlling the real estate finance industry. The list of regulatory schemes is long: risk retention, “Regulation AB,” Basel capital requirements, margin requirements, multifamily loan reserves, HMDA disclosures, and housing finance reform, to name a few. We must utilize a single, loud voice to influence regulatory outcomes in a positive way.Download PDF