Sluggish Economy Dampens U.S. Occupier Sentiment, Yet Investor Demand Rising

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According to RICS' US Commercial Property Monitor for Q2, 2016, a slow U.S. economy seems to be taking a toll on occupier sentiment in many parts of the United States though demand still rose in the office and industrial segments.
 
And the New York market is at peak or even already in a downturn according to a majority of respondents, though the industrial sector is a notable exception there as well. Despite these occupier trends, investor demand continue rising across all segments of the market, with interest from foreign buyers also increasing. The report is based on a survey of RICS qualified professionals conducted quarterly.
 
Nationally, the more subdued economic picture has led to a slight reduction in expectations for rental growth over the coming three and 12-month periods. Over the next year, respondents expect rental values to rise 1.2%, with multi-family expected to outperform with 2.6% growth predicted.
 
Back to the investor side, over the next quarter, respondents expect capital values to keep rising in office and industrial, with retail prices predicted to remain stable. Over the next year, respondents foresee cap values rising 1%, compared to expected growth of 2.9% one quarter ago. 
 
New York: From peaking, to acknowledging, to acting
 
Fully 90% of Big Apple respondents see the commercial market there as expensive or very expensive and 30% view it as at peak, while one-third see it in early downturn and five percent already in mid-downturn. However, more than 40% are still optimistic about where industrial cap values and rents are headed over the next 12 months, followed by multi-family and office, and with only retail expectations actually negative.
 
"The New York City market peaked 12 months ago," says Woody Heller, FRICS, executive managing director and group head, Capital Transactions Group, Savills Studley, New York, who participated in a recent panel discussion on the report. "In Q3 2015 we started to feel the change but didn't discuss it; in Q4 2015 we started acknowledging it; and in Q1 2016 the market started to act on it. Perhaps the most dramatically impacted asset class is land, which came out of the last downturn at approximately $300 per square foot (psf), peaked at an average of $1,000 psf, and has settled back down to $600-700 psf. That's an enormous change in a short time period. Given that most recent land sales have been for condo development, this change is a largely a reflection of the shift in the for-sale residential market."
 
Heller adds, "Given the view shared by many that interest rates will stay low for a long time, and the emergence of negative interest rates in several global economies, some have changed their view of long-term cap rates, causing them to underwrite exit caps at levels as low as 4.5%."
 
"Manhattan tenants are finally demonstrating resistance to non-stop increases in rents, with a handful of landlords responding," comments Alice P. DiMarzio FRICS, senior managing director, NGKF Capital Markets, New York. "In 2015 select B quality office buildings that had been commanding $40 base rents were up to $65 -$70 in asking rents. Some of those properties were sold to speculative buyers who were reluctant to pay 2.5% caps for trophy properties. And now, a few of those buildings are quietly on the market for resale."
 
"But more significant are the vacancies in retail, high in neighborhoods, and emerging even in prime commercial areas," DiMarzio adds. "Retail chains are closing multiple locations to rely on e-business versus brick and mortar stores. But while the big story is retail, my general sense of the market is that those landlords whose basis and debt positions allow them more flexibility on rent, will ratchet downwards in base rent for the right tenant and transaction." 
 
Finally, an asset manager at a prominent investment firm located in New York believes that rent is becoming a less dominant factor in location decisions, and particularly for one increasingly important retail segment. "In my experience, many businesses are making location decisions based on their logistics models, and once that decision is made, rent is generally not a major driver," says the asset manager, who asked not to be named. "This is especially true for e-Commerce players."