Fundamentally Speaking: Commercial Real Estate Fundamentals Sound Despite Volatility

In the latest edition of Fundamentally Speaking, Calvin Schnure, NAREIT’s vice president for research and industry information, observed that commercial real estate fundamentals remain sound despite stock market volatility during October.

Schnure explained that movements in the stock market in October mostly reflected concerns about global growth and the impact of the global economy on the United States. Worries about the strength of the U.S. dollar and its impact on U.S. firms that repatriate their foreign earnings also played a factor, according to Schnure.

“What we’ve seen is that the U.S. economy is still fairly resilient through all of this,” Schnure said. He stressed that investors shouldn’t put too much focus on any one monthly number because, overall, the economy has shown continued steady improvement.

Schnure noted that “the job market is a good indicator that the U.S. economy is gaining strength and gaining momentum.” At the same time, third quarter earnings show corporate profits are exceeding expectations, Schnure said.

“That’s an indication that business fundamentals are fairly sound,” he said. “This is all saying that market fears that the U.S. economy could stumble were really overblown.”

October also saw additional movement regarding interest rates, Schnure said.

“The important takeaway is that last year’s fears that Treasury yields were going to take off from 3 percent and go higher… never materialized,” Schnure said.

Interest rates are still at very low historical levels, and even if there is an increase during the next couple of years, it won’t be nearly as important on commercial real estate as the fact that occupancy rates and rent growth are both increasing, Schnure said.

“We’re seeing a very benign interest rate environment, moderate growth, no inflation risk, and the Federal Reserve is reasonably patient with how the economy is going. The rising occupancy and rent growth in the commercial real estate sector is really going to be the driver going forward,” Schnure observed.

Looking broadly at the commercial real estate sector, Schnure pointed to a continued moderate improvement in fundamentals.

“This is not a gangbusters market by any sense, but we are seeing that even as there’s new supply, the demand is there,” he said. “Overall, as the economy continues to gain momentum, with a moderate increase in supply, we’re seeing very good fundamentals for the real estate sector going forward.”