Macroeconomic fundamentals

Favorable economic trends and solid operating fundamentals support REIT industry’s growth.

The macroeconomy and real estate markets had a good performance in 2017. That may well continue into 2018, but there are several risks that might cause a change in the outlook.

The fundamentals for the REIT industry remain firm, which gives us some confidence that the recent decline in FFO is a short-term dip amidst a longer-term trend of mostly solid growth.

Data centers house the servers and network equipment that make modern communications possible, including the Internet and data transmitted by cell phones. 

Excessive debt growth is a warning sign of an overheating real estate sector. Growth of commercial mortgage debt has been modest, however, at only half the pace of the prior cycle. Banks have been the mainstay of lending, but life insurers have shown increased appetite for commercial mortgages, and net issuance of CMBS turned positive in the second quarter. 

Vacancy rates are likely to remain low as adult members of shared households eventually strike out on their own. However, that the process may take longer than anticipated. 

REITs and other owners of commercial properties are likely to benefit from a favorable balance of supply and demand in the months ahead.

Commercial real estate markets appear to have settled in for the long haul. New supply and the growth of demand are roughly balanced in most property sectors, vacancy rates are stable and rents growing modestly.

The $64 million question in commercial real estate today is whether or not the sector is past its peak and headed for a slowdown.

The data show positive fundamentals entering the New Year. Supply remains in check, and demand growth is sustained, despite some bumps along the way. 

The apartment market has been riding a wave of robust demand and rapidly rising rents for the past several years, pushing multifamily into the leading ranks of commercial real estate. Recently, however, there have been some signs of softening.

What happens if “two steps forward, one step back” turns into “two steps forward, two steps back”?