October 4, 2019

Strong Fundamentals in Commercial Real Estate

Investors and owners continue to face a dichotomy of sorts. On the one hand, overall economic conditions remain strong. Consumer spending and corporate profits continue to rise. Gross domestic product and industrial production are still growing, and inflation is in check. Employment is strong; in fact, it’s the best since the Great Recession among 25- to 54-year-olds, a key gauge of the labor market’s vigor.

On the other hand, there is still some market uncertainty amid concerns over the ongoing trade war with China, a slowdown in business investment, and the recent formal impeachment inquiry in Washington, D.C.

It is difficult to predict how this dichotomy between solid economic fundamentals and market uncertainty will play out, but no matter what, it’s a great time to be in commercial real estate.

It is difficult to predict how this dichotomy between solid economic fundamentals and market uncertainty will play out. But, no matter what, it’s a great time to be in commercial real estate. Equity from both domestic and foreign sources remains plentiful. Debt remains widely available at historically low rates. And, commercial real estate continues to provide superior returns when compared to other asset classes.

The positive arbitrage between cap rates and the cost of capital remains compelling for most real estate asset classes. And these investments also provide an inflation hedge along with stable, long-term cash flow. Meanwhile, socio-demographic trends continue to favor real estate. Multifamily and Seniors Housing, for example, will continue to get a boost from an aging population and the tendency of millennials to rent rather than own. And, industrial properties continue to benefit from the growing levels of e-commerce.

In short, don’t overreact positively or negatively to the daily barrage of uncertainty in the media. Take advantage of the market opportunity and talk with your lending professional about shifting into loans with longer maturities and non-recourse provisions. At today’s rates, this could provide a substantial cushion to protect you from any downside risk and keep you well-positioned for the future.

Randolph Taylor

Randolph Taylor, CCIM, is a Chicago multifamily investment sales broker with over 25 years of experience advising apartment owners on valuations, marketing strategy, and dispositions across the Chicago metro area.