4 Market Trends That Will Impact CRE in 2016
Last week, we shared our 5 CRE tech predictions for 2016. This week we're focused on the broader CRE industry with 4 predictions that we think will have broad impact on the industry. Here are some trends we’re watching for in 2016:
1. Interest rates go up 75 bps by the end of 2016
In December, the Federal Reserve raised the overnight target interest rate for the first time in nearly a decade from 0 to 25bps. This was a highly anticipated move by the Fed but as we enter 2016, the question now turns to how much interest rates will rise this year. In their last official statement, the Fed communicated that their median rate projection is 125bps by the end of 2016, implying an additional 100bps of hikes this year. This projection is highly data-dependent and the market is currently testing these projections and pricing a mere 41bps of hikes in 2016, according to Hilary Curran, an Interest Rate Derivative Trader at Morgan Stanley. While this recent leg lower in rates can be attributed other macroeconomic factors such as China’s currency devaluation and record low oil prices, there is little doubt that the path to higher rates will be gradual.
2. Institutional investment in real estate tops $7 trillion
NAIOP reported that an estimated $6.7 trillion flowed into real estate in 2015. That was a record year, but will be overshadowed by 2016. All signs point to more capital coming into real estate this year, with a record amount raised by closed-end private funds and foreign capital increasingly parking capital in U.S. real estate. 2016 is also going to see real estate become the 11th category of the GICS code, which could draw even greater allocation from institutional investors. The continued flow of capital will likely keep transactions robust.
3. 5-7 publicly-traded REITs will be taken private
REITs closed 2015 trading significantly below NAV. Like 2007 and 2008 — the last time the REIT sector traded at similar discounts — very large, cash-rich PE funds will look to acquire mis-priced real estate through acquisition and take-privates. It could be a great opportunity to create value through portfolio discount, arbitrage between the public and private markets, and operational efficiencies. There has been some M&A in late 2015, but much more will come in 2016. E-REITs and FIRPTA reform will be interesting to watch, but those will likely be more impactful in 2017-2018.
4. CRE in oil-dependent markets will face difficult times
CRE owners and brokers that focus on oil-dependent markets will face an uncertain and challenging 2016. In 2015 alone, crude oil prices dropped by 42%, causing thousands of layoffs, woes in local economies, and even some corporate defaults. 2016 is off to an even worse foot with crude oil prices dropping right out of the gate. The fundamentals and demand for CRE in Alaska, North Dakota, Texas, and Louisiana will be low, causing CRE professionals in those regions to revisit their strategy, whether that be around leasing, hold period or valuation expectations. Although oil is known for booms and busts, it doesn’t seem like this bust is ending soon.