Stability continues to characterize the commercial real estate sector in most asset classes and markets, as the current cycle extends into its second decade.
The duration of the market’s expansion is at least partly attributable to a delayed response following the Great Recession. Many real estate investors remained gunshy early in the recovery, and the boom years for rent growth and new construction did not begin until the mid-2010s.
Multifamily rent growth has leveled off in the 2.5 to 3.0 percent range nationally, with certain markets in the South and West—including Phoenix, Las Vegas and Atlanta—outperforming the rest of the nation. New supply has also found a comfortable level at roughly 300,000 units per year. A handful of metros have attracted the lion’s share of development, including Denver, Dallas and Seattle; each ranks among the top markets nationally for domestic migration and job formation. The demographic tailwind in a number of secondary markets continues to keep supply and demand in balance.
In the office sector, job formation continues, specifically in office-using employment, despite a historically low unemployment rate and a record streak of consecutive months with positive job growth. Headlines have focused on major projects like Hudson Yards, which will add more than 20 million square feet of office space to Manhattan’s Far West Side when it’s completed in 2024, yet the national development pipeline is stable and growing steadily. Highly amenitized properties are becoming the norm rather than the exception, and providing a high-quality experience for office workers is a strategy for leading companies in the competition for talent.
While real estate fundamentals appear stable, the potential for economic disruption remains a concern. The possible impact of tariffs and rhetoric related to trade policy have generated uneasiness at home and abroad. One result has been a flight to quality among sovereign bond investors, which has decreased yields on the 10-year Treasury. A yield curve inversion is prompting the Federal Reserve to consider dropping overnight rates for the first time in 13 years. Lower long-term rates are generally a welcome sign for the commercial real estate industry; if the yield curve remains inverted, however, a recession in the next year is highly probable.
In general, steadiness and stability remain the bywords for commercial real estate, and for now, the industry is showing few signs of cracking. That said, a global economic slowdown will certainly have an impact on domestic real estate performance.
Chris Nebenzahl is associate director of Research with Yardi Matrix.