At times, it feels like we are being hit by gale-force winds and using words like “disruption” when discussing current real estate sectors. This is partly due to the fact that the main sectors are in the process of reinventing themselves to accommodate technology-driven changes in business operations. Although the rate of change is very rapid, it’s the most exciting and interesting time to be involved in commercial real estate for many generations, according to CBRE’s 2017 Real Estate Market Outlook report.
CBRE believes there is a good chance that global market growth will be stronger in 2017 than in 2016. The report covers six research themes: economy, capital markets, office, retail, industrial and hotel.
2017 will be a year of greater economic growth but also greater policy uncertainty. The global economic cycle, which is in mid-to-late stage, recently has been boosted by a fiscal stimulus in China. More government spending is on its way, particularly in the United States, so economic growth will pick up from a lackluster 2016. Key risks are a potential for cooling trade relations between China and the United States, the nature of the United Kingdom’s exit from the European Union, and a series of political elections in Europe, namely in the Netherlands, France and Germany, all of which could undermine future economic integration. The continued strength of the U.S. dollar might also be problematic for emerging markets.
Economic growth will boost investor confidence, but transaction levels are expected to be flat on 2016 as economic uncertainty in Europe and the United States will lead to a conservative approach. Rising bond rates are likely to put a floor under average global yields, but there is still some scope for yield compression in certain cities. Alternative real estate sectors will continue to attract investors because of the higher yields on offer.
More temperate growth in office employment, in part due to labor shortages, will slow the pace of leasing activity. Development activity in mature markets will remain subdued due to limited availability of development finance and space-efficiency gains by corporate occupiers. The Asia Pacific region will see gains in development completions, most notably in China and India. Occupiers will increasingly take a more activist approach to portfolio optimization in 2017 and will pursue a focus on amenity-rich locations and buildings in order to retain talent.
CBRE expects continued retail expansion but at a cautious pace, with retailers placing greater emphasis on location when expanding in new markets. Technology will continue to be a significant disruptor in the sector. Large stores in prime locations acting as showrooms and “theaters” of customer engagement will be sought with overall requirements for new space scaled back as online sales continue to grow. On the other hand, the food and beverage sector is innovating and flourishing, and is anticipated to occupy an increasing amount of space in shopping centers and high streets, as well as new outlets such as pop-ups.
Once again, technology will play a key role in the industrial sector as well. Online retailing has boosted demand for large modern warehouses and last-mile facilities on the periphery of large cities that allow for rapid order fulfillment of online purchases and returns. Rents are rising in the more land-constrained markets, but overall rental growth is modest in Europe’s logistics sector due to an uptick in supply in prime markets in 2016. Yield compression remains the main driver of capital growth.
Security concerns have undermined demand in many established hotel markets in Europe, such as Paris and Brussels, while a strong dollar will discourage significant inbound travel to the United States. Technology will also play a role, with Airbnb taking increasing market share. Investors in hotels will find continued scope for appreciation in capital values and income, but at a slower pace than in 2016 and only in markets where local supply is constrained.
CBRE predicts the global property markets will have much to offer in 2017, but achieving success will require real estate professionals to be more informed than they have ever been.