The first year of the Trump Administration is in the books, and with it came a new tax bill passed into law and soaring stock market records. As the economy continues to show signs of growth in 2018, commercial real estate executives cite rising interest rates once again as their lead concern for the industry this year, according to Seyfarth Shaw’s 3rd annual Real Estate Market Sentiment Survey.
Consistent with last year’s sentiment, respondents are overwhelmingly hawkish: 98 percent expect interest rate increases from the Federal Reserve in 2018, with one-third of real estate executives projecting three increases over the next 12 months. As the real estate industry embraces the new Trump tax cuts, low unemployment and stock market success, industry insiders expect today’s economic factors to force the hand of the new Fed Chair and, consequently, shape their 2018 investment strategies.
From new tax policy to the rise of ride-sharing, Seyfarth Shaw’s 2018 Survey examines the industry’s current market sentiment:
Pain Point: Respondents clearly believe that multiple interest rate increases will start to have a material adverse impact on the commercial real estate market. With large questions looming on the federal deficit and budget, 63 percent of commercial real estate executives believe the industry can stomach an increase of 51-150 basis points.
Fundamental Focus: As a new sheriff takes charge at the Fed, respondents continue to focus on the fundamentals, ranking rising interest rates and CRE supply/demand issues as their top concerns for the industry. Notably, political volatility is a sizable concern while concerns over banking regulations fell and concerns over a wall of maturing CMBS loans appear past their peak.
Trump Tax Turbocharge: Last year, survey respondents placed tax reform near the top of the heap when it came to the Trump Administration’s expected positive impacts on real estate. Now that this has become a reality, most respondents (58 percent) believe that the new Tax Cuts and Jobs Act will extend the positive industry cycle for at least another one to two years — right into the 2020 presidential election.
Rise of Ride-Sharing: 43 percent of respondents believe the rise of ride-sharing services will impact their analysis and/or development of property. Due to the efficiency and growing popularity of ride-sharing services, real estate executives are increasingly re-evaluating their properties based on reduced parking needs and proximity to public transportation.
Web Worries: A credit to the ongoing efforts of the FBI and Homeland Security, cyber attacks have not yet profoundly hit the real estate industry. Despite this, a significant number of survey respondents (46 percent) remain concerned about a cyber attack in 2018 affecting their businesses.
Bearish on Bitcoin: Although a popular topic at water coolers across the country, a vast majority of respondents (96 percent) report they have no plans to adopt cryptocurrency into their CRE transactions in 2018. Three big reasons why: volatility, lack of understanding, and lack of regulations.
Private Equity Push: With more third party investment expected this year than 2017, private equity and institutional investors are the top primary sources of equity for respondents in 2018. Jumping from No. 3 to No. 1 this year, private equity is viewed as the preferred source due to its new tax benefits and the current positive economic conditions.
Long and Winding Road: Most survey respondents (73 percent) report that infrastructure will not be a part of their investment strategy. Although not released at the time of the survey, the Administration’s new infrastructure bill places a hefty burden on cities – a potential cause of concern for real estate executives.
Seyfarth, which helped clients close more than $30 billion in real estate transactions in 2017, surveyed commercial real estate executives in January. For a full copy of the 2018 Seyfarth Real Estate Market Sentiment Survey, visit here.