By Roland Murphy for Arizona Builder’s Exchange
With the uncertainty of the U.S. presidential election over and promises of major infrastructure investment soon to come, the national real estate market experienced a pronounced bump in optimism between midyear 2016 and year end.
Halfway through 2017, though that optimism has tempered somewhat, the industry experts have generally maintained their sunny disposition.
A two-part survey published by RCLCO Real Estate Advisors, which polls industry experts across the country every six months, attributed the causes of the year-end swell to excitement about the possibility of the Trump Administration and Republican-controlled Congress potentially pushing through “tax reform, deregulation and other business-friendly policies that would lead to a continued, and perhaps even more robust, economic expansion….”
The mid-year survey sought to find out how much of that optimism remained. So far, despite a slight dip, cautious optimism remains the order of the day. “Enthusiasm for the new president and his ability to deliver on concrete policies has faded,” the report states. “But despite this, real estate and economic outlooks remain cautiously optimistic. There is widespread agreement that while the current cycle may be in the process of sunsetting, fundamental conditions remain strong for the near- to mid-term.”
Fifty-two percent of respondents said national real estate market conditions are “moderately or significantly” improved over where they were at this time last year, a 4 percent drop in sentiment from the year-end survey. Only 16 percent said conditions now are worse than a year ago. Forty-three percent say they expect real estate markets to improve over the coming year, a full 10 percent more than a year ago.
RCLCO’s Real Estate Market Index, a measure of sentiment on a 100-point scale, dipped to 68, 2.8 points below its year-end total. RCLCO analysts project the dip will continue, however, and anticipate a drop to the low 60s in the next 6-12 months. With the exception of the mid-year to year-end 2016 irregularities, the index has generally trended downward since mid-2015, when it approached 90 percent.
Does ‘The Trump Effect Matter?
The boost in year-end survey results was largely fueled by optimism that Trump and Congress would enact pro-business policies to stimulate the economy more than past efforts. Nearly 60 percent of respondents expected Trump to have either a somewhat or very positive effect on national real estate markets. Only 17 percent expected a negative impact.
The new administration has had nearly no significant accomplishments to show for its first months in office, leading to a decline in respondents’ faith. In the current survey, only 36 percent expect a somewhat or very positive impact, a drop of 23 points over six months.
One interesting correlation, however, is that the general dip in sentiment regarding the President does not necessarily tie-in with faith in real estate markets’ progress. “This disconnect reflects that while optimism for Trump has fizzled acutely, the overall decline in positive expectations has declined much more moderately for respondents overall,” the report states.
Stability Still the View of the Day
While optimism has shifted slightly downward, most respondents still anticipate market stability for now. Nearly two-thirds don’t expect the next market downturn to start before 2019. While they are wary of and watchful for signs of markets potentially shifting from late-stable stage conditions to the beginning stages of a downturn, they predict stability across most product types for the next year.
This is reflected in their view that most product types are still in the stable phase, with little change between the most recent and year-end 2016 surveys.
“Some land uses, such as office, resort/second home, and age-restricted, inched closer to the late stable phase,” according to the report. “Other uses – notably multifamily and for-sale residential – have backed down from the peak slightly. The most prominent change in sentiment was in retail, most likely in part reflecting short- and longer-term concerns about how retail will respond to e-commerce threats.”
That said, however, respondents expect all land uses will arrive in the “late stable” cycle spectrum within the next 12 months, with land, hospitality and for-sale residential moving the farthest along the line.
How Long Will Multifamily Keep Winning?
Multifamily apartment was the first segment to start showing stabilization after the economy cratered, moving into the early-stable phase in mid-2012. By the year-end 2016 survey, 40 percent were expecting to see the start of a downturn in apartments within a year. That number currently sits at 38 percent.
This comes despite a report published by We Are Apartments this summer that estimates a need for 4.6 million apartment units across the country by 2030. In the Phoenix area, that projection was more than 150,000. Still, 61 percent see moderate or significant risk in the apartment sector, particularly in the Southwest, the Southeast and Washington, D.C., areas where the perceived risk rises to 65 percent or more.
Continuing Retail’s Song of Woe
With seemingly every other industry report and speculation foretelling either the immediate demise or continued withering on the vine of American retail, it’s not surprising that sector experienced the most movement in the survey.
For the year-end responses from 2014-2016, respondents moved retail from end-to-end across the late stable stage. The current poll sets it at the far edge of late stable, with expectations hitting early downturn within 12 months from 31 percent of respondents.
Joining retail on the list of uses expected to hit the early downturn stage in the next year are land and resort/second homes.
The Advisor’s Perspective
As supply begins to catch up with demand and both income and property values moderate, RCLCO estimates the market for most property types is either in or approaching the late stable stage. However, the firm’s analysis across all the metrics predicts that stage will continue beyond this year, and that “current expansion could continue for another 18 to 24 months, though the probability that unexpected events derail this trajectory continues to be high.”
In the near term, the firm expects to see continued increases in demand for most products, but notes construction activity is catching up in most areas. As a result, the advisors warn significant increases in rents and occupancy may be harder to pull off.
RCLCO concludes by saying, “On balance, we anticipate moderating, though still generally positive, operating and investment performance for the duration of 2017 and into 2018, resulting largely from a strong economy and healthy property market fundamentals.”