While challenges face commercial real estate markets, realtors specializing in the sector should have confidence that growth will continue. That's according to speakers at a commercial economic issues and trends forum at the REALTORS® Legislative Meetings & Trade Expo.

NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets; the panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.

George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. "During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue," he said.

Unemployment has declined to 4.4% and consumer confidence is at its highest point in 15 years. As the economy improves, the commercial real estate market has continued to improve as well, said Yun. "A rising interest rate environment is likely to halt commercial price growth or even cause a minor decline; that outlook is supported by the expanding economy and the over 2 million jobs gained in the past year," he said.

Looking at the global market, Ratiu explained that global commercial investors have hit the pause button on investments, which in the first quarter of 2017 decreased nearly 20% year-over-year; however, certain US markets are seeing good global cash flow with $76 billion flowing to the US. "Overall global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains," he said.

With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the US market this year. “Over the past five years, a near majority of realtors experienced an increase in the number of international clients. We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market's gradual recovery," said Yun.

One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.

"Realtors are seeing evidence of markets being impacted by regulators' increased scrutiny of banks' balance sheet allocations to commercial real estate loans," said Ratiu. "Considering that 64% of Realtor® clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37% of Realtors' markets, a four% increase from last year."

John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors. "Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend," he said.

(Source: National Association of Realtors)

US real estate markets are increasingly becoming international, and changing demographics brought forth by immigration and growing interest from foreigners are positioned to bolster home sales activity and prices. That's according to speakers at an international real estate forum organized by the REALTOR University Richard J. Rosenthal Center for Real Estate Studies session here at the 2017 REALTORS^® Legislative Meetings & Trade Expo.

NAR's Danielle Hale, managing director of housing research, was joined by Alex Nowrasteh, immigration policy analyst at the Center for Global Liberty and Prosperity at the Cato Institute, to share insight on the current and future impact of foreign buyers and immigration on the US housing market.

According to Nowrasteh, the rising US population is being bolstered by a growing number of immigrant households, and their presence will continue to transform the housing market. Referring to data from the 2015 American Community Survey, Nowrasteh said of the roughly 321.4 million residents in the US, 278.1 million are born here (natives) and the remaining 43.3 million – made up of 20.7 million naturalized citizens and 22.6 million non-citizens – are foreign-born.

"Immigration affects rents and home prices far more than it affects the labor market," said Nowrasteh. "An expected 1% increase in a city's population produces a 1% uptick in rents, while an unexpected increase results in a 3.75% rise."

Nowrasteh, pointing to studies conducted on immigration and housing, explained that the effects of immigration on real estate are localized, with most of the impact felt where immigrants tend to reside: low-to-middle income counties. Each immigrant adds 11.6 cents to housing value within that county. In 2012, 40 million immigrants added roughly $3.7 trillion to US housing wealth.

Referencing the Legal Arizona Workers Act that went into effect on January 1st 2008, Nowrasteh said the decline in population resulting from the law likely exasperated the drop in home prices the state experienced during the downturn. Fewer households purchasing or renting property subsequently lead to higher vacancies and lower prices. "Immigration is the best way to increase population, housing supply and prices," he said.

Presenting some of the key findings from NAR's 2016 Profile of International Activity in US Residential Real Estate released last July, Hale said foreigners increasingly view the US as a great place to buy and invest in real estate. She noted the upward trend in sales activity from resident and non-resident foreign buyers¹ in the past seven years, with total foreign buyer transactions increasing from $65.9 billion in 2010 to $102.6 billion in the latest survey.

"A majority of foreign buyers in recent years are coming from China, which surpassed Canada as the top country by dollar volume of sales in 2013 and total sales 2015," said Hale. "Foreign buyers on average purchase more expensive homes than US residents and are more likely to pay in cash."

Perhaps foreshadowing where a bulk of future home purchases from immigrants will come from, Hale said that in NAR's latest survey roughly over half of all foreign buyers purchased property in Florida (22%), California (15%), Texas (10%), Arizona or New York (each at 4%). Latin Americans, Europeans and Canadians – who tend to buy for vacation purposes in warm climates – mostly sought properties in Florida and Arizona. Asian buyers were most attracted to California and New York, while Texas mostly saw sales activity from Latin American, Caribbean and Asian buyers.

NAR's 2017 Profile of International Activity in US Residential Real Estate survey is scheduled for release this summer. Looking at the past year, Hale said monthly data from the Realtors Confidence Index revealed a rise in responses from Realtors^® indicating they worked with an international buyer.

"Chinese buyers are once again expected to top all countries in both total dollar volume and overall sales," said Hale.

¹The term international or foreign client refers to two types of clients: non-resident foreigners (Type A) and resident foreigners (Type B).
Non-resident foreigners: Non-US citizens with permanent residences outside the United States. These clients typically purchase property as an investment, for vacations, or other visits of less than six months to the United States.
Resident foreigners: Non-US citizens who are recent immigrants (in the country less than two years at the time of the transaction) or temporary visa holders residing for more than six months in the United States for professional, educational, or other reasons.

(Source: National Association of Realtors)