The Fed is expected to raise interest rates between 2 and 4 times over the course of 2018. History has shown that commercial real estate valuations tend to be resilient to interest rate increases as relative inflation adjusts cash flow. The forward interest rate curve is historically flat, which has helped soften the impact of rising rates on valuations. If signs of inflation cause the interest rate curve to steepen and revert back towards its historical average, that may cause some temporary downward pressure on valuations as cap rates adjust. Equity investors are demonstrating little tolerance to reduce their return expectations, which remain at cycle lows.

John Randall, deputy national production manager

Grandbridge Real Estate Capital LLC

Anecdotally, there has been a shift in sentiment regarding where we are in the cycle. Two years ago, or even a year ago, concerns about the longevity of the cycle were on the upswing and there was a larger minority of investors and lenders who were talking about needing to adopt more defensive strategies. There are now a larger number of investors who are open to the idea that price appreciation and investment volume could continue to improve, or could stabilize at fairly healthy levels. Concerns about the cycle are generating fewer conversations.

Sam Chandan, PhD, the Larry & Klara Silverstein Chair in Real Estate Development & Investment and Associate Dean at the NYU Schack Institute of Real Estate

High Volatility Commercial Real Estate (HVCRE) introduced by bank regulators in 2015 made construction lending more restrictive and more expensive. In September 2017, federal regulators put out for comment a new variation of HVCRE. It is called High Volatility Acquisition, Development and Construction (HVADC) and proposes to simplify HVCRE. HVADC actually includes more types of commercial loans in its definition, but reduces the more onerous capital provisions of HVCRE. In November 2017, The House of Representatives passed HR 2148, which was designed to bring greater clarity to and eliminate some of the more restricted provisions of HVCRE. The Senate has yet to take up the bill. This makes for a very unsettled environment for bank lenders.

Hilary Provinse, head of mortgage banking

Berkadia

Ten years after the GSEs were placed in conservatorship, the policy debate continues, and Congressional reform discussions may be gaining momentum. Policy makers could be poised to provide greater certainty on the future of mortgage finance, including the financing of multifamily rental housing within the commercial real estate ecosystem.  

Thomas Kim, senior vice president of commercial/multifamily

Mortgage Bankers Association

As a result of tax reform, we anticipate tax credit pricing to decline and the need for additional subsidies to increase, which could result in fewer deals and less housing being produced. The need for affordable housing continues to be significant. According to projections from Enterprise Community Partners and the Joint Center for Housing Studies, more than one in four families who rent their homes are “housing insecure” meaning they pay more than half of their monthly income on housing. The number of housing insecure renters in the U.S. has increased by 30 percent over the past decade and even if rent growth matches income growth, the number of housing insecure renters is expected to increase by 1.3 million households over the next decade—an increase of over 10 percent.

Maria Barry, community development executive

Bank of America Merrill Lynch

REITs and commercial real estate have grown up as an industry and are now expected to consistently fill a specific part of investing strategies. REITs overall under-performed against the broader markets in 2017. However, they still achieved broadly consistent returns. In fact, this performance, even when compared with the last several years, still points to a level of steady returns. One can expect continued differences between various REIT sectors. As you look below the sector performance metrics and dive down into key operating metrics such as occupancy, leasing velocity and debt leverage, REITs generally performed positively. The discipline of the overall REIT industry during this economic cycle should continue to provide opportunities for the industry to remain an important part of investing strategies.

Jim Berry, US real estate and construction leader at Deloitte

The new tax law could spark a faster pace of economic growth in 2018, leading to inflation and rising interest rates. The stimulative effects of the new tax law could trigger inflationary pressure, particularly considering the very low unemployment rates. Potential increases in expenditures on capital equipment and infrastructure, consumption, hiring and wage growth could place upward pressure on inflationary measures. The Federal Reserve will closely monitor these trends and could accelerate its monetary tightening policies, raising rates more quickly than most currently anticipate.

Increased clarity on the new tax law could bring some investors back from the sidelines. Over the last year, transaction activity slowed, partially a reflection of uncertainty surrounding tax laws. With the finalization of the Tax Cuts and Jobs Act, investors now have some guidance on how the new tax laws will affect their income and capital gains from commercial real estate investment activity. This additional insight could bring some investors back from the sidelines and boost sales activity.

John Chang, first vice president, research services

Marcus & Millichap Real Estate Investment Services

Everyone knows that starting off 2018 industrial is hot and retail is not. There is a lot of great information available on real estate fundamentals and drivers, and market participants are wisely paying close attention. A good part of 2018 will be defined by how particular markets fair relative to expectations, e.g. retail could outperform bearish expectations. Equally important will be the wildcards that nobody sees coming. Being prepared to weather—and profit from—the unexpected turns will be key in 2018 and beyond.

Jamie Woodwell, vice president, research and economics

Mortgage Bankers Association