- Amid stronger signs of growth for the U.S. and global economy, the Federal Reserve will, at some point, begin to taper its quantitative easing program, which will result in a long-term increase in interest rates.
- Cap rates will begin to rise, but not one-to-one with the increase in interest rates, as better economic conditions and improving real estate market fundamentals will reduce the level of investment risk in commercial real estate, limiting the growth of cap rates. While timing remains highly uncertain, we anticipate cap rates for the market as a whole to grow by 60 to 120 basis points, and interest rates to settle into a normalized rate in the 4% to 4.5% range.
- Given the improving economic and real estate picture, investors—primarily focused on low-risk prime assets and Gateway markets over the past few years—are bidding up the price of assets in secondary markets in the U.S., and have more opportunities in Europe.
- Technological and design disruptors—such as the rise of e-commerce for the retail sector and the growing adaptation of workplace strategy among office occupiers—represent both opportunity and risk for commercial real estate investors and occupiers. Investors can realizes significant gains from these shifts, but need to be aware of the potential risk of investments in outmoded properties and “out of style” submarkets.