Commercial real estate investors in California and across the country can expect lower returns in 2017 and 2018, according to a senior executive from the Pension Real Estate Association. The gloomy forecast reflects an uncertain market that will have to adapt to stricter lending regulations and volatile pricing in the year ahead. Tougher underwriting rules for highly volatile commercial properties have already gone into effect, and developers say that they are finding it increasingly difficult to secure the funds they need to get new projects off the ground.
More rigid risk retention rules are not scheduled to take effect until later in the year, but they have already been blamed for sluggishness in the commercial mortgage backed securities market. According to PREA forecasts, the returns on commercial real estate investments, which are expected to be a robust 8.4 percent in 2016, will fall to 6.8 percent in 2017 before falling again to just 5.7 percent in 2018.
Fears triggered by the decision of British voters to leave the European Union have largely subsided, but many investors are still concerned about interest rates. While low rates can be a boon to developers, investors are becoming increasingly worried about the possibility of negative interest and would welcome a rate hike. The Federal Reserve was expected to raise rates earlier in the year, but the Brexit vote and some troubling economic reports put those plans on hold.
Finding secure footing in an uncertain market can be a challenge for investors, and they may be tempted to venture into areas that they are unfamiliar with when their regular sources of income are performing poorly. Experienced real estate attorneys may help troubled investors by performing due diligence tasks on their behalf and reviewing commercial property leases and other documents to ensure that the claims made by a project’s promoters are backed up by solid data.