Rising Rates May Slow the Improvement in Commercial Real Estate, But Not Stop the Progress

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The Federal Reserve is expected to raise interest rates several times this year. Although that may slow gains in the commercial real estate sector in the Investors Bank footprint, it should not stop the improvement from continuing. 

When it comes to real estate, everything is local. So let’s tour Investors Bank’s regional commercial real estate markets.

Long Island: The strength of this market can been seen in its vacancy rates, which are the lowest in a decade. Demand is rising, but supply is growing modestly. That is not a bad problem, as the market is not being overbuilt. In addition, although rents are increasing, they are not so high as to depress absorption. With local businesses hiring at a decent pace, this market should be able to do well this year.

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New York City: There is no simple way to summarize New York City’s varied markets, so let’s consider two major segments, Manhattan and Brooklyn. Although leasing activity in Manhattan still is solid, the market is being riled by a surge in construction; this is suppressing rent increases and causing vacancies to rise. Manhattan may be in one of its periodic construction boom phases, which usually creates an oversupplied market. Still, a modest rise in rents, even if it is coming with concessions, indicates the market is in decent shape. 

In Brooklyn, commercial real estate is mirroring the housing boom. New construction is strong, maybe too strong. Vacancy rates are high and that is restraining rents. The rapid growth of the borough is not likely to slow soon, implying escalating demand, supply and even rents.

New Jersey: Volatility in the northern New Jersey submarket masked the true condition of the state’s office market. In general, demand for space was solid, especially at year-end. However, added supply kept rents down. Central New Jersey has again become the darling of the commercial real estate world, due to a rise in costs and lack of supply in more densely populated areas. The state’s economy is too soft to support a strong market. However, the expanding footprints of New York and Philadelphia should keep the market going. 

Philadelphia: Philadelphia is hot. The economy is expanding solidly and broadly. Millennials and downsizing boomers are locating in Center City and the surrounding neighborhoods. That is generating significant demand for office space throughout the region and especially downtown. Despite increasing supply, vacancy rates are declining and rents are firming, not just in the City, but in South Jersey and much of the Pennsylvania suburbs as well. The Comcast Innovation Center, which should be completed in a year, should act as a growth pole for other technology-related companies, adding to the demand for space.

Outlook: In most parts of the Investors Bank footprint, the commercial real estate market is solid, if not strong. However, growing supply in some portions of the region already is restraining rents. Still, commercial real estate looks to have carried enough momentum into 2017, that a moderate rise in interest rates should not cause a significant slowdown.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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