Higher interest rates shouldn't sidetrack strong commercial property market, CBRE says

The Federal Reserve's recent decision to raise interest rates should not slow capital flows into the thriving U.S. commercial property market—which includes warehouses and distribution centers—because solid economic fundamentals will prop up asset values and foreign demand for U.S. property will remain strong, said real estate giant CBRE Group Inc. in releasing its fourth-quarter analysis of the commercial sector.

The fourth-quarter "industrial availability" rate, which CBRE defines as the percentage of properties being marketed and available within a 12-month period for a tenant to make any interior modifications, hit 9.4 percent in the fourth quarter, the Los Angeles-based firm said Monday. This marks the 23rd consecutive quarter of failing availability in the industrial sector, the longest stretch since CBRE began tracking the national market in 1989, the company said.

Of 57 industrial markets that CBRE monitors, 35 reported declining availability in the fourth quarter, CBRE said. Detroit reported the most significant drop, with the availability rate falling 120 basis points, or more than one full percentage point, from the third quarter, CBRE said. Dallas, New York, and Atlanta also reported significant sequential declines, it said.

"The majority of markets continue to improve, and a few are even experiencing lower levels of available space than has been seen in decades," said Jeffrey Havsy, Americas chief economist for CBRE. "Such constraints will continue to provide upward pressure on rent levels, as demand-side fundamentals remain quite favorable for industrial users."

Besides the industrial sector, CBRE tracks the office, retail, and apartment sectors. Those sectors also performed well in the fourth quarter, the company said. CBRE has not issued its 2016 outlook for the overall market.

In mid-December, the Fed raised its key federal funds rate—the rate banks and credit unions charge each other for overnight loans—from a range of 0 to 0.25 percent to a range of 0.25 to 0.5 percent. It was the first interest-rate hike in nearly a decade.

Yet the marginally higher borrowing costs will not sidetrack an industry that is demonstrating steadily improving fundamentals, according to Havsy. "Commercial real estate remains in a 'Goldilocks' state, with both demand and supply neither too hot nor too cold," Havsy said in a statement. "This slow, stable improvement is extremely healthy for the sector, but is at a pace that is sustainable for 2016."