Commercial real estate investment will continue to be attractive until another asset class can

compete, according to Dr. Mark G. Dotzour, a leading real estate economist.  Dotzour recently presented his annual real estate outlook to members of the Houston Gulf Coast Chapter of the Society of Industrial and Office REALTORS®.

That statement was among several he noted as key investment themes for 2016:

  • No American inflation will occur until one year after the price of oil bottoms.
  • GDP is ambling along with a 2% growth rate.
  • There will be political uncertainty until April 2017.
  • Watch for Federal Reserve rate hikes in 2017, after a couple meaningless ones in 2016.
Dr. Mark Dotzour

Dr. Mark Dotzour

Dotzour, who served as chief economist of the Real Estate Center at Texas A&M University in College Station for 18 years, reported that all financial markets are currently distorted. He said we are experiencing an expansion cycle that has lasted 87 months, far longer than any of the 11 economic cycles that have happened since 1945.

“We have propped up prices artificially until the adjustment becomes reality,” he said, noting that the GDP’s growth rate is usually slower during expansions. This could change the view of capitalism in other countries.

“Our economy is still the strongest on earth but not as strong as it was before. Interest rates will go up but not much because our economy cannot handle high interest rates,” he said.

Dotzour shared a few positives on the economy: Nationally the economy is bullish but signals are mixed. Monthly employment growth for nonfarm workers continues to rise with the average hourly wage also increasing; increased wages have not been seen for some time. This higher employment coupled with increased wages signals a stronger economy, which in turn points to a rise in interest rates during the next 12-18 months.

He said a lack of building activity has created skyrocketing housing prices throughout Texas, which in turn resulted from a lack of available financing for land development.  He noted that affordable housing is not available because of the federal government‘s restraints on loans, which makes development of lower-end housing unprofitable at today’s pricing.

Discussing the price of oil in several scenarios, he said that oil and gas company mergers and acquisitions are occurring more than before. He specifically mentioned the recent merger of Spectra Energy and Enbridge, two midstream companies who recently announced consolidating their businesses.  He speculated that the immediate future will see more vacancy in office and industrial projects due to the merger and acquisition activity.

He also noted that several oil companies have utilized new drilling and engineering efficiency to increase profit, such as drilling deeper. These newer methods typically increase a company’s return even at a lower price of oil.

He suggested three trends which could signal economic growth: increased car and light truck sales, which are currently flat; overall job growth; and increased new home construction.