18 Commercial Real Estate Trends To Dominate In 2019

Commercial real estate analysis

Goodbye 2018, hello 2019! As the new year approaches, Bishop spoke with several business execs, researchers and economists to uncover the major trends expected to dominate the commercial property sector in the upcoming year. By the rise of opportunity zones to a downturn in industrial absorption, these are 18 trends experts predict for 2019.
comps real estate

1.

As investors await finalized advice from the Department of the Treasury and the IRS regarding the Opportunity Zone program, the hunt is on for assets and investment opportunities in these designated areas that pose the strongest upside potential. Investors are lining up to pour billions into Opportunity Zone Funds, with a report from Real Capital Analytics stating there’s over $6 trillion in unrealized capital gains eligible to be deployed into potential zones.

Though the program was made via the passing of this Tax Cuts and Jobs Act annually to induce economic growth in underserved communities in exchange for a hefty tax break, research reveals many of the census tracts classified as opportunity zones have already brought a considerable amount of investment ahead of the initiation of the new national plan. Critics of the program worry it will accelerate investment in areas already experiencing a surge in development action, resulting in a convergence of investment into burgeoning neighborhoods currently in high demand, and too little investment in differently blighted communities.

2. Industrial Boom To Keep Thanks To High Demand From E-Commerce Players, Though A Few Headwinds May Surface

Industrial real estate demand soared to new heights this past year, and CBRE Head of Industrial Research David Egan anticipates more of the same in 2019.

“I think the market has outperformed this season, at least from consumer action. There’s been a general expectation for a number of years that this can not continue, and it ends up that has not been true. We’ve got a massive amount of demand on the market for logistics properties of all types; of course the Class-A big-bulk warehouses are what get most of the attention, but the demand is quite broad-based and extending all of the way down to secondary and tertiary markets,” he said. “My expectation in 2019 is that we ought to see less or more of the exact same dynamic.”

Web absorption resulting from e-commerce growth is expected to moderate between 75M SF and 94M SF, same as this year, according to CBRE’s 2019 Outlook report, and a lack of new supply has pushed vacancy levels down to 4.3%, a historic low.

“Based on the demand that we are seeing in the e-commerce industry — and from traditional brick-and-mortar retailers that are entering or expanding into the online space — we could fully anticipate that e-commerce will continue to drive the marketplace next year,” Bridge Development Partners President Anthony Pricco said. “This is especially true for infill sites proximate to the major population centres. While the rising costs of land and construction could be viewed as emerging market headwinds, the upside of industrial development remains exceptionally powerful, as rents have been appreciating at an even quicker rate.”

Egan advised Bisnow that he would not be shocked if internet absorption tapered off in 2019 because of new distribution not keeping pace with robust demand levels.

“You can only absorb what’s available,” he explained. “While we hope to see supply-demand relatively in check, these expansion metrics will continue to be positive.”

3. Federal Reserve To Slowly Boost Interest Rates Due To The Strength Of The Economy

With robust jobs growth continuing to increase at a healthy clip and the unemployment rate stable at 3.7 percent, a 50-year low, Fed officials hint that they’ll probably continue their path of action in 2019 to slowly boost short-term interest rates to temper inflation and keep a stable market.

“Inflation exists above the Fed’s target of 2 percent to 2.5%, with more job openings than unemployed and more homebuyers than brand new housing inventory. The Fed sees inflation ahead and foremost and will continue on a hike-pause-hike-pause pattern in 2019 as long as GDP stays above 2 percent and unemployment below 5%,” CCIM Institute Chief Economist K.C. Conway stated.

The Fed boosted rates three times annually to a range of 2% to 2.25 percent, and many anticipate central bankers to bulge prices again in December. Big Wall Street banks polled by Reuters expect central bankers to increase rates another three times in 2019.

“Though the most recent Fed guidance has appeared less definitive on its future course, the market and most analysts expect another increase this month and 2 to four months, as both inflation and wage growth exceed their targets,” Colliers International U.S. Chief Economist Andrew Nelson stated. “This may ultimately translate into declines in consumer and business borrowing and curb spending and investing.”

4. Online Retailers Will Continue To Open Brick-And-Mortar Stores, Additional Validating That Physical Retail Is Far From Dead

With the retail sector stabilizing in 2018, CBRE Head Of Global Retail Research Melina Cordero expects retailers to begin reinvesting in their physical footprints to accomplish the perfect omnichannel shopping experience for customers. In addition, digitally native (or e-commerce only) retailers will increasingly shift to open physiological shops to cultivate their company and retain more customers, Cordero said.

“In relation to retail and real estate, I believe that the retailers have finally sort of heard what to do. There’s a lot of investment, changes and closures that had to occur to adjust to omnichannel. Over 2018 a lot of those investments finally started paying off.

“What we believe is going to happen over 2019 is a true return to the shop. Retailers are now beginning to realize the value of the property — they can not just close a shop and rely on online, they really need the store for profit margins, consumer care, client acquisition, for many reasons. I believe we are going to see a lot of reinvesting in the store and lots of reinvesting in plans to try and get folks into the shop,” Cordero said.

5. Industry To Keep on Reading The Tea Leaves To Predict The Next Downturn

Everybody is on the lookout for signs of the next downturn, since the market nears its 10th year of expansion — its longest period of growth .

“In the background of U.S. business cycles, downturns have generally occurred within one or two years after the market has reached full employment,” JPMorgan Chase Commercial Banking Head Economist Jim Glassman explained. “A careful evaluation of this historic regularity suggests, however, that this pattern has been the result of 2 imbalances — a building inflation problem which requires that the Fed to adopt a more restrictive policy posture, or unprecedented financial imbalances.

“In that regard, there are not any obvious imbalances that have the capability to trigger a downturn, so the present expansion is very likely to settle to a lengthy period of balanced, noninflationary growth.”

Though U.S. economic growth and job earnings were powerful in 2018, several analysts and economists forecast the economy will likely slow in 2019 because of continued short-term interest rate lumps by the Federal Reserve and waning financial stimulus from federal tax reductions.

“Inevitable disruption is most likely the appropriate risk plan mode to maintain for 2019. Real estate isn’t immune from business cycles, economic recessions or tumultuous black swan events — such as a trade warfare, money meltdown or cyberterrorism,” Conway said.

6. Investor Demand For U.S. Assets To Maintain Transaction Volume Powerful

“Though property markets peaked for this cycle in 2015, leasing and sales transaction activity remains robust and pricing company,” Nelson told Bishop. “Transaction quantity through Q3 2018 [was] 11% above its level for the comparable period this past year and is approaching the entire closed in 2015 — the peak sales year for this particular cycle.

“While all of four core businesses have shared in this year’s gains, apartment and office — perennial investor favorites –‘ve submitted the greatest sales totals and also the most powerful price appreciation to date. However, equally [will] likely slow sharply in the next two decades, together with price appreciation and lease growth, as the market slows or even turns negative.”

7.

Commercial property professionals — from owners and operators to agents and architects — may no longer deny that the effect technology is having on the business. More property firms are embracing the latest innovations to streamline perform tasks and create a more paperless, transparent way of sourcing deals, managing resources, assessing data and closing transactions.

Mihir Shah, co-CEO of JLL Spark — JLL’s PropTech branch with a $100M global fund dedicated to investing in real estate technology companies — informed Bisnow that PropTech companies have become increasingly valuable as their products have aided real estate firms further their initiatives.

“As a part of the effort, we’re seeing companies that typically went through long RFPs demonstrating interest in piloting new products to see which ones are workable. This helps them establish [return on investment] faster and assists the winners grow quicker,” Shah said. “This willingness to attempt new things will help PropTech adoption in 2019 and outside.”

8. Investment In Value-Add Assets To Assist Assuage U.S. Workforce Housing Availability, Affordability Concerns

Requirement for available and affordable workforce housing choices will remain a subject of interest from the multifamily sector, as costly land and development costs make it more difficult to build affordable housing from the ground up. This is especially a pain stage in urban metros, JPMorgan Chase Head of Commercial Real Estate Al Brooks told Bishop.

“The continuing job growth we have been experiencing in the U.S. is having a massive effect on workforce housing affordability in major cities. This influx of talent continues to be fueled by the need to maintain close proximity to operate, the convenience of mass transit alternatives, in addition to the appeal of being at the center of this action in major metropolitan regions,” Brooks said.

CBRE Americas Head of Multifamily Research Jeanette Rice stated investment in value-add multifamily resources will help assuage those concerns.

“Workforce housing will even stay appealing in 2019 because of demand outpacing accessible supply, thereby keeping vacancy rates low and rental growth over the overall multifamily sector.

“Investor interest will even stay very high in 2019. Interest is coming from all types of funds, such as foreign and institutional capital in addition to conventional sources like smaller private buyers. The appetite for workforce housing is quite strong for the greater property fundamentals and higher yields. Value-add investment will still predominate in 2019 and remain largely successful. Acquisitions of stabilized merchandise will also be attractive for some investors, especially those who have longer-term hold horizons,” Rice explained.

9. Millennials To Keep Flocking To Hipsturbias And 18-Hour Suburban Cities

Research and information has dispelled the long-held myth which millennials are city-flocking suburbia haters. With aging millennials now hitting their early 30s, many are turning into the suburbs with their households. More than 2.6 million Americans relocated in the city into the suburbs in the previous two years, as stated by the U.S. Census Bureau according to ULI. This has renewed investor interest and confidence in select non-gateway markets, ULI reports in its 2019 Trends poll. “Hipsturbias” or”Urban-burbs” have been used to classify those suburban markets with increased walkability and accessibility to public transit which so resemble urban metros.

A U.S. bank senior researcher advised ULI the following:

“The first phase is millennials moving into the suburbs for bigger, cheaper homes and accessibility to schools, so adequate single-family and multifamily housing will be critical. Retail follows rooftops, therefore retail growth to satisfy the new occupants’ requirements will follow. Last, you might begin to see more emphasis on job facilities as individuals decide they want to operate closer to where they live.”
10. Investors To Favor Industrial, Multifamily And Retail Assets In The New Year

It comes as no surprise that industrial real estate resources are an anticipated favorite for investors in 2019, together with multifamily assets, based on ULI’s 2019 Emerging Trends report. Deep-pocketed investors like Blackstone Group continue to gobble up whole portfolios of industrial resources at a rapid pace this season, for example its purchase of industrial REIT Gramercy Property Trust for $7.6B, also a portfolio of last-mile logistics assets from Harvard University for almost $1B and a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.

More intriguing is the fact that retail is expected to draw attention from investors in 2019, particularly those resources ripe for redevelopment and upgrades.

“Many shopping center properties are simply not going to return as successful retail resources. But while some are reduced in price to mere property value, many are well below replacement cost and also have great locations for other applications,” ULI reports. “If a website is sufficiently big, mixed-use is a superb option for close-in suburbs appearing to exploit maturing millennials’ want to enter their next life-cycle stage. There is an opportunity to turn the tables around the e-commerce trend that fostered the obsolescence by redevelopment into supply centers.”

11. Investors To Continue Flocking To Secondary, Tertiary Markets For Alerts

Commercial property investors on the hunt for strong risk-adjusted returns continue to skip entry markets to bet on resources in burgeoning secondary markets, and the tendency is very likely to last in 2019.

“Because of the high prices and restricted opportunities in primary U.S. metros, investors are continuing to focus more on secondary markets, that are appreciating double-digit increase in investment activity and substantially more powerful price increases than in the primary (largely coastal) subway markets,” Colliers’ Nelson said. “However, those tendencies will probably reverse if/when we view the economic downturn, and investors find the security of bigger, more liquid markets”

This behavior is typical at a late-stage cycle like this, CBRE Chairman of Americas Research Spencer Levy said.

“The downside of this coin is it is typical of late-cycle investment action that you see a change from primary to secondary in search for returns. What is new is we have not seen that a compression of yields that would be average in late-market action,” he explained. “What occurs is cap rates in primaries and secondaries converge; we have not seen that in retail and office, but we have seen that in multifamily. The issue is, is this trend durable during a recession that will occur in the next few years?”

12. Construction Industry To Continue Grappling With High Costs, Labor Shortage

Rising construction costs have been the No. 1 property and development concern for economists who participated in ULI’s Emerging Trends in Real Estate 2019 surveys. On a scale of one to five, five of the greatest importance, building costs ranked 4.59, with property prices and housing prices and availability following close behind at 4.14 and 4, ULI reports.

“Rising construction costs could possibly be the most undertold story of 2018 that has to become a substance narrative in 2019,” CCIM’s Conway said. Conway identified a variety of factors exacerbating price and labor challenges in the construction business, including a decrease in immigrant building laborers following the fiscal crisis, loony superstorms as a consequence of climate change that has resulted in enormous rebuilding efforts across the nation, along with tariffs and the trade war.

“Essential materials such as steel,… bathroom fittings from China, lumber from Canada, etc., are affected. Look closely at the quarterly revenue reports from construction materials companies as to the sort of input cost increases being experienced. Caterpillar, for instance, reported strong earnings in Q3 2018, however, a large rise in substance inputs like steel. The result is rising pressure on margins.

“That is the key takeaway regarding construction labor and material costs increases — margins are going to be squeezed, cost overruns incurred, and values under stress unless rents and [net operating income] can be increased to cover the rising costs of new construction,” Conway said.

13. U.S. Office Real Estate Markets To Remain Stable, Though Demand May Slow

CBRE said in its own 2019 U.S. Outlook report which office web absorption is predicted to reach 37M SF in 2019, representing the business’s 10th consecutive year of positive absorption. Should the country continue to experience powerful office-using job growth in the new year, it could lead to strong absorption prices and renewed attention from shareholders.

“One portion of office real estate growth is the demand for more office space near entertainment venues and other comforts. These office buildings are relying on smaller, more flexible workspaces. Working spaces also have become more prevalent as professionals select alternative working methods,” Green told Bishop.

Nevertheless, Colliers’ Nelson anticipates office need will taper off in reaction to a downturn in job creation and strong supply amounts.

“Demand for office space will medium in reaction to slower job creation, just as a substantial quantity of projects already under construction begins to enter the current market,” Nelson said. “So vacancy will trend upward and lease growth will ease as market conditions become more aggressive for landlords.”

14. Retail Bankruptcies To Immediately, Retailer Earnings To Stabilize

“The real estate business has experienced significant change in the last couple of years, and the transformation is profound and will last throughout 2019. The convergence of brick-and-mortar and online retail will continue to make major seismic changes in the industry,” TD Bank Head of Commercial Real Estate Gregg Gerken informed Bishop.

Though a tide of retailers filed for insolvency and shuttered stores this year — such as Sears, Mattress Company, Nine West and Claire’s — the situation surrounding most store closures next year should be enormously different, CBRE’s Cordero said.

“I think that the general industry opinion is that 2017 was likely the peak year [for retail closures]. I believe there’ll continue to be closers in 2019 — it’s difficult to say whether we’ll have less or more — but I’d say a lot of those closures that we will find in 2019 will be more about that which we predict portfolio rationalization or optimization than they’re about retailers which are failing.

“Retailers in lots of cases do need to shut shops to reorient their portfolios — so I really do expect closures at 2019, however I do not really [associate] a great deal of those closures as dying or neglecting retail, it is more of morphing and adapting retail,” Cordero said.

15. Multistory Warehouse Development From The U.S. To Accelerate

Conditions have ripened for multistory warehouse growth from the U.S., and this trend will continue into 2019. Facilities are underway or have delivered in Seattle, San Francisco, New York, Miami and Chicago. Even though multistory warehouses are nothing new in Europe and Asia, the U.S. is at the beginning phases of developing these kinds of facilities now that construction costs are no longer as cheap and there’s less accessible land than in earlier times CBRE’s Levy said. Unprecedented demand for warehouse and logistics area today has changed that dynamic.

“The rents which are being achieved in such multistory industrial [centers ] could be just two or three times what you are seeing in traditional industrial. We think this specific trend is simply in the beginning in the USA,” Levy explained.

Although the bumps in lease are significant, CBRE Head of Industrial Research David Egan said these multistory facilities can also pose operational challenges for users.

“The users are going to need to alter the way that they operate in such buildings to make it operate effectively,” he said. “The operational issues aren’t small — to change how that they move stock in and outside of these buildings is not a tiny little tweak.”

16. Grocery Chains To Move Additional Online, Expand Their Online Offerings With The Help Of Tech

Up to now, delivering fresh groceries to consumers’ doors has been a fairly nascent notion — and it is no easy task. Grocers already combat low profit margins due to progressively declining food prices and fresh low-cost rivals like Aldi entering the marketplace. The challenges, coupled with costly online delivery costs, has maintained online grocery delivery in its infancy. But CBRE’s Cordero sees that tendency changing in 2019.

“Grocery is likely, among all of the retail categories, one of the cheapest for online penetration. We think due to a combination of technological advancement, investment on the part of retailers and customer demand, that we are going to see a fairly important shift next year at grocery going online and retailers offering more to consumers in that domain name,” she said.

17. Economic Development Teams Round The Country Continue To Feel The Effects Of HQ2 Competition

“An open contest like the Amazon HQ2 search is an chance for communities to redefine their own legacy image and showcase what’s different about their economy today versus 10, 20 or even 30 decades back. The 238 communities that collaborated for the Amazon HQ2 are winning economic growth consequently,” CCIM’s Conway stated.

“Amazon is using the data to site-select new fulfillment centers in places like Tucson, Arizona, and Birmingham, Alabama. Other significant transportation and e-commerce businesses, such as Norfolk Southern Railroad, have utilized the information to create a relocation decision (in Norfolk Southern’s case, to Atlanta, that was one of the 20 finalist cities for Amazon HQ2). To put it differently, the Amazon HQ2 search was to economic development precisely what the census is to demographics.”

18. U.S. Hotel Occupancy To Break Records In 2019

The hotel sector is anticipated to undergo a record-breaking year of occupancy levels in 2019, according to a prediction from CBRE Hotels America Research. Occupancy levels are predicted to spike to 66.2% next year, the 10th successive year of growth. This increase will be driven with a 2.1% growth in demand to cancel incoming supply.

That strong demand might not be felt equally across markets, Quadrum Hospitality Group President Foiz Ahmed said.

“Though the hospitality industry keeps growing, the markets where Quadrum is active will stay relatively horizontal given their higher-than-national average occupancy prices. While ordinary daily rates are rising nationally, the business will face some challenges due to the rapid adoption of programs that offer discounted prices.”

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