March 6, 2019 2019 Commercial Real Estate Trends

2019 Commercial Real Estate Trends was recently covered by Bisnow. Recent research has generated 18 major trends in commercial real estate that are expected to be at the forefront of the industry in 2019.

1. The opportunity zone craze is going to persist. As investors await finalized guidance 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 present the strongest upside potential. There are more than $6 trillion in unrealized capital gains eligible to be deployed into opportunity zones.
2. The industrial boom will continue thanks to high demand from e-commerce players, though a few headwinds may surface. Net absorption resulting from e-commerce growth is expected to average between 75M and 94M square feet and lack of new supply- industrial buildings and complex- has driven vacancy levels down to 4.3%, a historic low. We can fully expect that e-commerce will continue to drive the market next year. Research shows net absorption may taper off in 2019 due to new supply not keeping pace with robust demand levels.
3. The Federal Reserve will gradually boost interest rates due to the strength of the economy. With robust job growth continuing to increase at a healthy clip and the unemployment steady at 3.7%, a 50 year low, federal officials hint that they will likely continue their course of action in 2019 to gradually boost short term interest rates to temper inflation and maintain a stable economy. The Fed boosted interest rates this year to a range of 2% to 2.25% and many expect central bankers to bump rates a few more times this year.
4. Online retailers will continue to open brick and mortar stores, further validating that physical retail is far from dead. Research expects retailers to begin reinvesting in their physical footprints to achieve the perfect omnichannel shopping experience for consumers.
5. Industry to continue reading the tea leaves to predict the next downturn. Everyone is on the lookout for signs of the next recession, as the economy nears its 10^th year of expansion-its longest period of expansion ever. Though US economic growth and job gains were strong in 2018, some economists and analysts predict the economy will slow in 2019 due to short term interest rate bumps by the Federal Reserve and waning fiscal stimulus from federal tax cuts.
6. Investor demand for US assets will keep transaction volume strong. Transaction volume through Q3 2018 was 11% above its level for the comparable period last year and is approaching the total closed in 2015- the peak sales year for this cycle.
7. PropTech adoption will accelerate industry-wide. More real estate firms embracing the latest innovations to streamline work tasks and create a more paperless, transparent approach to sourcing deals, managing assets, analyzing data and closing transactions.
8. Investment in value-add assets to help assuage US workforce housing availability and affordability concerns. Demand for available and affordable workforce housing options will remain a topic of interest in the multi-family sector, as expensive land and development costs make it increasingly difficult to build affordable housing from the ground up.
9. Millennials to continue flocking to “Hipsturbias” and 18-hour suburban cities. More than 2.6 million Americans relocated from the city to the suburbs in the last 2 years. “Hipsturbias” or “Urban-burbs” have been used to classify these suburban markets with increased walkability and access to public transit that so resemble urban metros.
10. Investors to favor industrial, multifamily, and retail assets in the new year. Retail is expected to attract interest from investors in 2019, particularly those assets ripe for redevelopment and upgrades.
11. Investors to continue flocking to secondary, tertiary markets for yield. CRE investors are on the hunt for a solid risk-adjusted return, yet continue to bypass gateway markets to bet on assets in burgeoning secondary markets.
12. The construction industry will continue grappling with high costs, labor shortage on a scale of 1-5 with 5 being of the greatest importance, construction costs ranked 4.59, with land costs and housing costs and availability following close behind at 4.14 and 4, respectively.
13. The US office real estate markets will remain stable, though demand may slow. In its 2019 US Outlook Report, CBRE citied that office net absorption is expected to reach 37M SF in 2019, representing the sector’s 10^th consecutive year of positive absorption. Should they continue to experience strong office using job growth in the new year, it could lead to strong absorption rates and renewed interest from investors.
14. Retail bankruptcies are expected to slow and earnings to stabilize. Though a wave of retailers filed for bankruptcy and shuttered stores this year, the circumstances surrounding most store closures next year should be vastly different.
15. Multi-story warehouses are nothing new in Europe and Asia, but the US is in the beginning stages of development for these types of facilities. Now that building costs are no longer as cheap and there is less available land than in the past. Although, the downside is that these multi-story facilities can present operational challenges for users.
16. Grocery chains to move forward online and expand their online offerings with the help of tech. Due to a combination of technological advancement, investment on the part of retailers and consumer demand, that we’re going to see a pretty important shift next year in grocery going online and retailers offering more to consumers in that domain.
17. Economic development teams across the country continue to feel the impact of Amazon’s HQ2 competition. The HQ2 search was to economic development what the census is to demographics.
18. US hotel occupancy is expected to break records in 2019. Occupancy levels are expected to surge to 66.2% next year, the 10^th consecutive year of growth. The increase will be driven by a 2.1% increase in demand to offset incoming supply.

 

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