Goodbye 2018, hello 2019! As the new year approaches, Bishop talked with several business execs, economists and researchers to discover the significant tendencies expected to dominate the commercial real estate industry in the upcoming year. By the increase of opportunity zones into a downturn in industrial absorption, these are 18 trends experts predict for 2019.
1. Opportunity Zones Craze To Persist
As investors await finalized guidance from the Department of the Treasury and the IRS concerning the Opportunity Zone program, the search is on for resources and investment opportunities in these designated areas that pose the strongest upside potential. Investors are lining up to pour billions to Opportunity Zone Funds, with a report from Real Capital Analytics stating there’s over $6 trillion in unrealized capital gains qualified to be set up into potential zones.
While the program was created via the passing of this Tax Cuts and Jobs Act last year to induce economic development in underserved communities in exchange for a hefty tax break, study reveals many of those census tracts classified as opportunity zones have already attracted a substantial amount of investment prior to the initiation of the new national plan. Critics of the program stress it’ll 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 a lack of investment in otherwise 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 season, and CBRE Head of Industrial Research David Egan anticipates more of the exact same in 2019.
“I believe that the marketplace has outperformed this year, at least from user action. There’s been an overall expectation for quite a few years that this can not continue, and it ends up that hasn’t been true. We have a huge quantity of demand in the marketplace for logistics properties of all types; of course the Class-A big-bulk warehouses are exactly 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 explained. “My anticipation in 2019 is that we ought to see more or less of the same dynamic.”
Web absorption resulting from e-commerce growth is expected to moderate between 75M SF and 94M SFexactly the same as this year, according to CBRE’s 2019 Outlook report, and a lack of new supply has pushed vacancy amounts down to 4.3 percent, a historic low.
“According to the requirement that we’re seeing from the e-commerce industry — and from conventional brick-and-mortar retailers which are entering or expanding into the online space — we could fully expect that e-commerce will continue to drive the market annually,” Bridge Development Partners President Anthony Pricco explained. “This is particularly true for infill sites proximate to the major population centres. While the rising costs of construction and land could be viewed as emerging market headwinds, the upside of industrial development remains exceptionally powerful, as rents have been enjoying at a much quicker pace.”
Egan told Bisnow that he would not be shocked if net absorption tapered off in 2019 because of new supply not keeping pace with strong demand levels.
“You can just absorb what’s available,” he said. “While we expect to see supply-demand relatively in check, those expansion metrics will continue to be positive.”
3. Federal Reserve To Slowly Boost Interest Rates Due To The Power Of The Economy
With solid jobs expansion 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 likely continue their course of action in 2019 to gradually boost short-term interest levels 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 compared to new housing inventory. The Fed sees inflation forward first and foremost and will last on a hike-pause-hike-pause pattern in 2019 as long as GDP stays above 2% and unemployment under 5%,” CCIM Institute Chief Economist K.C. Conway said.
The Fed boosted rates three times annually to a range of 2% to 2.25 percent, and several anticipate central bankers to bulge prices again in December. Big Wall Street banks polled by Reuters expect central bankers to increase rates another 3 occasions in 2019.
“Although the latest Fed advice has seemed less authoritative on its future path, the market and most analysts anticipate another hike this month and 2 to four months, as both inflation and wage growth surpass their targets,” Colliers International U.S. Chief Economist Andrew Nelson stated. “This may translate into declines in consumer and business borrowing and curtail 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 start reinvesting in their physiological footprints to achieve the ideal omnichannel buying experience for consumers. Additionally, digitally native (or even e-commerce only) retailers will increasingly shift to open physical stores to cultivate their company and keep more customers, Cordero said.
“In relation to retail and property, commercial real estate data think the retailers have finally sort of heard what to do. There is a lot of investment, changes and closures that needed to happen to adapt to omnichannel. More than 2018 a good deal of those investments eventually started paying off.
“What we think will occur over 2019 is a real return to the shop. Retailers are finally beginning to understand the value of the property — they can not just close a store and rely on online, they actually need the store for profit margins, customer care, client acquisition, for many reasons. I believe we are going to find a lot of reinvesting from the store and a lot of reinvesting in plans to attempt to get folks into the store,” Cordero said.
5. Industry To Keep on Reading The Tea Leaves To Predict The Next Downturn
Everybody is watching out for signs of the next recession, 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 a couple of years after the economy 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 two imbalances — a construction inflation problem which needs the Fed to adopt a more restrictive policy position, or unprecedented financial imbalances.
“In that regard, there are no obvious imbalances which have the potential to trigger a recession, so the current expansion is very likely to settle into a protracted period of balanced, noninflationary growth”
Although U.S. economic growth and job gains were powerful in 2018, several economists and analysts forecast the market will slow in 2019 because of continued short-term rate of interest lumps by the Federal Reserve and waning financial stimulus from federal tax reductions.
“The inevitable disruption is probably the appropriate risk plan mode to be in for 2019. Real estate isn’t immune from business cycles, economic recessions or tumultuous black swan events — like a trade war, 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 remain strong and pricing company,” Nelson informed Bisnow. “Transaction quantity through Q3 2018 [has been ] 11% above its level for the comparable period last year and is coming the total closed in 2015 — the peak sales year with this cycle.
“While all of four core sectors have contributed in this year’s profits, office and apartment — perennial investor favorites — have submitted the greatest sales totals and the most powerful price appreciation thus far. But equally [will] likely slow sharply in the following two decades, together with price appreciation and lease growth, since the economy slows or even turns negative.”
Commercial real estate professionals — from owners and operators to brokers and architects — may no longer deny that the effect technology is having on the business. More property companies are embracing the latest innovations to streamline perform tasks and create a more paperless, transparent way of sourcing deals, handling assets, assessing data and closing trades.
Mihir Shah, co-CEO of JLL Spark — JLL’s PropTech division with a $100M international fund dedicated to investing in real estate technology firms — informed Bisnow that PropTech companies are now increasingly valuable as their products have helped real estate firms further their initiatives.
“As part of this endeavor, we are seeing businesses that typically went through long RFPs showing interest in piloting new products to determine which ones are viable. This helps them establish [return on investment] faster and helps the winners grow faster,” 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 accessible and affordable workforce housing options 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 advised Bisnow.
“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 be in near proximity to operate, the ease of mass transit options, in addition to the allure of being at the center of the activity in major metropolitan areas,” Brooks explained.
CBRE Americas Head of Multifamily Research Jeanette Rice said investment in value-add multifamily resources will help assuage those concerns.
“Workforce housing will also stay attractive in 2019 because of demand outpacing available supply, thereby keeping vacancy rates low and leasing growth above the overall multifamily sector.
“Investor interest will also stay very high in 2019. Interest is coming from all types of funds, including foreign and institutional funds in addition to traditional sources like smaller private buyers. The appetite for labor housing is very strong for the greater property fundamentals and greater yields. Value-add investment will likely still dominate in 2019 and stay mostly successful. Acquisitions of stabilized merchandise will also be appealing for some investors, especially those with longer-term hold horizons,” Rice said.
9. Millennials To Continue Flocking To Hipsturbias And 18-Hour Suburban Cities
Research and data has dispelled the long-held myth which millennials are city-flocking suburbia haters. With aging millennials now hitting their early 30s, many are turning to the suburbs with their households. More than 2.6 million Americans relocated in the city to the suburbs in the previous two decades, as stated by the U.S. Census Bureau as reported by ULI. This has renewed investor interest and confidence in select non-gateway markets, ULI reports in its own 2019 Trends survey. “Hipsturbias” or”Urban-burbs” have been used to classify those suburban markets with greater walkability and access to public transit that resemble urban metros.
A U.S. lender senior researcher advised ULI the following:
“The first phase is millennials moving to the suburbs for bigger, more affordable homes and access to schools, so decent single-family and multifamily housing will be critical. Retail follows rooftops, so retail growth to satisfy the new residents’ needs will follow. Finally, you might start to view more emphasis on employment facilities as residents decide they would like to work closer to where they reside.”
10. Investors To Favor Industrial, Multifamily And Retail Assets In The New Year
It comes as no surprise that industrial real estate resources would be an expected favorite for investors in 2019, along 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 assets at a quick pace this year, for example its purchase of industrial REIT Gramercy Property Trust for $7.6B, also a portfolio of last-mile logistics resources from Harvard University for nearly $1B and a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.
More intriguing is the fact that retail is expected to attract interest from shareholders in 2019, especially those assets ripe for redevelopment and upgrades.
“Many shopping centre properties are simply not going to return as successful retail assets. But while few are reduced in price to mere land worth, many are well below replacement cost and have great locations for other applications,” ULI reports. “If a site is adequately large, mixed-use is a superb alternative for close-in suburbs appearing to exploit maturing millennials’ desire to input their next life-cycle stage. There also is a chance to turn the tables on the e-commerce fashion that fostered the obsolescence by redevelopment into distribution facilities.”
11. Investors To Continue Flocking To Secondary, Tertiary Markets For Alerts
Commercial real estate investors on the search for solid risk-adjusted returns continue to skip entry markets to gamble on assets in burgeoning secondary markets, and the tendency is likely to continue in 2019.
“Due to the high rates and limited opportunities in primary U.S. metros, investors are continuing to concentrate more on secondary markets, that are appreciating double-digit growth in investment activity and much more powerful price increases than in the primary (largely coastal) metro markets,” Colliers’ Nelson said. “But, those trends will probably reverse if/when we view the economic downturn, and investors seek the safety of larger, more liquid markets”
This behaviour is typical at a late-stage cycle such as this, CBRE Chairman of Americas Research Spencer Levy stated.
“The downside of this coin is it’s standard of late-cycle investment activity that you find a shift from primary to secondary in search of returns. What is new is we’ve not seen that a compression of returns that would be typical in late-market activity,” he said. “What occurs is cap rates in primaries and secondaries converge; we’ve not seen that in retail and office, but we’ve seen that in multifamily. The issue is, is that this trend durable during a recession that will occur within another couple of years?”
12. Construction Industry To Continue Grappling With High Costs, Labor Shortage
Rising construction costs have been the No. 1 real estate and growth concern for respondents that participated in ULI’s Emerging Trends in Real Estate 2019 surveys. On a scale of one to five, five of the best importance, construction costs ranked 4.59, with property costs and housing costs and availability following near at 4.14 and 4, ULI reports.
“Growing construction costs may be the most undertold narrative of 2018 that has to become a substance story in 2019,” CCIM’s Conway said. Conway identified a number of factors exacerbating price and labor challenges in the construction industry, such as a decline in immigrant building laborers following the fiscal crisis, loony superstorms as a result of climate change which has led to enormous rebuilding efforts throughout the nation, and tariffs and the transaction war.
“Essential materials like steel,… toilet fixtures from China, timber from Canada, etc., are impacted. Pay attention to the quarterly revenue reports from construction materials companies regarding the sort of input cost increases being experienced. Caterpillar, by way of example, reported solid sales in Q3 2018, however, a large growth in substance inputs such as steel. The result is rising pressure on margins.
“This is the key takeaway regarding construction labor and material costs increases — margins will be squeezed, cost overruns incurred, and worth under pressure unless rents and [net operating income] can be increased to cover the increasing 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 that workplace net absorption is predicted to reach 37M SF in 2019, representing the business’s 10th consecutive year of positive absorption. Should the nation continue to experience strong office-using job growth in the new year, it could lead to strong absorption prices and renewed interest from investors.
“One part of office property expansion is the demand for more office space near amusement venues and other comforts. These office buildings are relying on smaller, more flexible workspaces. Coworking spaces also have become more common as professionals select alternative working methods,” Gerken informed Bisnow.
Nevertheless, Colliers’ Nelson anticipates office need will taper off in reaction to a slowdown in job development and robust supply amounts.
“requirement for office space will medium in response to slower job development, just as a substantial volume of projects already under construction starts to enter the market,” Nelson stated. “So vacancy will trend upward and lease growth will ease as market conditions become more competitive for landlords”
14. Retail Bankruptcies To Slow, Retailer Earnings To Stabilize
“The real estate business has undergone significant change in recent 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 shifts in the business,” TD Bank Head of Commercial Real Estate Gregg Gerken told Bishop.
Though a tide of merchants filed for bankruptcy and shuttered stores this year — such as Sears, Mattress Firm, Nine West and Claire’s — the circumstances surrounding most shop closures next year ought to be vastly different, CBRE’s Cordero said.
“I feel that the general industry opinion is that 2017 was probably the peak year [for retail closures]. I think there’ll continue to be closers in 2019 — it’s hard to say whether we will have more or less — but I’d say a lot of those closures that we will see in 2019 will be about what we predict portfolio rationalization or optimization when they’re about retailers that are failing.
“Retailers in many cases do need to shut stores to reorient their portfolios — therefore I do anticipate closures in 2019, but I do not really [connect ] a great deal of these closures as dying or failing retail, it’s more of morphing and adjusting retail,” Cordero said.
15. Multistory Warehouse Development From The U.S. To Accelerate
Conditions have ripened for multistory warehouse growth in the U.S., and this tendency will continue into 2019. Facilities are underway or have delivered in Seattle, San Francisco, New York, Miami and Chicago. While multistory warehouses are not anything new in Europe and Asia, the U.S. is in the beginning phases of developing these kinds of facilities today that building costs are no longer as cheap and there’s less available land than in the past, CBRE’s Levy explained. Unprecedented demand for logistics and warehouse space today has changed this dynamic.
“The rents which are being achieved in such multistory industrial [facilities] could be two or three times what you are seeing in traditional industrial. We think this particular tendency is only in the beginning in the USA,” Levy explained.
Though the lumps in rent are significant, CBRE Head of Industrial Research David Egan reported these multistory facilities can also present operational challenges for consumers.
“The users are going to need to change how they function in these buildings to make it work effectively,” he said. “The operational problems aren’t small — to alter the way they move inventory in and outside of these buildings isn’t 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 turned into a rather nascent concept — and it is no easy task. Grocers already battle low profit margins due to progressively declining food prices and fresh low-cost rivals like Aldi entering the marketplace. These challenges, coupled with costly online delivery costs, has maintained online grocery delivery in its infancy. But CBRE’s Cordero sees that trend shifting in 2019.
“Grocery is likely, among all the retail categories, one of the cheapest for online penetration. We believe because of a combination of technological progress, investment on the part of retailers and consumer demand, that we’re going to find a pretty important shift next year in grocery going on the internet and retailers that offer more to customers in that domain name,” she said.
17. Economic Development Teams Across The Country Continue To Feel The Effects Of HQ2 Competition
“An open competition like the Amazon HQ2 search is an chance for communities to redefine their own legacy image and showcase what is different in their economy now versus 10, 20 or even 30 years ago. The 238 communities that competed to the Amazon HQ2 are winning economic growth as a result,” CCIM’s Conway said.
“Amazon is using the data to site-select new fulfillment centers in places like Tucson, Arizona, and Birmingham, Alabama. Other major transport and e-commerce companies, such as Norfolk Southern Railroad, have utilized the data to make a relocation decision (in Norfolk Southern’s case, to Atlanta, that was among the 20 finalist cities for Amazon HQ2). In other words, the Amazon HQ2 research was to economic growth what the census is to demographics.”
18. U.S. Hotel Occupancy To Split Records In 2019
The hotel sector is anticipated to experience a record-breaking year of occupancy degrees in 2019, according to a forecast from CBRE Hotels America Research. Occupancy levels are predicted to spike to 66.2% following year, the 10th consecutive year of growth. This increase will be driven with a 2.1% increase in demand to offset the incoming supply.
That strong need may not be felt evenly across markets, Quadrum Hospitality Group President Foiz Ahmed stated.
“Though the hospitality sector continues to grow, the markets in which Quadrum is busy will stay relatively flat given their higher-than-national average occupancy rates. While ordinary daily rates are increasing nationwide, the industry will face some challenges as a result of rapid adoption of apps which provide discounted prices.”