18 Commercial Real Estate Trends To Dominate In 2019

Goodbye 2018, hi 2019! Since the new year approaches, Bishop spoke with many business execs, researchers and economists to discover the major trends expected to dominate the commercial property sector in the coming year. From the increase of opportunity zones to a slowdown in industrial absorption, these are 18 trends experts forecast for 2019.

1. Opportunity Zones Craze To Persist

As investors await finalized advice from the Department of the Treasury and the IRS concerning the Opportunity Zone program, the hunt is on for resources and investment opportunities in those 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 saying there’s more than $6 trillion in unrealized capital gains eligible to be deployed into opportunity zones.

Though the program was created via the departure of this Tax Cuts and Jobs Act last year to drive 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 considerable amount of investment ahead of the initiation of the new national program. Critics of the program stress it’ll accelerate investment in areas already experiencing a surge in development action, leading to a convergence of investment to burgeoning neighborhoods currently in high demand, and a lack of investment in otherwise blighted communities.

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

Industrial property demand jumped to new heights this past year, also CBRE Head of Industrial Research David Egan anticipates more of the same in 2019.

“I believe the market has outperformed this season, at least from consumer activity. There has been an overall expectation for a number of years that this can’t continue, and it turns out that hasn’t been true. We’ve got a huge amount of demand in the comps real estate for logistics properties of all kinds; of course the Class-A big-bulk warehouses are what get most of the attention, but the need is quite broad-based and extending all the way down to secondary and tertiary markets,” he said. “My expectation in 2019 is that we should see less or more of the same dynamic.”

Net absorption caused by e-commerce expansion is expected to moderate between 75M SF and 94M SF, same as this season, according to CBRE’s 2019 Outlook report, and a lack of new supply has pushed vacancy levels down to 4.3 percent, a historic low.

“Based on the demand that we are seeing in the e-commerce sector — as well as from conventional brick-and-mortar retailers that are entering or expanding in the online space — we can fully expect that e-commerce will continue to drive the marketplace annually,” Bridge Development Partners President Anthony Pricco said. “This is particularly true for infill sites proximate to the significant population centres. While the rising costs of land and construction could be viewed as emerging market headwinds, the upside of industrial growth remains exceptionally strong, as rents have been appreciating at an even faster rate.”

Egan told Bisnow that he wouldn’t be shocked if net absorption tapered off in 2019 due to new supply not keeping pace with strong demand levels.

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

3. Federal Reserve To Gradually 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%, a 50-year reduced, 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 economy.

“Inflation exists above the Fed’s target of 2 percent to 2.5%, with more job openings than jobless and more homebuyers than new housing stock. The Fed sees inflation forward and foremost and will continue a hike-pause-hike-pause routine in 2019 provided that GDP stays above 2% and unemployment below 5%,” CCIM Institute Chief Economist K.C. Conway stated.

The Fed boosted rates three times this year to a range of 2% to 2.25%, and many expect central bankers to bump 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 appeared less authoritative on its future path, the current market and most analysts anticipate another hike this month and 2 to four next year, as both inflation and wage growth surpass their targets,” Colliers International U.S. Chief Economist Andrew Nelson said. “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 customers. Additionally, digitally native (or even e-commerce just ) retailers will increasingly shift to open physical stores to cultivate their business and keep more customers, Cordero said.

“In terms of retail and real estate, I believe the retailers have sort of learned what to do. There is a good deal of investment, changes and closures that had to happen to adapt to omnichannel. More than 2018 a good deal of these investments finally started paying off.

“What we think is going to happen over 2019 is a true return to the shop. Retailers are now starting to realize the value of their real estate — they can not just close a store and rely on internet, they actually need the store for profit margins, customer care, client acquisition, for many reasons. I believe we’re going to find a lot of reinvesting in the shop and a lot of reinvesting in strategies 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 watching out for signs of the next recession, since the market nears its 10th year of growth — 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 the historic regularity suggests, however, this pattern has been the result of two imbalances — a construction inflation problem that needs the Fed to adopt a restrictive policy posture, or unprecedented fiscal imbalances.

“In that regard, there are not any obvious imbalances that have the potential to trigger a recession, so the present expansion is likely to settle into a protracted period of balanced, noninflationary growth”

Although U.S. economic growth and job earnings were strong in 2018, several economists and analysts predict the economy will likely slow in 2019 because of continuing short-term interest rate bumps by the Federal Reserve and waning fiscal stimulus from federal tax cuts.

“The inevitable disruption is probably the right 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 Need For U.S. Assets To Maintain Transaction Volume Powerful

“Though property markets peaked with this cycle in 2015, leasing and sales transaction activity remain strong and pricing firm,” Nelson informed Bisnow. “Transaction volume through Q3 2018 [was] 11% over its level for the comparable period this past year and is approaching the total closed in 2015 — the peak sales year with this particular cycle.

“While all four core sectors have contributed in this year’s profits, office and apartment — perennial investor favorites –‘ve posted the greatest sales totals and the strongest price appreciation to date. However, equally [will] probably slow sharply in the next two years, along with price appreciation and rent growth, since the economy slows or even turns negative”

7.

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 real estate companies are embracing the latest innovations to streamline work jobs and create a more paperless, transparent approach to sourcing deals, managing resources, assessing data and final transactions.

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

“As part of this effort, we’re seeing businesses that typically went through extended RFPs showing interest in piloting new products to determine which ones are workable. This helps them prove [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 industry, as costly land and development costs make it more hard 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 from the U.S. is having a massive effect on labour housing affordability in major cities. This influx of talent continues to be fueled by the need to be in near proximity to work, the ease of mass transit options, as well as the appeal of being in the center of this action in major metropolitan areas,” Brooks explained.

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

“Workforce housing will also remain appealing in 2019 due to demand outpacing available supply, thereby maintaining 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 capital, including institutional and foreign capital as well as traditional sources like smaller buyers. The appetite for labor housing is very strong for the greater property fundamentals and greater yields. Value-add investment will still dominate in 2019 and remain largely successful. Acquisitions of stabilized product are also attractive for some investors, particularly those who have 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 from the city to the suburbs in the last two years, according to the U.S. Census Bureau as reported by ULI. This has revived 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 accessibility to public transit that so resemble urban metros.

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

“The first stage is millennials moving into the suburbs for larger, cheaper homes and access to colleges, so decent single-family home and multifamily housing will be necessary. Retail follows rooftops, therefore retail growth to satisfy the new occupants’ needs will follow. Last, you may begin to see more emphasis on job centers as individuals decide they want 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 anticipated favorite for investors in 2019, along with multifamily assets, according to ULI’s 2019 Emerging Trends report. Deep-pocketed investors like Blackstone Group continue to gobble up whole portfolios of industrial assets at a rapid pace this year, such as its purchase of industrial REIT Gramercy Property Trust for $7.6B, a portfolio of last-mile logistics assets from Harvard University for nearly $1B plus 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 resources ripe for redevelopment and upgrades.

“Many shopping center properties are just not going to come back as successful retail resources. However, while few have been reduced in cost to mere property worth, many are well below replacement cost and also have good places for other applications,” ULI reports. “If a website is adequately big, mixed-use is a great option for close-in suburbs looking to exploit maturing millennials’ want to enter their following life-cycle phase. There also is a chance to turn the tables on the e-commerce trend 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 hunt for solid risk-adjusted returns continue to bypass gateway markets to bet on assets in burgeoning markets that are secondary, and the tendency is likely to continue in 2019.

“Due to the high rates and restricted opportunities in primary U.S. metros, investors are continuing to focus more on secondary markets, which are enjoying double-digit increase in investment activity and also much stronger price increases than at the primary (largely coastal) subway markets,” Colliers’ Nelson said. “But, those tendencies are likely to undo if/when we view the economic downturn, and investors find the safety of bigger, more liquid markets.”

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

“The disadvantage of the coin is it’s standard of late-cycle investment activity that you see a shift from primary to secondary in search of yields. What’s new is we have not seen that a compression of returns that would be average in late-market activity,” he said. “What happens is cap levels in primaries and secondaries converge; we have not seen that in office and retail, but we have seen that in multifamily. The question is, is this trend durable during a recession which will happen in another couple of years?”

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

Rising construction costs have been the No. 1 real estate and development concern for respondents that participated in ULI’s Emerging Trends in Real Estate 2019 survey. On a scale of one to five, five being of the greatest importance, construction prices ranked 4.59, with property costs and housing costs and availability following near at 4.14 and 4, ULI reports.

“Growing construction costs could possibly be the most undertold story of 2018 that should become a material narrative in 2019,” CCIM’s Conway stated. Conway identified a number of factors exacerbating cost and labour challenges in the construction business, such as a decrease in immigrant construction laborers after the fiscal crisis, loony superstorms as a consequence of climate change which has resulted in massive rebuilding efforts across the country, along with tariffs and the trade warfare.

“Key materials like steel,… toilet fixtures from China, lumber from Canada, etc., are impacted. Pay attention to the quarterly earnings reports from building materials companies as to the sort of input cost increases being experienced. Caterpillar, by way of instance, reported solid sales in Q3 2018, but a sizable rise in material inputs like steel. The result is growing pressure on margins.

“That is the key takeaway regarding construction labour and material prices increases — margins are going to be squeezed, cost overruns incurred, and worth under pressure unless rents and [net operating income] could be increased to cover the rising costs of new building,” 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 office net absorption is expected to reach 37M SF in 2019, representing the sector’s 10th consecutive year of positive absorption. Should the country continue to experience strong office-using job growth in the new year, it might lead to strong absorption prices and renewed interest from investors.

“One part of office property growth is the demand for more office space near entertainment venues and other amenities. These office buildings are relying on smaller, flexible workspaces. Working spaces also are becoming more common as professionals choose other working methods,” Green informed Bishop.

That said, Colliers’ Nelson expects office need will taper off in reaction to a downturn in job development and strong supply levels.

“Demand for office space will moderate in reaction to slower job creation, as a significant volume of projects already under construction starts to enter the market,” Nelson said. “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 retail real estate industry has experienced significant change in recent decades, 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 industry,” TD Bank Head of Commercial Real Estate Gregg Gerken told Bisnow.

Though a wave of retailers filed for bankruptcy and shuttered shops this year — such as Sears, Mattress Firm, Nine West and Claire’s — the circumstances surrounding most shop closures next year ought to be enormously different, CBRE’s Cordero said.

“I think the general industry sentiment is that 2017 was likely the summit [for retail closures]. I think there will continue to become closers in 2019 — it’s difficult to say whether we will have less or more — but I would say a great deal of those closures that we will find in 2019 will be about that which we call portfolio rationalization or optimization than they are about retailers which are failing.

“Retailers in lots of instances do need to close stores to reorient their portfolios — therefore I do expect closures in 2019, but I don’t actually [associate] a great deal of these closures as dying or neglecting retail, it’s more of morphing and adjusting retail,” Cordero said.

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

Requirements have ripened for multistory warehouse development in the U.S., and this tendency will continue into 2019. Facilities are detained or have already 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 at the beginning stages of developing these kinds of facilities today that construction prices are not as cheap and there is less available land than in earlier times CBRE’s Levy explained. Unprecedented demand for logistics and warehouse area now has changed that dynamic.

“The rents which are being achieved in these multistory industrial [facilities] may be just two or three times what you are seeing in traditional industrial. We believe this particular tendency is only at the beginning in the USA,” Levy explained.

Although the lumps in lease are substantial, CBRE Head of Industrial Research David Egan said 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 efficiently,” he said. “The operational problems aren’t small — to alter the way that they move stock in and out of those buildings isn’t a small little tweak”

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

Up to now, delivering new markets to customers’ doors has been a rather nascent concept — and it’s no easy task. Grocers already battle low profit margins because of increasingly declining food costs and new low-cost rivals like Aldi entering the market. The challenges, coupled with expensive online delivery expenses, has kept online grocery delivery in its infancy. But CBRE’s Cordero sees that tendency shifting in 2019.

“Grocery is likely, one of all of the retail classes, among the cheapest for internet penetration. We think due to a combination of technological advancement, investment on the part of retailers and customer demand, that we’re going to see a pretty important shift next year in grocery going online and retailers offering more to customers in that domain name,” she explained.

17. Economic Development Teams Round the Nation Continue To Feel The Impact Of HQ2 Competition

“An open competition like the Amazon HQ2 hunt is an opportunity for communities to redefine their heritage image and showcase what is different in their economy now versus 10, 20 or even 30 years back. The 238 communities which competed for the Amazon HQ2 are winning economic development as a result,” CCIM’s Conway said.

“Amazon is using the information to site select new fulfillment centers in places like Tucson, Arizona, and Birmingham, Alabama. Other major transport and e-commerce businesses, like Norfolk Southern Railroad, have utilized the data to create a relocation choice (in Norfolk Southern’s instance, to Atlanta, which was among the 20 finalist cities for Amazon HQ2). To put it differently, the Amazon HQ2 research was to economic growth precisely what the census is to demographics”

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

The hotel industry is expected to experience a record-breaking year of occupancy degrees in 2019, according to a prediction from CBRE Hotels America Research. Occupancy levels are expected to spike to 66.2% following year, the 10th successive year of expansion. This growth will be driven by a 2.1% increase in demand to cancel the incoming supply.

That strong need may not be felt evenly across markets, Quadrum Hospitality Group President Foiz Ahmed stated.

“Though the hospitality sector keeps growing, the economies where Quadrum is busy will remain relatively flat given their higher-than-national average occupancy rates. While ordinary daily rates are increasing nationwide, the business will likely face some challenges due to the rapid adoption of programs that provide discounted rates.”