CRE’s Tailwinds and Headwinds for 2019

Gregg Gerken

The commercial real estate industry has displayed signs of continued health so far this year, but a number of risks and influencing factors remain.

There is slowing of transaction volume because current valuations are more challenging given the competitive nature of the market. In addition, the length of the economic recovery and changing tenant and investor expectations are redefining the market.

A number of trends are impacting all four major property assets. Demographic shifts, for example, will remain an issue for the industry as a large number of retiring baby boomers give way to the wave of Millennials starting careers and buying their first homes. Millennials continue to seek amenity-based housing within close proximity to stores, work, transportation and restaurants. That’s  driving demand for retail space in urban environments.

As we transition into 2019, many are wondering what the future holds for commercial real estate lending. Following is an overview of the top trends across the four major asset classes: multifamily, retail, office and industrial.

Multifamily

Over the past few years, the multifamily market has experienced a great deal of lender and investor interest, with attention on markets such as Austin and Dallas, Texas; Charlotte, N.C., and Atlanta. Whether as a result of wage- and job-growth patterns, the changing priorities among a new generation of households or some combination of those variables, there continues to be opportunity for investors in the multifamily market.

There is also a growing need for affordable housing across the country. According to the U.S. Department of Housing and Urban Development, an estimated 12 million households now pay more than 50 percent of their annual income for housing—a ratio of more than 30 percent is considered cost burdened.

Why is that? The number of households needing affordable housing has grown and the supply has not kept pace. In the years ahead, the industry will need to pursue different zoning and subsidy financing to find a solution.

Retail

According to the National Retail Federation, consumers on average had planned to spend $1,007 on holiday purchases in December of 2018. Despite stronger sales, the retail real estate industry continues to experience significant change and the transformation is profound. The convergence of brick-and-mortar and online retail will continue to create major seismic shifts in the industry. In the past year, brick-and-mortar stores have closed at a record pace, while online retailers such as Amazon and Walmart continue to grow. 

Urbanization also has had a big impact on the retail real estate industry in both suburban and metro markets. Within the suburban market, retailers may be at a risk of having too much brick-and-mortar space, given many young families are opting to live in urban areas.

Office

Robust hiring continued in 2018 and knocked the unemployment rate to the lowest level since 1969. Last December, the jobless rate was 3.9 percent. While this was an increase from the previous month, it’s still historically low.

One portion of office real estate expansion is the demand for more mixed-use office space in newer, trendy urban neighborhoods. These office buildings are relying on smaller more flexible workspaces. Co-working spaces also have become more common as professionals choose alternative working methods. Owners and developers of suburban office space need to set their sights on offering amenities that mimic urban-styles such as proximity to transit, retail, restaurants and more.

Green buildings remain a priority for the office sector. There are many benefits to building green, including improving operational efficiency, potentially lowering energy costs and meeting building-code requirements. Tenants place a high demand on green buildings and WELL Building Standards, a performance-based system for monitoring building features that have a positive impact on health and productivity.

Industrial

Consumer-buying behaviors are not only impacting retail real estate. They also have significant influence on industrial properties. Consumers’ need for immediacy and convenience is driving demand for additional distribution centers across the U.S. A majority of retailers and e-commerce sites are pursuing distribution centers within close proximity to the biggest U.S. cities.

Ultimately, macro-economic signs point to a healthy financial landscape as we transition into 2019. Changing market trends, however, including global and political uncertainty, are expected to have a significant impact on the real estate and business communities going forward. The best course of action for both investors and lenders is to remain disciplined, with a focus on the changing supply and demand equation.