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18 Commercial Real Estate Trends To Dominate In 2019

Commercial real estate data

Goodbye 2018, hi 2019! As the new year approaches, Bishop talked with many industry execs, economists and researchers to discover the major trends expected to dominate the commercial real estate industry in the upcoming year. From the increase of opportunity zones to a downturn in industrial absorption, these are 18 trends experts predict for 2019.

commercial real estate trends

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 search is on for resources and investment opportunities in those designated areas that present the most powerful upside potential. Investors are lining up to pour billions to Opportunity Zone Funds, using a report by Real Capital Analytics saying there is more than $6 trillion in unrealized capital gains eligible to be set up into potential zones.

Though the program was created via the departure of the Tax Cuts and Jobs Act last year to induce economic growth in underserved communities in exchange for a hefty tax break, study reveals many of the census tracts classified as chance zones have already brought a considerable amount of investment prior to the launch of the new federal plan. Critics of the program stress it'll accelerate investment in areas already experiencing a surge in development activity, leading to a convergence of investment to burgeoning neighborhoods already in high demand, and a lack of 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 property demand soared to new heights this past season, also CBRE Head of Industrial Research David Egan expects more of the exact same in 2019.

"I believe the market has outperformed this year, at least from user action. There has been an overall expectation for a number of years that this can not continue, and it ends up that hasn't been true. We've got a huge quantity of demand in the marketplace for logistics properties of all kinds; obviously the most Class-A big-bulk warehouses are exactly what capture the majority of the attention, but the need is very broad-based and extending all the way down to secondary and tertiary markets," he said. "My anticipation in 2019 is that we ought to see less or more of the same dynamic."

Web absorption caused by e-commerce growth is expected to moderate between 75M SF and 94M SFexactly the same as this season, according to CBRE's 2019 Outlook report, and a lack of new supply has driven vacancy amounts down to 4.3 percent, a historic low.

"Based on the demand that we're seeing from the e-commerce industry -- as well as from conventional brick-and-mortar retailers that are entering or expanding into the online space -- we could fully expect that e-commerce will continue to drive the marketplace annually," Bridge Development Partners President Anthony Pricco explained. "This is particularly true for infill sites proximate to the significant population centers. While the increasing costs of construction and land could be seen as emerging economy headwinds, the upside of industrial growth is still exceptionally strong, as rents have been appreciating at a much quicker rate."

Egan told Bisnow that he wouldn't be surprised if net absorption tapered off in 2019 because of new distribution not keeping pace with strong demand levels.

"You can only absorb what is available," he explained. "While we hope to see supply-demand relatively in check, those growth metrics will still 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 steady at 3.7%, a 50-year reduced, Fed officials hint that they will likely continue their path of activity in 2019 to gradually boost short-term interest levels to temper inflation and maintain a stable market.

"Inflation exists over the Fed's target of 2% to 2.5%, with more job openings than jobless and more homebuyers than brand new home inventory. The Fed sees inflation forward first and foremost and will continue on a hike-pause-hike-pause pattern in 2019 provided that GDP remains above 2 percent and unemployment below 5%," CCIM Institute Chief Economist K.C. Conway said.

The Fed boosted prices three times this year to a range of 2% to 2.25 percent, and several expect central bankers to bump prices again in December. Big Wall Street banks polled by Reuters expect central bankers to increase rates another 3 times in 2019.

"Though 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 next year, 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 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 start reinvesting in their physical footprints to accomplish 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 business and keep more customers, Cordero said.

"In relation to retail and real estate, I believe the retailers have finally sort of heard things to do. There is a good deal of investment, changes and closures that needed to happen to adapt to omnichannel. More than 2018 a good deal of these investments eventually started to pay off.

"What we think is going to occur over 2019 is a true return to the shop. Retailers are finally beginning to understand the value of their real estate -- they can not just close a shop and rely on internet, they really need the shop for profit margins, consumer care, customer acquisition, for lots of reasons. I think we are going to see a great deal of reinvesting from the store and a lot of reinvesting in strategies to attempt to get people into the shop," Cordero said.

5. Industry To Continue Reading The Tea Leaves To Predict The Next Downturn

Everybody is watching out for signs of the next recession, as the market nears its 10th year of expansion -- its longest period of expansion ever.

"In the history 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 said. "A careful evaluation of this historical regularity indicates, however, that this routine has been the consequence of two imbalances -- a building inflation problem that needs the Fed to adopt a more restrictive policy position, or unprecedented financial imbalances.

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

Although U.S. economic growth and job gains were strong in 2018, some economists and analysts forecast the market will likely slow in 2019 because of continuing short-term interest rate lumps by the Federal Reserve and waning financial stimulus from federal tax reductions.

"Inevitable disruption is most likely the right risk strategy mode to be in for 2019. Real estate is not immune from business cycles, economic recessions or tumultuous black swan events -- like a trade war, currency meltdown or cyberterrorism," Conway said.

6. Investor Demand For U.S. Assets To Keep Transaction Volume Strong

"Though property markets peaked for this cycle in 2015, sales and leasing trade activity remain robust and pricing firm," Nelson informed Bisnow. "Transaction quantity through Q3 2018 [has been ] 11% above its level for the comparable period this past year and is approaching the total closed in 2015 -- the peak sales year for this cycle.

"While all four core sectors have contributed in this year's profits, office and apartment -- perennial investor favorites -- have posted the highest sales totals and the most powerful price appreciation thus far. However, equally [will] probably slow sharply in the next two decades, together with price appreciation and lease growth, as the market slows or even turns negative"

7. Industrywide PropTech Adoption To Accelerate

Commercial real estate professionals -- from operators and owners to brokers and architects -- may no longer deny the impact technology is having on the industry. More real estate firms are embracing the most recent innovations to streamline perform tasks and make a more paperless, transparent approach to sourcing deals, managing resources, assessing data and closing trades.

Mihir Shah, co-CEO of JLL Spark -- JLL's PropTech division that has a $100M global fund dedicated to investing in real estate tech firms -- told Bishop that PropTech companies have become increasingly precious as their products have helped property companies further their initiatives.

"As part of the effort, we are seeing businesses that typically went through extended RFPs showing interest in new products to see which ones are workable. This helps them prove [return on investment] quicker and helps the winners grow faster," Shah said. "This willingness to try new things will help PropTech adoption in 2019 and outside."

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

Requirement for accessible and affordable workforce housing options will remain a topic of interest from the multifamily sector, as expensive land and development costs make it increasingly difficult to construct affordable housing from the bottom up. This is particularly a pain stage in urban metros, JPMorgan Chase Head of Commercial Real Estate Al Brooks advised Bisnow.

"The ongoing job growth we have been experiencing in the U.S. is having a huge impact on workforce housing affordability in important cities. This influx of talent is still fueled by the need to be in close proximity to work, the ease of mass transit options, in addition to the allure of being at the center of this action in major metropolitan areas," Brooks said.

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

"Workforce housing will also stay appealing in 2019 due to demand outpacing available supply, thereby keeping vacancy rates reduced and leasing growth above the overall multifamily market.

"Investor interest will also stay very high in 2019. Interest is coming from all sorts of capital, including foreign and institutional capital as well as traditional sources like smaller private buyers. The desire for labor housing is very strong for the better property fundamentals and greater yields. Value-add investment will likely still predominate in 2019 and stay largely successful. Acquisitions of stabilized merchandise will also be appealing for some investors, particularly 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. Over 2.6 million Americans relocated from the city to the suburbs in the previous two years, according to the U.S. Census Bureau as reported by ULI. This has renewed investor interest and confidence in pick non-gateway markets, ULI reports in its own 2019 Trends survey. "Hipsturbias" or"Urban-burbs" have been used to classify these suburban markets with greater walkability and access to public transit which resemble urban metros.

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

"The first phase is millennials moving to the suburbs for larger, more affordable homes and access to colleges, so decent single-family home and multifamily housing will be necessary. Retail follows rooftops, so retail development to meet the new occupants' needs will follow. Last, you might start to see more emphasis on job facilities as individuals decide they want to operate closer to where they reside." 10. Investors To Favor Industrial, Multifamily And Retail Assets From The New Year

It comes as no surprise that industrial property assets are an anticipated favorite for investors in 2019, along with multifamily assets, based on ULI's 2019 Emerging Trends report. Deep-pocketed investors such as Blackstone Group continue to gobble up entire portfolios of industrial resources at a rapid 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 also a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.

More interesting is the fact that retail is expected to attract attention from shareholders in 2019, especially those assets ripe for redevelopment and updates.

"Many shopping centre properties are simply not going to return as successful retail resources. However, while few have been reduced in cost to a mere land worth, many are well below replacement cost and have good locations for alternative applications," ULI reports. "If a website is adequately big, mixed-use is a great option for close-in suburbs appearing to exploit maturing millennials' desire to input their next life-cycle phase. There is a chance to turn the tables around the e-commerce fashion that fostered the obsolescence by redevelopment into supply facilities."

11. Investors To Keep Flocking To Secondary, Tertiary Markets For Yield

Commercial property investors on the hunt for solid risk-adjusted returns continue to skip entry markets to gamble on assets in burgeoning secondary markets, as well as the trend is likely to last in 2019.

"Due to the high rates and limited opportunities in main U.S. metros, investors are continuing to concentrate more on secondary markets, that are appreciating double-digit increase in investment activity and also much stronger price increases than at the primary (mostly coastal) metro markets," Colliers' Nelson said. "But, those trends are likely to reverse if/when we see the economic downturn, and investors find the safety of bigger, more liquid markets."

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

"The downside of the coin is it is standard of late-cycle investment action that you find a change from primary to secondary in search of yields. What's new is we've not seen a compression of yields that would be average in late-market activity," he said. "What occurs is cap levels in primaries and secondaries converge; we have not seen that in office and retail, but we have seen that at multifamily. The issue is, is that this trend durable during a recession which will occur within another couple of years?"

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

Increasing construction costs were the No. 1 property and development 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, together with land costs and housing prices and availability following near at 4.14 and 4, ULI reports.

"Growing construction costs may be the most understood narrative of 2018 that has to become a substance narrative in 2019," CCIM's Conway stated. Conway identified a number of factors exacerbating cost and labour challenges in the building industry, such as a decline in immigrant construction laborers following the financial crisis, loony superstorms as a consequence of climate change which has resulted in massive rebuilding efforts across the nation, and tariffs and the transaction war.

"Key materials such as steel,... toilet fittings from China, timber from Canada, etc., are affected. Pay attention to the quarterly earnings reports from building materials companies regarding the kind of input cost increases being experienced. Caterpillar, for instance, reported solid sales in Q3 2018, however, a sizable rise in material inputs like steel. The outcome is rising pressure on margins.

"This is the key takeaway regarding construction labour and material costs increases -- margins will be squeezed, cost overruns incurred, and worth under pressure unless rents and [internet operating income] can be raised to cover the rising costs of new building," Conway said.

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

CBRE stated in its 2019 U.S. Outlook report which office 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 cause strong absorption rates and renewed interest from shareholders.

"One part of office property expansion is the requirement for more office space near amusement venues and other comforts. These office buildings are relying on smaller, more flexible workspaces. Working spaces also are becoming more common as professionals choose other working procedures," Gerken informed Bisnow.

That said, Colliers' Nelson anticipates office demand will taper off in reaction to a downturn in job development and strong supply levels.

"Demand for office space will medium in response to slower job development, just as a significant quantity of projects already under construction starts to enter the current market," Nelson stated. "So vacancy will trend up and rent growth will ease as market conditions become more aggressive 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 deep and will continue throughout 2019. The convergence of brick-and-mortar and internet retail will continue to create major seismic changes in the industry," TD Bank Head of Commercial Real Estate Gregg Gerken told Bishop.

Though a tide of merchants filed for bankruptcy and shuttered stores this season -- including Sears, Mattress Firm, Nine West and Claire's -- the situation surrounding most shop closures next year ought to be vastly different, CBRE's Cordero explained.

"I feel that the general industry opinion is that 2017 was likely the summit [for retail closures]. I think there will continue to become closers in 2019 -- it is hard to say whether we will have more or less -- but I would say a lot of the closures that we will find in 2019 will be about that which we call portfolio rationalization or optimization than they're about retailers that are failing.

"Retailers in many cases do need to close shops to reorient their portfolios -- therefore I really do anticipate closures at 2019, but I don't actually [connect ] a lot of those closures as dying or neglecting retail, it's more of morphing and adjusting retail," Cordero said.

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

Requirements have ripened for multistory warehouse development from the U.S., and this trend will continue into 2019. Facilities are detained or have already 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 in the beginning phases of developing these kinds of facilities today that building costs are not as cheap and there is less available land than in earlier times CBRE's Levy explained. Unprecedented demand for logistics and warehouse space now has changed this dynamic.

"The rents which are being achieved in such multistory industrial [centers ] may be two or three times what you're seeing in conventional industrial. We believe this particular tendency is only at the beginning in the United States," 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 have to alter how that they function in such buildings to make it work efficiently," he explained. "The operational problems are not small -- to change how they move inventory in and outside of those buildings is not a small little tweak."

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

Up to now, delivering fresh markets to consumers' doors has turned into a rather nascent concept -- and it's no simple job. Grocers already combat low profit margins because of increasingly declining food costs and new low-cost competitions like Aldi entering the marketplace. These challenges, coupled with expensive online delivery costs, has maintained online grocery delivery in its infancy. However, CBRE's Cordero sees that tendency changing in 2019.

"Grocery is probably, one of all the retail classes, one of the lowest for online penetration. We believe because of a mixture of technological progress, investment on the part of retailers and customer demand, that we're likely to see a pretty significant shift next year at grocery going online and retailers offering more to consumers in that domain," she explained.

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

"An open competition like the Amazon HQ2 search is an opportunity for communities to redefine their own legacy image and showcase what's different in their economy today versus 10, 20 or 30 years back. The 238 communities which competed for the Amazon HQ2 are winning economic growth as a result," 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 transport and e-commerce businesses, like Norfolk Southern Railroad, have used the data to create a relocation decision (in Norfolk Southern's instance, to Atlanta, that was one of 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 expected to undergo a record-breaking year of occupancy degrees in 2019, according to a prediction from CBRE Hotels America Research. Occupancy levels are expected to surge to 66.2% following year, the 10th successive year of growth. This growth will be driven with a 2.1% growth in demand to offset the incoming supply.

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

"Though the hospitality sector continues to grow, the economies where Quadrum is active will remain relatively horizontal given their higher-than-national average occupancy prices. While average daily rates are increasing nationwide, the industry will likely face some challenges as a result of rapid adoption of apps that provide discounted rates."