Posted on May 15, 2019
Commercial Real Estate Trends to Watch in 2019 and Beyond
Commercial real estate ended 2018 on a high note, but has the industry missed any beats in 2019? The answer depends on how closely you attend to the trends, many of them long-developing, just now beginning to exert their influence in the marketplace.
We’ve asked the research, insights, and valuation experts here at LPA to share their thoughts about what the immediate future holds for owners of and investors in commercial property. Here are the top 5 commercial real estate challenges and opportunities our analysts are monitoring in 2019.
The millennials are coming
Millennials are aging. Now in their 30s, this huge (and hugely influential) demographic is leaving the city for the suburbs. But are the suburbs ready for millennials, their young families, and their sensibilities? For example, hip, trendy retails will need to rethink their urban-only storefronts, while employers may need to scout for office options beyond downtown. Additionally, millennials want easy access to mass transit. Metropolitan areas served by public transportation that connects commercial centers to residential neighborhoods therefore stand to reap the biggest benefits of the millennial migration. Nevertheless, millennials are only gradually likely to raise their historically low homeownership rate, meaning suburban rental properties may only increase in value.
The Opportunity Zone boom
Created by the 2017 Tax Cuts and Job Act, the Opportunity Zone program incentivizes the deferment (or elimination) of capital gains taxes by promoting investment in commercial and residential development in 8,700 specially designated areas across the United States. By lowering the risk associated with investing in previously underdeveloped and underserved communities, the program has sparked something of a gold rush. One developer in the Midwest has already pledged to pour $1 billion into Opportunity Zone projects and anticipates that this investment could grow to $20 billion by 2030. Yet questions about the program linger. Will acquisition costs, plus CapEx and OpEx, wipe out the potential tax savings? And what constitutes a reasonable return on such investment? Still, Opportunity Zones present a lot of upside, and those who find success early will also gain the expertise they need to control properties with even greater future potential.
Thinking outside the big box
Shuttered big-box stores have long been considered a form of blight. But CRE developers are getting rather innovative in their repurposing of these spaces and the massive footprint they leave. Some are carving up the original storefronts, creating new configurations of retail and restaurant spaces. Others are completely renovating, transforming them into residential, office or entertainment facilities. Credit co-tenancy clauses for this shift—or, rather, new legal precedents for the interpretation and enforcement of these key lease agreements provisions. For many businesses, the prospect of collaborating and evolving into new, multi-use concept together is more attractive than running a traditionally solo operation. Luckily, the multi-use concept aligns with shoppers’ values as well, giving retailers a better shot at keeping that “Open” sign in their window lit.
The rising cost of building
Unfortunately, other economic and social forces are driving up the price of new construction. That includes both tariffs on Chinese steel and Canadian lumber. Combine these international trade policies with a skilled labor shortage and the consequences for the CRE industry start to look quite serious. Not only are tenants facing higher maintenance fee and occupancy costs, but contractors and building service providers now must budget with tighter margins in mind. Rent increases are a real possibility barring an about-face from the White House, and investors should plan accordingly.
Industrial space scarcity
Vacancy rates in industrial spaces have dropped to an unprecedented 4.3 percent, with further drops a virtual certainty. The reason? E-commerce, which still has its own brick-and-mortar needs—namely, warehousing and distribution centers. Additionally, as more and more established companies adopt digital technology to cut down on the costs associated with operating traditional retail outlets, industrial spaces will remain both scare and in high-demand.
How are you planning to prosper in 2019?