Although it might seem that 2019 forecasts for commercial real estate investment represent a textbook study in Good News/Bad News predictions, there are some indicators that, at the very least, there are some reasons for concern. Although demand for housing is still high in most urban areas, so are prices and they continue to rise, but there are mixed signs across all CRE sectors.
Business, particularly retail sales, posted slowdowns at the end of 2018, and that is worrisome for CRE investors and developers. However, any current assessments might seem more like guesses than educated predictions backed up by facts, figures and identifiable trends. Part of the problem with forecasting this year is the mixed signals coming from almost every sector—government, business, the Federal Reserve, Wall Street and the global economy.
Aside from adopting a wait and see attitude, there are positive signs pointing to moderate gains in specific areas. There is also a continuing belief that a recession is due, if not this year, then certainly by 2020. And there are other signs that investors will become more cautious and deliberate, but that may also be a plus in terms of future returns.
Industrial Zone Strength
Joseph J. Ori at GlobeSt.com cites growth, investor capital and robust demand as the factors that will spur continued growth in the industrial zone. He notes especially the effects of e-commerce growth, strong customer demand for next day deliveries, and high consumer optimism. adding that the average rent growth was 7.8 percent over the last two and a half years, and that during the first half of 2018, 128 million square feet of industrial space was absorbed.
The Opportunity Zones established by the passage of the 2017 Tax Cut and Jobs Act is poised to introduce additional investment capital and create far-reaching potential for new business development in underdeveloped and low-income regions. Minnesota's 128 targeted opportunity zones, including the City of Duluth, stand ready to utilize available investment funding to add new growth and stability to some blighted areas. The first of the state's investment funds was recently launched with a goal of attracting $100 million in investment dollars to be distributed to spur low and modern income development in smaller Minnesota communities. Investors will reap substantial reinvestment tax benefits under the program.
The Growth of REIT Asset Value
Ori also singles out 2017 as a turning point in the health of the Carver County commercial real estate REIT market, adding that the introduction of Blackstone REIT with its sales of shares at a monthly per share net asset value introduced a profound improvement in the health of the REIT investment market. He sees that as continuing in the coming year, and singles out additional players that include Nuveen, Starwood Capital, and Jones Lang LaSalle.
Class B Mall Gains
Even though the past four years have been brutal for some Class B malls, Ori believes that the surge of bankruptcies and failures that occurred are now in the past, and that the future looks bright for this market sector. He cites decreasing competition from national retailers for available consumer spend, and looks to higher rents and better occupancy rates, in addition to higher values and more sales.
The Role of Technology
Innovative technology is also viewed as a player in the CRE investment scene during the coming year. Because the widespread belief exists that a downturn is in the offing, more investors are likely to be more cautious in their decision-making, according to Liam Kerins, writing for Captivate.com. He believes that the role of new technology, including drones, meeting tenant communication and management objectives, online leasing capabilities, data analysis and the occupant experience will all have an effect.
The need to build ongoing relationships, particularly between real estate managers and tenants is also expected to impact the commercial real estate market, prompting more human interaction, just as the expectation of a work-life balance has affected office development and facility design. Rather than simple energy efficiency and sustainable materials, new buildings are more likely to focus on overall health and wellness of employees and the work force.
One thing about 2019 may not be open to debate. Changes are in the air. That may be the most pertinent—and the most predictable—message concerning the future of commercial real estate.