Looking back on the past few months, it’s safe to say that a strong economy continued to fuel the United States’ commercial real estate market in 2018. And while the industry is expected to face a bit of pushback in the form of rising interest rates, tightening credit, and uncertainty concerning the geopolitical climate, many commercial real estate experts remain optimistic on the market as we head further into the New Year, particularly as the longer-term effects of tax reform come into focus.
So, regardless of your role in the CRE industry, which commercial real estate trends should you be on the lookout for this year? The experts at Valbridge are here to break down the top commercial real estate trends 2019. Let’s take a closer look at what you should expect, and which movements you should definitely keep on your radar.
Top Commercial Real Estate Trends 2019
Potential Decreases in Office Construction
With the implementation of many new businesses, the demand for modern office environments is definitely on the rise, both in the form of traditional companies and new innovative start-ups.
Throughout 2018, the new-space demand was met with successful office construction. In fact, nearly 60 percent of all new office spaces were leased as soon as building was complete last year.
However, according to the U.S. housing market predictions for 2019, office construction might not be as positive as they were panning out to be. Experts predict developers will start pulling back for a number of reasons. Among these reasons are increasing construction costs, real estate cycle concerns, and zoning problems.
A projected 54.7 million square feet of new office construction in 2019 would mean an 18 percent drop from the 2018 figure (expected to be 68.4 million sq/ft).
Industrial Boom Looks to Move Forward
Based on the demand stemming from the e-commerce sector — as well as from traditional brick-and-mortar retailers that are entering or expanding in the online space — the pros at Valbridge fully expect that e-commerce will continue to drive the market in 2019. This holds especially true for e-commerce fulfillment sites proximate to the major population centers.
While the rising costs of land and construction could be viewed as emerging market headwinds, the upside of industrial development is still exceptionally strong for 2019, as rents have been appreciating at an even faster pace.
Commercial Asset Pricing is on the Rise
According to Real Capital Analytics’ Commercial Property Price Indices, overall pricing in the U.S. housing market has increased 6.5 percent year after year.
Although every real estate sector has experienced price increases, the commercial sector has hit record-high pricing levels. Apartments, industrial, and suburban office assets have the largest boosts, with prices rising 11.6 percent, 6.5 percent, and 6 percent, respectively. So, in general, property prices are increasing at modest rates, with cap rates remaining stable.
Multi-Family Investing Rates Climb Higher
One of the strongest commercial real estate trends of 2019 is being noticed in the multi-family sector. After all, multi-family real estate transactions throughout 2018 led to an increase in sales volume of 8 percent to $70 billion year after year.
Investor’s eyes are definitely on multi-family properties in the market this year. It’s one of the sectors to keep a close eye on. Now they’re the best-selling assets of the major property sectors, but they haven’t always been on top. Ten years ago, the highest sales volume was seen in commercial office properties.
Opportunity Grows in Opportunity Zones
2019 is looking as though it may be a “Gold Rush” year for the Opportunity Zone program, created by the 2017 Tax Cuts and Jobs Act to leverage private capital to improve distressed areas across the nation.
Under the program, investors can invest unrealized capital gains in an Opportunity Fund that, in turn, finances residential or commercial development, or even business enterprises, within the designated Opportunity Zone census tracts. The longer investors leave their money in the fund, the more tax forgiveness they get.
Opportunity Zones have the potential to pump equity into distressed communities with less risk than existed before the funds were created. We believe that, in 2019, a lot of people are going to flock to Opportunity Zones – and there are already investment funds established with billions of dollars in them doing so.
Office Central Business District and Retail Seeing Weakest Numbers
Offices in the central business district (CBD) in the United States were the only sector experiencing a drop in price appreciation at the end of 2018. This decline (about 2.2 percent) triggered a pullback in office CBD investment volume. Office CBD sales are down 17 percent compared to a 10 percent drop in suburban office sales.
The retail sector isn’t performing much better, based on the commercial real estate trends for 2019.
Demand has been relatively weak and retail continues to slip (as we touched on earlier, with the dominance of e-commerce). Retail pricing isn’t increasing at the same pace of the other property types in the commercial real estate market. So, retail and office CBD might not be the best investment for 2019. Again, we’re seeing a bigger push toward industrial fulfillment centers and warehouses.
Final Thoughts on Commercial Real Estate Trends 2019
To sum everything up, having the upper hand in the commercial real estate market through 2019 means knowing what to expect. Commercial investors need to be proactive by keeping track of commercial real estate trends. Doing a little bit of research on investment properties will point you in the right direction.
Keep these commercial real estate trends in mind as we move deeper into 2019. In the meantime, garner more crucial insights by working together with the professionals at Valbridge Property Advisors. We’re here to help you make the best and most informed CRE decisions.