Commercial Real Estate: Economy keeps going strong, but CRE investors are a little uneasy

With the US economy on the cusp of its longest expansion in history, the commercial real estate (CRE) market is expected to perform reasonably well in 2019.

Ken Riggs, President of Situs RERC, says, “Investors are traveling into uncharted territory as the US economy’s expansion approaches its 10-year anniversary in July 2019, which would break the record for the longest economic expansion. There is no guarantee that we will pass the milestone; there are potential disruptors for the economy – global geopolitical turmoil and anticipated increases in interest rates. The good news for CRE investors is that solid property fundamentals are underlying strong valuations.”

This is one of the key findings of the annual forecast report released this week by Situs RERC, Deloitte and the National Association of REALTORS® in their annual forecast report: Expectations & Market Realities in Real Estate 2019 – Uncharted Territory. This report reviews 2018 CRE trends in the economy, capital markets, residential and commercial real estate (CRE) markets, and provides their joint predictions for real estate in 2019.

Despite the good news, CRE investors are worried because they know nothing good lasts forever. In 2018, the stock market rode a roller coaster and ended down for the year. So investors enter 2019 asking the question: What will the year bring for the US and global economies and the commercial real estate (CRE) market?

All the property types seem to be holding their own – including retail, which has struggled in recent years due to overbuilding and the rise in e-commerce. Surviving retailers are learning how to adapt to new technology and changes in consumer shopping tastes. As more consumers make online purchases, the demand for industrial space keeps growing. The apartment sector exhibits renewed strength, thanks, in part, to a continuing problem with affordability for single-family housing. In the hotel sector, room supply, room demand, occupancy, ADR, RevPAR and room revenue are at all-time highs. The office sector has been spurred by increased investment in non-major and suburban markets.

“With pricing gains now slowing to more of a measured pace, and net operating income continuing on pace with a slow level of growth, CRE will rely on income to drive total returns moving forward versus price appreciation. This is especially true of the gateway cities and major core assets. But all the property types seem to be holding their own – even retail, which has struggled in recent years to adjust to the rise in e-commerce,” adds Matt Kimmel, Principal at Deloitte Transactions and Business Analytics LLP.

“Backed by continued strength in the labor market, the outlook for the CRE sector looks strong in 2019,” states George Ratiu, NAR Director, Housing & Commercial Research. “Low unemployment is expected to push wage growth higher, which in turn is expected to ramp up consumer spending and elevate demand for both renting and buying real estate. However, rising mortgage rates pose a small threat to weaker housing affordability this year, and may put downward pressure on single-family home prices.”

Other key findings include:

  • Favorable economic conditions, including historic employment gains, are expected to allow room for rent growth in many property sectors. This is despite uncertainty about how long the expansion can last.
  • Prices are inflated in many markets, including CRE markets, but the underlying confidence on value of CRE generally supports the prices being paid today.
  • The industrial sector will likely have the most favorable near-term fundamentals, with the boom in e-commerce fueling demand.

The Expectations & Market Realities in Real Estate report is built on knowledgeable insights from the recognized real estate authorities of Situs RERC, the National Association of REALTORS® (NAR) and Deloitte with experience across all property types worldwide. Collectively, the three firms operate in 50 countries around the globe and employ thousands of real estate professionals.

To access a free copy of this report, click here.

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