Goodbye 2018, hi 2019! Since the new year approaches, Bishop talked with many industry execs, economists and researchers to uncover the significant tendencies expected to dominate the commercial property sector in the upcoming year. By the increase of opportunity zones into a slowdown in industrial absorption, these are 18 tendencies experts predict for 2019.

1.

As investors await finalized guidance from the Department of the Treasury and the IRS regarding the Opportunity Zone program, the hunt is on for resources and investment opportunities in these designated areas that present the strongest upside potential. Investors are lining up to pour billions into Opportunity Zone Funds, with a report from Real Capital Analytics saying there is more than $6 trillion in unrealized capital gains qualified to be deployed into potential zones.

Though the program was made via the departure of the Tax Cuts and Jobs Act annually to induce economic development in underserved communities in exchange for a hefty tax break, research shows many of the census tracts classified as chance zones have already attracted a considerable amount of investment prior to the launch of the new national program. Critics of this program worry it will accelerate investment in areas already experiencing a surge in growth action, leading to a convergence of investment into burgeoning neighborhoods currently in high demand, and a lack of investment in otherwise blighted communities.

2. Industrial Boom To Keep Thanks To High Demand From E-Commerce Players, Though A Few Headwinds May Surface

Industrial property demand jumped to new heights this past season, also CBRE Head of Industrial Research David Egan expects more of the exact same in 2019.

“I think that the marketplace has outperformed this season, at least from consumer action. There’s been an overall expectation for quite a few years that this can’t last and it ends up that has not been true. We have a massive amount of demand in the marketplace for logistics properties of all types; obviously the Class-A big-bulk warehouses are what get most of the attention, but the need is very broad-based and extending all the way down to secondary and tertiary markets,” he explained. “My expectation in 2019 is that we ought to see less or more of the exact same dynamic.”

Web absorption caused by e-commerce expansion 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%, a historic low.

“According to the requirement that we are seeing in the e-commerce industry — and from conventional brick-and-mortar retailers which are entering or expanding in the internet space — we could fully anticipate that e-commerce will continue to drive the market next year,” Bridge Development Partners President Anthony Pricco said. “This is particularly true for infill 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 growth is still exceptionally strong, as rents have been enjoying at an even quicker rate.”

Egan advised Bisnow that he wouldn’t be surprised if internet absorption tapered off in 2019 because of new supply not keeping pace with robust demand amounts.

“You can only absorb what is available,” he said. “While we hope to see supply-demand relatively in check, those growth metrics will continue to be positive.”

3. Federal Reserve To Gradually Boost Interest Rates as a Result of Strength Of The Economy

With robust jobs growth continuing to grow at a healthy clip and the unemployment rate stable at 3.7%, a 50-year low, Fed officials hint that they’ll likely continue their course of activity in 2019 to gradually boost short-term interest rates to temper inflation and keep a stable market.

“Inflation exists above the Fed’s target of 2 percent to 2.5%, with more job openings than jobless and more homebuyers compared to new housing stock. The Fed sees inflation ahead first and foremost and will last a hike-pause-hike-pause pattern in 2019 as long as GDP remains above 2 percent and unemployment under 5 percent,” CCIM Institute Chief Economist K.C. Conway stated.

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

“Though the most recent Fed guidance has seemed less definitive on its future path, the current market and many analysts anticipate another increase this month and two to four months, as both inflation and wage growth exceed their goals,” Colliers International U.S. Chief Economist Andrew Nelson said. “This will translate into declines in consumer and business borrowing and curb spending and investing.”

4. Online Retailers Will Continue To Open Brick-And-Mortar Stores, Further Validating That Physical Retail Is Far From Dead

With the retail industry stabilizing in 2018, CBRE Head Of Global Retail Research Melina Cordero expects retailers to start reinvesting in their physical footprints to accomplish the perfect omnichannel shopping experience for consumers. In addition, digitally native (or even e-commerce just ) retailers will progressively shift to open physical shops to grow their company and retain more clients, Cordero said.

“In terms of retail and property, I think that the retailers have finally sort of heard things to do. There is a lot of investment, changes and closures that needed to happen to adapt to omnichannel. Over 2018 a lot of those investments finally started to pay off.

“What we think is going to happen over 2019 is a true return to the shop. Retailers are finally beginning to realize the value of the real estate — they can not just close a store and rely on online, they really need the shop for profit margins, consumer care, customer acquisition, for lots of reasons. I believe we’re going to find a lot of reinvesting in the store and lots of reinvesting in plans to attempt to get folks into the store,” Cordero said.

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

Everybody is on the lookout for signs of the next downturn, as the economy nears its 10th year of expansion — its longest period of expansion .

“In the history of U.S. business cycles, downturns have generally occurred within one or two years after the market has reached full employment,” JPMorgan Chase Commercial Banking Head Economist Jim Glassman said. “A careful examination of this historical regularity suggests, however, this routine has been the result of 2 imbalances — a building inflation problem which requires that the Fed to adopt a restrictive policy position, or unprecedented financial imbalances.

“In that respect, there are no obvious imbalances which have the capability to trigger a recession, so the current expansion is very likely to settle into a protracted period of balanced, noninflationary growth.”

Though U.S. economic growth and job gains were strong in 2018, some economists and analysts predict the economy will likely slow in 2019 because of continued short-term rate of interest bumps by the Federal Reserve and waning financial stimulus from federal tax cuts.

“The inevitable disruption is probably the appropriate risk strategy mode to be in for 2019. Real estate is not immune from business cycles, economic recessions or tumultuous black swan events — such as a trade warfare, currency crisis or cyberterrorism,” Conway said.

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

“Though property markets peaked with this cycle in 2015, sales and leasing transaction activity remains robust and pricing company,” Nelson told Bishop. “Transaction volume through Q3 2018 [has been ] 11% above its level for the similar period last year and is coming the entire closed in 2015 — the peak sales year with this cycle.

“While all of four core sectors have contributed in this year’s gains, apartment and office — perennial investor favorites — have posted the highest sales totals and the strongest price appreciation to date. However, equally [will] likely slow sharply in the following two years, together with price appreciation and rent growth, since the economy slows or even turns negative.”

7. Industrywide PropTech Adoption To Accelerate

Commercial real estate professionals — from operators and owners to agents and architects — may no longer deny the impact technology is having on the business. More real estate companies are embracing the latest innovations to streamline work tasks and make a more paperless, transparent way of sourcing deals, handling assets, assessing data and closing trades.

Mihir Shah, co-CEO of JLL Spark — JLL’s PropTech division with a $100M global fund dedicated to investing in real estate technology companies — told Bishop that PropTech businesses are now increasingly valuable as their products have aided real estate companies further their initiatives.

“As part of the endeavor, we are seeing companies that normally went through long RFPs demonstrating interest in piloting new products to determine which ones are workable. This helps them prove [return on investment] quicker and helps the winners grow quicker,” 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 available and affordable workforce housing choices will remain a topic of interest in the multifamily sector, as expensive land and development costs make it more hard to construct affordable housing from the ground up. This is particularly a pain stage in urban metros, JPMorgan Chase Head of Commercial Real Estate Al Brooks told Bishop.

“The ongoing job growth we’ve been experiencing in the U.S. is having a huge effect on labour housing affordability in important cities. This influx of talent continues to be fueled by the need to maintain close proximity to operate, the convenience of mass transit alternatives, as well as the allure of being at the middle of the activity in major metropolitan regions,” Brooks explained.

CBRE Americas Head of Multifamily Research Jeanette Rice said investment in value-add multifamily resources will help assuage those concerns.

“Workforce housing will also remain appealing in 2019 due to demand outpacing accessible supply, thereby maintaining vacancy rates reduced and rental growth over the overall multifamily sector.

“Investor interest will also stay very high in 2019. Interest is coming from all types of funds, including institutional and foreign capital as well as conventional sources like smaller buyers. The desire for workforce housing is quite strong for the greater property fundamentals and higher yields. Value-add investment will still dominate in 2019 and stay largely profitable. Acquisitions of stabilized product are also attractive for many investors, particularly those who have 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 last two years, according to the U.S. Census Bureau according to ULI. This has renewed investor interest and confidence in select non-gateway markets, ULI reports in its 2019 Trends survey. “Hipsturbias” or”Urban-burbs” have been used to classify those suburban markets with greater walkability and accessibility to public transit which resemble urban metros.

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

“The first stage is millennials moving into the suburbs to get larger, more affordable homes and accessibility to schools, so adequate single-family and multifamily housing will be necessary. Retail follows rooftops, so retail development to meet the new residents’ needs will follow. Finally, you may start to view more emphasis on job centers as individuals decide they would like to work closer to where they reside.”
10. Investors To Favor Industrial, Multifamily And Retail Assets In The New Year

It comes as no surprise that industrial real estate resources are an anticipated favorite for investors in 2019, along with multifamily assets, according to ULI’s 2019 Emerging Trends report. Deep-pocketed investors like Blackstone Group continue to gobble up whole portfolios of industrial resources at a rapid pace this year, such as its purchase of industrial REIT Gramercy Property Trust for $7.6B, a portfolio of last-mile logistics assets from Harvard University for almost $1B and a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.

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

“Many shopping centre properties are just not likely to return as successful retail resources. However, while some have been reduced in price to a mere land value, many are well below replacement cost and have good locations for alternative uses,” ULI reports. “If a site is adequately large, mixed-use is a great alternative for close-in suburbs appearing to exploit maturing millennials’ want to enter their following life-cycle stage. There also is a chance to turn the tables around the e-commerce fashion that fostered the obsolescence by redevelopment into supply centers.”

11. Investors To Continue Flocking To Secondary, Tertiary Markets For Alerts

Commercial property investors on the hunt for solid risk-adjusted returns continue to bypass gateway markets to bet on resources in burgeoning secondary markets, and the trend is likely to continue in 2019.

“Due to the high rates and restricted opportunities in main U.S. metros, investors are continuing to concentrate more on secondary markets, which can be appreciating double-digit increase in investment activity and also substantially stronger price increases than in the primary (mostly coastal) metro markets,” Colliers’ Nelson said. “However, those trends are likely to reverse if/when we see the economic slowdown, and investors seek the safety of larger, more liquid markets.”

This behaviour is typical at a late-stage cycle like this, CBRE Chairman of Americas Research Spencer Levy said.

“The disadvantage of this coin is it’s standard of late-cycle investment action that you find a change from primary to secondary in search for yields. What’s new is we’ve not seen that a compression of yields that would be typical in late-market activity,” he explained. “What happens is cap rates in primaries and secondaries converge; we’ve not seen that in retail and office, but we have seen that in multifamily. The question is, is this trend lasting during a recession that will happen within another few years?”

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

Rising construction costs have been the No. 1 property and development concern for respondents that participated in ULI’s Emerging Trends in Real Estate 2019 survey. On a scale of one to five, five being of the greatest importance, building costs ranked 4.59, with land costs and housing costs and availability following near at 4.14 and 4, ULI reports.

“Growing construction costs could possibly be the most understood narrative of 2018 that should grow to be a substance narrative in 2019,” CCIM’s Conway stated. Conway identified a variety of factors exacerbating cost and labor challenges in the building industry, including a decline in immigrant construction laborers following the financial crisis, crazy superstorms as a result of climate change which has led to massive rebuilding efforts throughout the nation, along with tariffs and the trade warfare.

“Essential materials like steel,… toilet fittings from China, timber from Canada, etc., are affected. Look closely at the quarterly earnings reports from building materials companies regarding the sort of input cost increases being experienced. Caterpillar, for example, reported solid earnings in Q3 2018, but a large growth in substance inputs like steel. The result is growing pressure on margins.

“That is the key takeaway regarding building labor and material prices increases — margins will be squeezed, cost overruns incurred, and worth under stress unless rents and [net operating income] can be raised to cover the rising costs of new construction,” Conway said.

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

CBRE said in its own 2019 U.S. Outlook report which office net absorption is expected to reach 37M SF in 2019, representing the sector’s 10th consecutive year of positive absorption. Should the country continue to experience powerful office-using job growth in the new year, it could lead to strong absorption rates and renewed interest from investors.

“One part of office property growth is the requirement for more office space near amusement venues and other amenities. These office buildings are relying upon smaller, more flexible workspaces. Working spaces also are becoming more prevalent as professionals choose alternative working procedures,” Gerken told Bisnow.

That said, Colliers’ Nelson anticipates office demand will taper off in response to a slowdown in job development and robust supply levels.

“requirement for office space will medium in reaction to slower job creation, as a substantial volume of projects already under construction starts to enter the current market,” Nelson stated. “So vacancy will trend upward and lease growth will ease as market conditions become more aggressive for landlords.”

14. Retail Bankruptcies To Slow, Retailer Earnings To Stabilize

“The retail commercial real estate analysis industry has experienced significant change in the last couple of years, and the transformation is profound and will continue throughout 2019. The convergence of brick-and-mortar and online retail will continue to make major seismic changes in the industry,” TD Bank Head of Commercial Real Estate Gregg Gerken told Bisnow.

Though a wave of retailers filed for insolvency and shuttered stores this year — including Sears, Mattress Firm, Nine West and Claire’s — the circumstances surrounding most shop closures next year ought to be enormously different, CBRE’s Cordero explained.

“I feel the overall industry opinion is that 2017 was likely the summit [for retail closures]. I believe there will continue to be closers in 2019 — it is hard to say whether we’ll have more or less — but I would say a lot of the closures that we’ll see in 2019 will be about what we call portfolio rationalization or optimization when they’re about retailers which are failing.

“Retailers in lots of instances do need to shut stores to reorient their portfolios — therefore I really do anticipate closures at 2019, however I don’t actually [connect ] a great deal of those closures as dying or failing retail, it’s more of morphing and adapting retail,” Cordero said.

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

Conditions have ripened for multistory warehouse growth from the U.S., and this trend will continue into 2019. Facilities are underway or have 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 stages of developing these types of facilities now that construction costs are no longer as cheap and there is less available land than in the past, CBRE’s Levy explained. Unprecedented demand for logistics and warehouse area now has changed this dynamic.

“The rents that are being attained in such multistory industrial [centers ] may be just two or three times what you’re seeing in traditional industrial. We believe this particular trend is only at the beginning in the United States,” Levy said.

Though the lumps in rent are substantial, CBRE Head of Industrial Research David Egan reported these multistory facilities can also pose operational challenges for users.

“The users will need to change how that they function in such buildings to make it operate efficiently,” he explained. “The operational problems aren’t small — to change the way they move stock in and out of these buildings isn’t a tiny little tweak.”

16. Grocery Chains To Move Further Online, Expand Their Online Offerings With The Help Of Tech

Up to now, delivering new groceries to customers’ doors has turned into a rather nascent notion — and it is no simple job. Grocers already combat low profit margins due to increasingly declining food prices and new low-cost competitions like Aldi entering the market. These challenges, coupled with expensive online delivery costs, has kept online grocery delivery in its own infancy. But CBRE’s Cordero sees that tendency changing in 2019.

“Grocery is probably, among all of the retail categories, among the cheapest for internet penetration. We think because of a mixture of technological advancement, investment on the part of retailers and customer demand, that we’re going to find a fairly significant shift next year in grocery going online and retailers offering more to customers 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 hunt is an opportunity for communities to redefine their own legacy image and showcase what is different in their market now versus 10, 20 or 30 years back. The 238 communities which competed to the Amazon HQ2 are decreasing 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 transportation and e-commerce companies, like Norfolk Southern Railroad, have used the information to create a relocation decision (in Norfolk Southern’s case, to Atlanta, which was among the 20 finalist cities for Amazon HQ2). In other words, the Amazon HQ2 research was to economic growth precisely what the census is to demographics”

18. U.S. Hotel Occupancy To Split Records In 2019

The hotel sector is anticipated to undergo a record-breaking year of occupancy levels in 2019, according to a forecast from CBRE Hotels America Research. Occupancy levels are expected to surge to 66.2% next year, the 10th successive year of growth. This increase will be driven by a 2.1% increase in demand to offset the incoming supply.

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

“Although the hospitality sector continues to grow, the markets where Quadrum is active will stay relatively flat given their higher-than-national average occupancy rates. While average daily rates are increasing nationwide, the business will likely face some challenges as a result of rapid adoption of apps which offer discounted prices.”