Coldwell Banker Commercial National Economic Outlook
2020 marks the start of a new year and, perhaps more excitingly, a new decade. And while economic and real estate cycles do not revolve around the calendar year – aside from any actions resulting from changes in calendar year tax policy – it is still a great time to reflect on what real estate decisions were successful and which may require rethinking in the year(s) ahead.
Economists often remind us that their forecasts are as reliable as a weather report. There are many externalities that influence the real estate markets as distant as oil prices and trade policy, or as close as taxation and wage rates. However, externalities are finite; it is unlikely the decision by Prince Harry and Meghan Markle will impact real estate values.
The national Coldwell Banker Commercial team aligned with local leadership and its real estate professionals around the country to discuss anticipated macro and micro market trends covering an array of asset classes, user types and investor profiles ranging from private investors to users across all property types.
Economic Stability. As we look forward to the new year, forecasts are for stable low interest rates, steady economic growth and strong consumer demand, all of which should result in good overall conditions for the U.S. property market. The fear of a near-term recession that was building in mid-2019 has waned. Election years are usually good for the economy. Commercial real estate is still an attractive investment class with perceived upside potential relative to an alternative investment in the stock market which is near all-time highs.
Multifamily. Apartment properties continue to be a desired asset class although there can be significant variation in demand by investors around the country. For private investors, continued low interest rates will help fuel the acquisition demand. In populous California where a housing shortage continues to fuel rental rate increases, multifamily properties will be in demand. By contrast in Florida, close to 29% of multifamily properties have traded during the past three years, per local Coldwell Banker Commercial professionals, and there is a lack of quality product for sale. In some markets, the demand for short-term rental units (e.g., Airbnb) is driving a portion of the value for multifamily assets. Further, possible public policy initiatives to address the shortage of affordable housing in select markets is leading to new development opportunities.
Industrial. The industrial property market will remain active in 2020 driven by continued demand for well-located, modern distribution facilities near transportation hubs and increased manufacturing activity as trade tensions ease. For investors and users, the challenge in many markets is locating suitable available product to buy or to lease. Fully leased industrial facilities continue to be in high demand by investors.
Retail. The retail evolution will continue, which will be challenging for owners of shopping centers that do not have a healthy mix of food and beverage, consumer retail and entertainment. We will continue to see the transformation of the enclosed shopping mall to a myriad of (re-)uses. Thinking outside of the box for retail assets is the name of the game.
Medical and Related. Hospital systems continue to invest in their networks, which include increased leasing and property acquisition activity to expand the geographic footprint of medical outpatient centers. Private investor demand for medical office space remains robust as the end of the baby boomer age cohort approaches retirement age.
Office. The tight labor market has resulted in the millennial worker being in control of what employers offer in terms of creative and “cool” office space, particularly in the large metro markets. Office properties in suburban markets will struggle compared to those closer to cities with transit systems – unless they are considered a tech hub. Co-working absorption may slow temporarily but the alternative office product offering will not go away.
Property Management. Well-managed properties wherein the operating costs are kept low will be the most competitive for new tenants, particularly tenants seeking adaptive re-use of existing spaces. Property owners will continue to deploy smart building technologies in order to keep buildings competitive and minimize operating expenses.
Local Market Knowledge, Global Perspective
While the real estate adage “location, location, location” is important relative to a particular real estate asset, commercial real estate investors and users must have a broad perspective when it comes to identifying the right property opportunity. Cap rates, rental rate regulation, local property taxes and affordable housing initiatives are all driving local or regional investors to look beyond their familiar markets for opportunities.
In a highly connected world, trends in large urban markets transfer quickly to secondary and tertiary markets. The role of the commercial real estate professional, particularly one with local-market knowledge but a global perspective, will continue to provide insights beyond the available data.
It doesn’t look like 2020 will be the year when the longest economic expansion comes to an end, which is good news for commercial real estate. There may be market uncertainty which may temper overall volume, however, there are always opportunities in commercial real estate if one looks across all property types and geographies. Best to rely on an experienced commercial professional to understand your goals and to provide custom solutions.