As we look toward the New Year and consider the new challenges and possibilities 2019 will bring for the industry, Bisnow revisited its commercial real estate predictions for 2018 to determine just how far off they were.
From the continued expansion of the economy to the booming industrial market, turns out they were pretty spot on.
Bisnow analyzed the 22 predictions below and how those trends all played out (or didn’t).
1. The Economy Will Continue To Expand
The U.S. economy is nearing its 10th year without a recession, with both domestic and global gross domestic product growth likely to hit a multiyear high of 3% in 2018, according to Yardi Matrix’s “Timing Of The Next Downturn” report. Economic stimulus came in various forms this year, such as favorable regulatory and tax policies that led to strong commercial real estate demand and fundamentals for much of the year. That said, everyone is proceeding with caution as they await the next downturn — with some economists projecting it will hit in 2020.
2. Age Of The Cycle To Wear On Sector Fundamentals
The unusually long length of this business cycle continued to take a toll on property fundamentals this year, with rental growth and net absorption in select sectors like office and multifamily slowing amid robust development pipelines as the market shows signs of maturing. Office net absorption fell nationally to 8.3M SF in Q3 compared to 15.2M SF in the second quarter, according to data from Cushman & Wakefield, and multifamily rental growth remained flat in October at 3.3%, where it will likely remain for the year, Yardi Matrix predicts.
3. Retail Bankruptcies To Slow
It felt like another rough year for retail closures, but data compiled by CB Insights revealed that retail bankruptcies this year did in fact slow compared to 2017. Last year there were roughly 21 major retail bankruptcies, including Toys R Us, Payless, hhgregg, Charming Charlie, The Limited and Rue21. So far this year, about 15 major retailers have filed for bankruptcy, including department store giant Sears.
4. Multifamily Construction To Remain Near Cyclical Peak
The multifamily development pipeline remains at a cyclical high, according to Yardi Matrix research, with supply expected to exceed demand in some of the top 30 metros in the next few years. There are approximately 600,000 units under construction, with 620,000 units delivered in 2016 and 2017 combined. Though concerns that the multifamily sector is nearing a bubble have been top of mind the past few years, research reveals that apartment demand in the U.S. is still high and fears of an approaching bubble seem to be premature.
5. Deal Volume To Pick Up, Slowly
Though deal volume did increase in the first half of the year, it is not expected to make any serious gains moving into the new year. Transaction volume rose modestly in the first half of 2018 compared to last year, up 4% to $236B, according to Colliers International.
“Although transaction volumes were modestly higher this year, the trend since 2015 has been a gradual decline in transaction volumes, and I see that trend continuing the rest of this year into next year despite the small pickup in the first half of 2018,” Colliers International U.S. Chief Economist Andrew Nelson said. “We’re close to the actual top of the market. It’s always difficult to call the top of the market with any precision, but I think we’re very close to it.”
6. Office Market To Remain Flat
A large increase in U.S. office product under development put pressure on office fundamentals much of this year, resulting in an uptick in vacancies and declining absorption rates, according to research from Cushman & Wakefield. Among the 87 markets C&W tracks, office absorption fell from 15.2M SF in Q2 to 8.3M SF in Q3. In the first three quarters of the year combined, absorption was down slightly to 31.1M SF compared to 35.4M SF during the same period in 2017. With 38.5M SF of new office product hitting the market in the first three quarters of the year, the national vacancy rate remained flat, falling to 13.3% in Q3 from 13.4% in Q2.
7. Industrial To Excel All The More
Thriving digital retailers accelerated warehouse and distribution center demand to push the industrial sector to new heights in 2018. Markets absorbed 66.3M SF of product in Q3 2018, up 10.5% compared to the year prior, according to Cushman & Wakefield data. Even with 72M SF in new supply hitting the market in Q3, vacancy rates remained at a historic low of 4.9% and asking rents were up 5.9%. A large amount of investment has flowed into industrial real estate this year, with deep-pocketed investors like Blackstone Group gobbling up logistics assets worth billions at a rapid pace. This year Blackstone acquired industrial REIT Gramercy Property Trust for $7.6B, a portfolio of last-mile logistics assets from Harvard University for nearly $1B and a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.
8. Leisure Travel To Become Increasingly Important in The Hotel Sector
CBRE stated in a report last year that the U.S. hotel market would continue to grow thanks to demand in leisure travel in 2018. The U.S. Travel Association confirmed CBRE’s prediction in a May report. A boost in consumer confidence this year increased domestic leisure travel, though the association noted that the pendulum was expected to shift in the second half of the year and that business travel would once again outpace leisure travel for the remainder of the year.
“Business travel has been on an upward trajectory in 2018, and this is expected to continue throughout the rest of the year. This is solid evidence that businesses are optimistic in the current economic environment, and are buoyed by the recent tax legislation,” U.S. Travel Senior Vice President for Research David Huether said in a statement.
9. Undervalued REITs To Bounce Back
Though publicly traded REITs were largely overlooked and undervalued in 2017, these companies did make a comeback at various points throughout the year. REITs experienced weakness in the beginning of the year, which experts attributed largely to investors rallying behind large-cap growth stocks like tech giants Facebook, Apple, Amazon, Netflix and Google parent Alphabet. But Nareit Senior Vice President of Research and Industry Information Brad Case told Bisnow in late October that since the end of February the REIT market had outperformed tech stocks by 7.36%, according to the S&P 500 Information Technology index.
10. Caution Of Overvalued Stock Market
Concerns that the stock market is overvalued persisted throughout 2018, with the stock market correcting on several occasions this year. On October, the S&P 500 plummeted 9%, slipping toward correction territory — when an index falls 10% or more from its recent high. On Oct. 30, the Nasdaq entered correction territory, dropping 10.3%. Experts attributed weakness in the market to concerns about both U.S. and global gross domestic product growth, trade war tensions and fears that corporate earnings have peaked.
11. CMBS Maturation To Slow
A massive wall of roughly $42B in CMBS loans issued between 2006 and 2007 were set to mature between June and November of 2017, according to Trepp data. Though concerns were rampant last year that with banks tightening their underwriting standards most of those loans would be difficult to refinance and even harder to sell, Trepp reports that most of those distressed loans have been paid off.
“The fact that the yield from the 10-year Treasury note remained near (and at times, less than) 2% helped forgive plenty of sins, such as marginally performing loans and properties from the 2006-2007 time frame. Plenty of previously questionable loans were paid off or defeased. The volume of delinquent CMBS loans, which represented 10% of the entire CMBS universe at one point, began to retreat quickly,” Trepp reports.
12. Data Center Demand Will Not Taper Off
Data center assets remained a top destination for investors on the hunt for attractive alternative investment opportunities this year. Healthy demand from cloud users boosted data center absorption rates across the globe, with more than 177 megawatts absorbed in the U.S. and $7B in investment transactions in the first half of this year alone, according to CBRE research.
13. Infrastructure Investment To Be A Priority For The Administration
This was Bisnow’s only prediction fail for the year — President Donald Trump touted infrastructure investment as a top priority for his administration during his campaign and first year in office, but little has been done to make his proposed $1.5 trillion infrastructure spending plan a reality. The initiative was pushed to the back burner last year to prioritize immigration, healthcare reform and the tax overhaul. There is talk that with the Democratic Party now in control of the House of Representatives, an infrastructure plan could be proposed that would rely heavily on federal spending, rather than public-private partnerships as Trump’s plan called for.
14. Investor Interest In Senior Housing To Soar
Baby boomers continued to drive demand in the senior housing market this year. Investment in these assets is being spearheaded by private equity giants, both foreign and domestic. In a survey conducted by the National Investment Center for Seniors Housing & Care in August, respondents overwhelmingly ranked senior housing as the most desirable asset for investment, with industrial and apartment assets trailing close behind.
15. Enrollment Headwinds To Put Pressure On Universities
As universities continue to grapple with high enrollment and the exorbitant costs and pressures that come with creating on-campus housing for students, it has opened the door for private developers to enter the student housing fray. Universities are increasingly partnering with private developers through public-private partnerships to build more highly amenitized units at a faster clip for students, and this year was no different. These developers are going to greater lengths to provide the amenities student residents prefer, such as pools, fitness centers, sports courts and outdoor amphitheaters.
16. Compressed Cap Rates Could Improve
In 2018 This prediction was a sort-of miss, as cap rates didn’t change all that much this year, and what change there was was a mixed bag depending on asset class.
“Capitalization rates for U.S. commercial real estate assets were broadly unchanged in H1 2018, with the exception of some retail segments. Industrial cap rates tightened the most and multifamily rates edged down modestly. Office cap rates were generally stable and cap rates for hotels were also firm,” CBRE reports. “We expect cap-rate stability in the second half of 2018.”
17. Retail Bifurcation, M&A Activity To Persist
The retail industry remains a battle of the haves and the have-nots — those well-positioned to embrace consumer’s changing shopping preferences, and those that have yet to evolve. To succeed in this competitive environment retailers are no longer functioning solely as brick-and-mortar stores or only using e-commerce. Those looking to grow are creating an interconnected experience using physical, online and social elements to establish a seamless shopping experience for customers. For brick-and-mortar brands, one trend that dominated this year is the rise of small-format stores. Retailers like Target, Kohl’s, Walmart and even Taco Bell are opening stores that are one-third or one-fourth the size of their normal stores to penetrate more urban markets. Large portfolio deals also persisted this year, with investment giant Brookfield Property Partners acquiring retail REIT GGP for $9.25B in cash.
18. Office Footprint To Continue To Shrink
The trend of office occupiers leasing less space has continued in the wake of the flexible office and coworking boom. Seen as a cost-saving move, office users like law firms and financial services companies are growing more conservative in their leasing activity in terms of square footage.
19. Strong Connectivity To Remain A Priority For Companies
As technology continues to transform the commercial real estate industry, ensuring properties have basic connectivity abilities (strong cell service, decent WiFi) is no longer a perk, it is a priority. But at a recent Bisnow London event, property owners said though smart building tech — like sensors that can adjust temperature and lighting based on employees mood — is growing in popularity, you don’t need fancy tech to attract tenants, and you can just focus on the basics.
“I don’t think [developers and owners] should be doing as much in the way of smart buildings and technology as is being proposed,” EY EMEIA Real Estate Leader Andrew O’Donnell said. “If landlords spend too much time focusing on every sensor and every piece of infrastructure, there is risk that it will be the wrong hardware, and in two to three years time someone else will come in with something new and take the opportunity away.”
20. Tech Solutions Continue To Address Challenges In Construction
As the construction industry continues to grapple with a skilled labor shortage and high material costs, new technologies have become increasingly helpful in managing projects and getting jobs completed on time. One form of tech buzzing among construction firms of late is the use of blockchain technology to streamline the construction process — from the bidding process to final payouts.
“This technology could mean getting the right subcontractors on a job quickly or expediting how those subcontractors or suppliers are paid,” Bisnow reports. “There are challenges to bringing blockchain technology to the industry, including the shortage of developers who have the knowledge necessary to apply blockchain technology to construction and the risk that, if poorly applied, the technology could make parts of the construction process less efficient.”
21. Co-Living, Short-Term Rentals Take Hold
The co-living market has matured this year with new entrants into the U.S. and startups raising millions to expand their footprint nationally. San Francisco co-living startup Starcity has raised more than $20M in venture capital to expand its offering in heavily populated metros like its home city. The company typically converts underused multifamily, hotel and office buildings into co-living residencies, and as of June owned four buildings in S.F., with nine under development. Quarters, a Berlin-based co-living concept with locations across Europe, plans to open co-living properties in every major U.S. hub, including Chicago, San Francisco, New York and Washington, D.C. The company already has two locations in Manhattan and one in Chicago.
22. Tiny Apartments, Micro-Units Boom
In a trend known as micro-housing, developers are continuing to build large projects consisting of tiny apartment units in cities dominated by millennials. The goal is to offer cheaper housing options at a time when housing affordability is a huge concern. The trend is growing legs in cities across California, Boston, Seattle and even Boise, Idaho.
“Gateway cities with high density and restrictive zoning are seeing an increase in smaller unit configurations. In addition, impact is seen in urban western and southeastern markets where there is a lack of new supply and 5-49 unit availability,” Yardi Matrix Operations Manager Doug Ressler told Bisnow.