3 Commercial Real Estate Trends to Watch in 2018
At the Commercial Economic Issues & Trends Forum on Friday, attendees got insights into how the economy and real estate market will interact over the next couple of years. Here are a few takeaways that can help guide your decision-making and investment moves in 2018, fresh from the 2017 REALTORS® Conference & Expo in Chicago.
NAR Chief Economist Lawrence Yun’s predictions for the commercial real estate market in 2017 and 2018
1. Don’t Believe the Hype
Whether it’s the White House’s line on tax reform or the media’s take on trends in the office sector, JLL Chief Economist Ryan Severino was quick to discredit dominant narratives.
Severino noted that while many companies are using shiny new office buildings to attract and retain talent, they’re mostly doing so in the suburbs, not big cities. “That’s the exact opposite of what you will hear in The Wall Street Journal,” he said. “People want to buy into this narrative … but the relocation back into city centers has been more Fortune 500 companies—companies that arguably never should have left [in the 1970s and 1980s].” Severino noted that not all suburbs are equal in their ability to attract new office tenants. “But if you think that the suburbs are dead, I have some data for you.”
Severino also noted that as an economist, he can’t endorse the idea that tax cuts alone will boost the economy in the long-term. While the country may see a short-term boost, the drag on the deficit will ultimately be felt in all sectors, including commercial real estate. “We need to get past this fantasy that we can just cut taxes and the economy will grow,” he said, asserting that the two factors most likely to have a positive impact on the economy are adding people to the labor force and increasing worker productivity. “Tax policy alone doesn’t have an empirical connection to either of those things.”
2. The Market Looks Good Now, But…
Overall, the outlook for commercial real estate in 2018 is sunny. “Rents will all be pretty much positive” across sectors, National Association of REALTORS® Chief Economist Lawrence Yun predicted during the forum. He noted that there will likely be a modest price correction in big cities and for trophy properties, but he expects only a 3 percent to 7 percent drop in 2018—and that’s after a 90 percent increase over the past seven years.
Yun predicted that 2018 won’t be as busy for many commercial real estate pros as this year has been due to a mismatch between the worldviews of buyers and sellers. Sellers and landlords will note that the economy is doing well and demand higher prices and rents. But buyers will see rising interest rates and won’t want to adjust their offers to meet seller demands. “They will stare into each other’s eyes, and they will not want to blink,” Yun said. The result will likely be a 5 percent to 10 percent decline in unit sales.
Severino’s outlook was also positive, but he noted that optimistic predictions tend to peter out rapidly. “Commercial real estate is poised to continue to perform well,” he said. “But once that gets baked in, it’s going to be hard to keep that going in 2019.”
3. Retail, Multifamily, and Industrial Poised for Change
It’s no secret that shopping malls have suffered setbacks after a long period of building that exceeded demand. While the shift to more experiential and dining opportunities has been slow and somewhat painful, Severino said the numbers tell a different story about the near future. “Retail is going through an evolution,” he said. “But there have been more store openings than closings in 2017.” Severino noted that the current pause on building new retail, combined with a net increase of 4,080 stores in the country, has translated to rising rents in a sector that many wrote off as dead over the past few years.
While multifamily and industrial have been commercial real estate darlings in the past few years, both Yun and Severino expect these sectors to cool slightly in the near future.
“Multifamily is still strong, though not quite as strong as a few years ago,” Severino said. “There is this deluge of supply that is cresting onto the marketplace in 2017.” But it’s not just construction; Yun noted that demographics also play a role. Though the number of people at prime renting age will increase over the next two years, it will begin to fall after that. Severino added that the rapid construction in industrial, meant to fill online retailers’ need for warehouses, may dampen demand as well.
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