December 13, 2018
Sustained momentum from the U.S. economy’s extended economic expansion bodes well for major commercial real estate asset classes in 2019. According to a new report from CBRE, that bright outlook promises additional allocation from institutional and international investors, a hunt for opportunities in secondary markets, and robust construction completions in sectors such as office and multifamily.
CBRE’s 2019 Real Estate Market Outlook anticipates that absent economic shocks such as sharply rising inflation and import costs, the U.S. economy will generate solid growth amounting to a 2.7% gain in gross domestic product and benefiting all sectors. That, in turn, is expected to contribute to stable capitalization rates for the market as whole, a 10th consecutive year of positive net absorption in the office market and support for redevelopment and re-tenanting in the retail market.
CBRE’s Richard Barkham says, “Continued economic growth bodes well for all sectors, sustaining job growth for the office market, consumer confidence for retail and industrial, and entity-level, mergers-and-acquisition activity for the capital markets sector. We foresee compelling opportunities in secondary markets, given that we haven’t experienced cap-rate convergence in those markets or even in many of the crowded primary markets.”
Sector highlights for the coming year include:
U.S. Economy: “We see confidence and momentum driving consumer spending and business investment in 2019. Growth might be less than in 2018, given the potential drags of inflation and the slowing single-family housing market, but we predict healthy GDP growth of 2.7%,” said Barkham.
Office/Occupier: An expected, healthy, 1.6% growth in office-using jobs in 2019 should beget a 10th consecutive year of positive net absorption for the office sector. CBRE foresees the office vacancy rate rising slightly as construction completions exceed absorption. Occupiers will continue to favor flexible workspace environments and lease structures, with flexible-office solutions claiming a larger share of the market and the ratio of square footage per employee contracting.
Industrial & Logistics: This sector’s lengthy run of gains might actually work against it a bit. With vacancy now at a historic low of 4.3% and construction still constrained, options for occupiers to expand are limited. That will continue to push up rents.
Retail: Strong consumer sentiment will boost retail sales in 2019. In turn, every U.S. market tracked by CBRE Econometrics Advisors is forecast to register positive net absorption next year. Continued retrenchment in the department-store industry will lead to more retail property owners filling or replacing big boxes with entertainment uses, food and beverage, fitness uses, offices, hotels and other nonretail uses. The omnichannel movement finally will make significant inroads in the food and beverage category, with restaurant and grocers investing to improve the melding of their online and in-store operations.
Multifamily: Completions will remain near the cyclical peak as complexes started in 2018 are completed, but new starts are declining. That should lead to a more balanced market in 2020 that supports rent growth. Meanwhile, demand will remain strong as the costs of homeownership – prices, borrowing costs and availability – remain relatively restrictive. One sector likely to generate rent gains, and subsequently investor interest, in 2019 due to demand outpacing supply is Workforce housing.
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