Research - DECEMBER 12, 2018

Strong economy expected to lift all commercial real estate sectors in 2019

by Jody Barhanovich

Sustained momentum from the U.S. economy’s extended economic expansion bodes well for major commercial real estate asset classes in 2019, promising 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, according to a new report from CBRE, 2019 U.S. Real Estate Market Outlook.

CBRE’s outlook report 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 percent gain in gross domestic product and benefiting all sectors. That, in turn, will contribute to stable capitalization rates for the market as a whole, a 10th consecutive year of positive net absorption in the office market, and support for redevelopment and re-tenanting in the retail market.

“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,” said Richard Barkham, global chief economist and global head of research, CBRE. “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.”

CBRE’s 2019 Outlook dives deeper into six topics for the coming year. In regards to the U.S. economy, CBRE sees “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 percent,” said Barkham.

As for capital markets, robust investment volume in 2019, including entity-level deals, should match the strong transaction levels of 2018. M&A momentum should carry into 2019, especially since individual assets are in limited supply and generally priced at a premium. Borrowing costs may ease up, due to slowly rising bonds rates, but the amount of equity available for investment in real estate should support transaction volume and keep cap rates low in some cases. Specifically, various secondary markets may register cap-rate decreases in 2019.

For office, an expected, healthy 1.6 percent growth in office-using jobs in 2019 should beget a 10th consecutive year of positive net absorption for the 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 and logistics’ lengthy run of gains might actually work against it a bit as well. With vacancy now at a historic low of 4.3 percent and construction still constrained, options for occupiers to expand are limited. That will continue to push up rents.

“We anticipate little impact on import volume from tariffs as long as the U.S. economy, employment and the dollar remain strong. New trends likely to add momentum in 2019 include development of multistory warehouses in select markets and a shift to more industrial cold-storage space from retail cold-storage space,” said Barkham.

Strong consumer sentiment will also 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.

Lastly, completions in the multifamily sector 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: workforce housing.

You can download CBRE’s full 2019 U.S. Real Estate Market Outlook here.


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