Between the bidding war over Amazon’s new HQ, an affordable housing crisis, big shifts in retail, and a last-minute perk in the form of President Trump’s tax bill, 2017 certainly offered a fair share of excitement to commercial real estate investors. According to top brokerages, industry reports and experts, 2018 will hold a different kind of thrill: one that results from general growth.
From the booming national economy to sector fundamentals and investment activity, industry insiders are predicting a positive trend in CRE. And, though the growth may be a bit more slow than it has been in recent years, it is growth nonetheless. Investors will be well served to take note of the following trends and topics, and look for opportunities in the months to come.
According to a recent report from research and analysis firm Moody’s, the retail sector will enjoy an operating income increase nearing 4.5% in 2018, with sales expected to jump by the same percentage. The report predicts that department store losses will likely taper off, drug stores will improve through cost efficiencies, and discount retailers such as Walmart will see a return on growth investments.
That said, the industry still has to adapt to consumers’ changing shopping preferences. Beyond online shopping and an increased emphasis on experiences over goods, there’s been a split in retail appeal. Recent trends show that shoppers are either gravitating toward discount options like TJ Maxx and Dollar General or luxury retailers like Tiffany’s or Nieman Marcus. This migration of spending toward opposite ends of the retail spectrum may create some interesting investment opportunities in secondary and suburban markets.
What’s more, experts anticipate more consolidations like the headline-making merger between Amazon and Whole Foods last year. As retail REITs are trading at considerable discounts to their net asset value, increased M&A activity is likely.
OFFICE IS EVOLVING
The emphasis on updated office space with modern amenities and technology will persist in 2018, and accelerated construction will put pressure on absorption and vacancy rates. Older buildings lacking the necessary infrastructure will likely struggle to keep up, especially in areas where large volumes of updated offerings are available. However, suburban areas offering a range of housing options along with amenities are in good shape to capture demand.
The Commercial Observer recently noted that some businesses are capitalizing on new developments by securing new space, including EY (formerly Ernst & Young), which recently leased more space than they need because they plan on adding to their workforce. Even so, other entities such as law firms and financial institutions choose to minimize overhead costs through smaller footprints, telecommute structures and co-working options. Conflicting reports like these dampen office real estate forecasts and reinforce the need for savvy investment moves within this sector.
INDUSTRIAL CONTINUES TO ADVANCE
Even after a huge year in 2017, the industrial market is poised to continue its success in 2018, driven by e-retail fulfillment and distribution, cloud computing and the proliferation of legalized marijuana. While construction will begin to catch up to absorption this year, record low vacancy will persist and it’s likely that rents will climb above the $80 per sq. ft. noted by The Business Journals last year.
An impending infrastructure overhaul also bodes well for the sector, as the White House has hinted at a proposal that will incentivize the update and upgrade of functionally obsolete roads, bridges and other nationwide infrastructure. This type of program won’t just increase the demand on raw materials, it will also drive growth for the facilities needed to store them.
While the stock market certainly enjoyed an increase in 2017 – the Dow enjoying a 25% boost for the year and Nasdaq up 28% – the boom has some advisors keeping a wary eye on market reports. Values are high and price-to-earnings ratios are easily topping long-term averages, spurring consumers to invest more capital into private and alternative real estate assets. And, as Forbes reported, comparable yield risk remains favorable to private real estate versus higher risk bonds and equivalents.
Beyond keeping an eye on stocks, National Real Estate Investment Trust economist Brad Case wants investors to take note of REIT valuations in 2018. Case told Bisnow.com that REITs were overlooked and undervalued last year, and both situations would be corrected in the coming months. “I expect strong performance among retail and apartment REITs — the former because they’ve become most undervalued, the latter because household formation will keep demand ahead of supply for years to come — but I think the entire REIT industry will outperform the broader stock market,” he said.
TECH IS TAKING CHARGE
Technology is factoring into commercial real estate in numerous ways, ranging from the connectivity demands of business tenants to the ways CRE brokers are handling research and transactions, but the influence technology has on the market will only increase in 2018.
It’s no surprise that connectivity is likely to be a major factor in office selection in 2018. According to a WiredScore and Radius Global Market Research report, 75% of tenants indicate that poor connectivity impacts their business’ profitability, and 72% of lease decision makers say reliable internet connection is paramount. “The connectivity infrastructure of an office building is critical to current office tenants and they are willing to pay more for better service. Independent certification/testing would generate more interest in a space and specifically, tenants would pay more, sign quicker and prefer leasing office space in a building that is Wired Certified,” WiredScore reports.
In support of the connectivity demand, data centers are also poised to make big moves in the year to come. Experts expect nearly 300 MW of data center space to come online in 2018, and the outlook for growth and investment opportunities will only improve as consumers ramp up data consumption and digital storage needs. The rapid evolution of technology – from networked homes to advanced content delivery and increased automation across services and goods – will transform multi-tenant data center space.