Economic safety net<\/h2>\n
The commercial real estate industry is riding the wave of another year of solid performance for the economy at large. In 2018, unemployment fell to the lowest level in half a century, wage growth started to pick up after many stagnant quarters and GDP increased by roughly 3 percent. That uptick is widely credited to the Tax Cuts and Jobs Act of 2017 and increased federal spending. \u201cObjectively I still think it\u2019s a good, but not great, result,<\/em>\u201d said Ryan Severino, chief economist at JLL. \u201cI would love to see the economy be knocking it out of the park like in the 1990s, but we\u2019re just not that economy anymore.<\/em>\u201d Overall, U.S. real estate values are projected to hold steady in 2019, with prices maintaining and transaction volume poised to outpace previous years.<\/p>\n By market tier as a % of crossborder capital Sources: NKF Research, Real Capital Analytics<\/em><\/p><\/div>\n Moreover, the GDP bump attributed to the tax cuts will likely fade during late 2019 and early 2020. That, could coincide with a market correction, said Melissa Reagen, managing director & head of research for the Americas for TH Real Estate, an affiliate of Nuveen. Interest rates are on the rise and the U.S. Treasury yield curve is flattening.<\/p>\n In this environment, a slowdown remains a possibility, however unlikely it appears today. Pricing pressures are building across several sectors of the economy, further pointing to a market correction. Low unemployment and accelerating wage growth give the Federal Reserve motivation for additional rate increases. Severino, for instance, is projecting that the Fed could authorize three hikes in 2019.<\/p>\n In an October 2018 report, Blue Chip Economic Indicators put the chances of a recession in 2019 at 26 percent. That may sound alarming to veterans of the market crash a decade ago, but analysts project a much softer landing. \u201cShould that happen, my view is that the value correction won\u2019t be a 2008 correction,<\/em>\u201d said Reagen. \u201cI say that because fundamentals do remain solid, and I\u2019m guessing they\u2019ll continue to remain solid.<\/em>\u201d However, real estate assets have a secret weapon in the form of NOI growth, which Nuveen expects to drive the majority of real estate returns in 2019.<\/p>\n The real estate lending market offers ample liquidity, as alternative lenders expand market share. By the third quarter of 2018, debt funds had accumulated more than $58 billion in dry powder, boosting their market share to nearly 20 percent, according to Newmark Knight Frank\u2019s capital markets report. Refinancing has continued to accelerate as capital has remained plentiful and owners seek to hold onto assets, in anticipation of a higher cost of debt in the future.<\/p>\n If retail and multifamily properties consistently achieved the highest returns in the previous cycle, the industrial sector is dominating today\u2019s investment market. Over the past six years, the category has generated the most significant gains, NKF reports. Market analysts expect more of the same, largely because the category seems to be less susceptible to economic vagaries than any other major asset category. \u201cIndustrial will continue to be the clear leader,<\/em>\u201d predicted Kevin Thorpe, Cushman & Wakefield\u2019s global chief economist. \u201cAlmost regardless of what\u2019s happening in the economy, it has continued to soar.<\/em>\u201d<\/p>\n A main factor in the stepped-up demand for logistics facilities is e-commerce. In a first, orders placed from mobile devices exceeded $1 billion on Black Friday in 2018. That marked a milestone for a day traditionally associated with brick-and-mortar shopping, not to mention an 8 percent year-over-year increase.<\/p>\n Specialty growth (U.S. totals by property category; $ in billions) Sources: NKF Research, Real Capital Analytics<\/em><\/p><\/div>\n \u201cIndustrial has overall become one of the darling sectors of this cycle,<\/em>\u201d said Graydon Bouchillon, head of industrial in the U.S. for TH Real Estate. \u201cWe\u2019re seeing that unfold still today, and growth rates that indicate to me that this secular trend for industrial still has legs through the end of this cycle and into the next one.<\/em>\u201d<\/p>\n In the third quarter of 2018, multifamily sales volume surged 33 percent quarter-over-quarter, with investors continuing to chase yield into suburban, value-add deals in the Southeast and Southwest, according to NKF\u2019s report. By the third quarter of 2018, the multifamily sector had drawn the highest sales volume of any property type for the past six quarters, even surpassing the office sector.<\/p>\n Dry powder (U.S. totals by asset category; $ in billions) *Excluding debt and distressed funds. Despite lingering concerns about overbuilding and too much high-end product, multifamily investment retains its built-in advantages. Though the oldest group of Millennials has now reached traditional home-buying age, the cohort will continue to drive the multifamily sector. In 2018, the number of Millennials reached 73 million, edging out Baby Boomers to become the largest demographic group. In 2016, 74 percent of Millennials lived in a rental property, according to Pew Research Center. That bodes well for long-term investment and development. \u201cYes, there is a lot of construction and supply, but there\u2019s also a whole lot of demand,<\/em>\u201d said Thorpe. \u201cDemographics are still very, very favorable for the multifamily sector.<\/em>\u201d<\/p>\n The office sector continues to offer a mixed bag. After strong absorption through 2017, a steady stream of new product began to push supply past demand in 2018, the MIT Center for Real Estate reported. That ratcheted up competition for tenants, nudged up vacancy and squeezed rent growth. Notwithstanding those issues, demand for space created by coworking is a factor to watch closely. Of note, WeWork emerged in late 2019 as New York City\u2019s single largest tenant. Technology hubs are creating opportunities for office development in secondary markets like Provo, Utah, and Raleigh-Durham, N.C., as well as in San Francisco, Seattle and other established hugs.<\/p>\n No other property category matches retail for challenges, contradiction and innovation. The sector will watch closely for the impact of the series of events that unfolded in 2018. On the consolidation front, Brookfield Property Partners\u2019 $15 billion acquisition of GGP Inc., and Brookfield Asset Management\u2019s deal for Forest City Realty Trust, are recalibrating the investment playing field. Another factor will be the fallout from the Sears bankruptcy, expected to result in store closings and further difficulties for owners of properties anchored by the troubled chain.<\/p>\n Retail assets, including both malls and strip centers, are starting to be repriced. According to the Green Street Advisors Commercial Property Price Index, the two niches have lost 11 percent of their value since their peak in the fall of 2016, and mall REITs are trading a 20 percent discount to net asset value.<\/p>\n![\"\"](\"https:\/\/www.commercialsearch.com\/news\/wp-content\/uploads\/sites\/46\/2019\/01\/CapitalDistribution_Map.png\")
<\/a>Shifts and movement<\/h2>\n
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Sources: Preqin; NKF Research<\/em><\/p><\/div>\nThe Millennial effect<\/h2>\n
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