Commercial Real Estate Trends 2018

If you’re not excited about commercial real estate (CRE) in 2018, you may not be looking in the right places. There are at least 14 reasons this year will be a promising one for commercial real estate investors who can spot the right opportunities.

Is CRE a Good Investment in 2018?

In short, yes, but let’s take a closer look at why this is.

Here are three reasons to believe it:

1. The Industry Is Following the Economy’s Direction: Up

First, there’s the fact that the industry is continuing on an upward trajectory. In fact, it’s riding high on one of our country’s longest economic expansions ever.

Second, that’s not expected to change any time in the near future.

Ken McCarthy, the chief economist for Cushman and Wakefield, recently made his optimism public, saying, “I feel like next year might be the best year of the entire expansion…The U.S. economy seems to be picking up. With tax reform passing, you should see more investment. Europe is doing well. Asia is doing well. Next year could be the best year of the entire cycle.”

He went on to say that, even if the economy took a nosedive tomorrow, we’d still have just seen the country’s third-longest recovery in modern times. However, McCarthy believes this will become the longest economic expansion in our history.

2. Retail Bankruptcies Are Headed the Other Direction

Given the good news, it should come as no surprise that Moody’s predicts the number of retail bankruptcies will reverse this year while the economy and the CRE industry continue heading up. Moody’s also believes that 5 retail sub-sectors will see growing operating income figures that exceed 5%.

Fortunately, there’s still time to take advantage of this trend.

The default rate will probably peak at about 10.5% in March and then begin its decline until it gets all the way down to 4.9% in October.

Expect restaurants to enjoy a more successful 2018, too. Moody’s predicts operating profits to see grow by as much as 4% over the next year to year-and-a-half.

3. Volume of Deals to Pick Up

Finally, one more sign that CRE remains an incredible investment opportunity is the fact that 2018 is going to be another year full of deals.

The beginning of last year was rough for transactions, which is why some people may now be questioning whether or not it’s worth putting money into CRE.

However, that was largely because of the Federal Reserve’s boost to interest rates and the election of President Trump, an event that almost no one predicted. Even fewer people knew what to expect.

While there were other events along the way, the fact of the matter is that investments are back up. Expect that trend to continue, albeit slowly, throughout 2018.

Important CRE Factors That Are Changing in 2018

Aside from the optimistic performances related to CRE that we’ve already seen, there are three other trends that will affect the industry this year.

1. CRE PropTech Is Advancing

PropTech may seem like a bit of a buzzword, but this is not a trend you can afford to ignore in 2018.

Despite its long history, commercial real estate investing has largely managed to remain rooted in old traditions. The industry has deflected most attempts at disruption, but that’s going to finally change in 2018.

PropTech startups are already well on their way to doing so. As this happens, the industry will become friendlier to more first-time investors. These companies have already grown on the backs of $6 billion in venture capital since 2011.

What’s even more impressive, though, is that roughly 70% of that amount was invested in the past 2 years. This new interest will continue to grow in 2018 and, as it does, so will the amount of money coming into CRE.

2. The Continued Rise of Fintech

Though not nearly as new, Fintech is another technological sector that is going to continue bringing investments to CRE this year, as well.

Again, the real value of Fintech companies entering the CRE industryis that they’re bringing in new investors.

By getting rid of the middleman, more investors can put their money into commercial real estate and, just as important, they can do it faster than ever before.

3. Interest Rates Are Headed Back Up

Back in 2015, when the Fed introduced the first interest rate increase since 2006, many investors worried.

Since then, the Federal Reserve has raised it three more times.

Yet, the truth is that the CRE industry still has more reasons to celebrate than suffer.

Yes, higher interest rates will mean borrowing is more expensive. Cap rates will go up and the price for properties will come down.

Still, higher interest rates typically mean a strong economy, which almost always correlates with a stronger real estate market.

Types of CRE Properties That Will Perform the Best in 2018

Let’s now look at which types of CRE properties are going to be the best investments in 2018.

1. Retail

We already mentioned this one, but with retail defaults cooling down and set to reverse, now’s the time to look for CRE opportunities in this market.

A lot has been made about ecommerce’s effect on retail, but most people have only heard half the story.

First, the national average isn’t spread evenly. We’re seeing increasing signs of health in the southeastern, southwestern, and western states.

Second, while ecommerce may continue to knock off retailers that are already struggling, high-end assets will use this technology to improve customer experiences and their bottom lines. In fact, some ecommerce brands are opening stores of their own, proving that physical locations are still profitable.

2. Industrial

Industrial properties continue to show promise after having a great show in 2017.

Here are just some of the impressive numbers from the Ten-X Research Industrial Market Outlook for Fall 2017:

· Industrial pricing hit $80 PSF (an all-time high)
· Industrial cap rates dropped to 5.6%, which is by more than 30 BPS year-over-year
· Deal volume increased by 14.4% year-over-year, reaching $15.8 billion

3. Debt

Finally, now may be the time to explore the potential benefits of investing in commercial real estate debt financing.

Specifically, think about adding debt to a multi-asset or equity portfolio and enjoying some high risk-adjusted returns.

Commercial mortgage-backed securities were up last year, which is a clear sign that lenders are growing increasingly comfortable with the strict regulations that were introduced in 2016.

The 5 Cities That Will Perform Best in 2018

Lastly, there are five cities that are primed to make CRE investors extremely happy in 2018.

1. Atlanta

Atlanta is in the middle of a Millennial migration, which is having an enviable effect on their economy.

The apartment market saw an average vacancy rate of 9% last year and a 3.6% rent growth rate. Compared to the national averages of 6.5% and 2.7%, respectively, that may not look too impressive.

However, the reason for those stats is that the city welcomed 11,700 new apartment units in 2017. While about 9,500 of them were rented out, the rest will most likely be absorbed this year.

More will need to be built as the city continues seeing new residents.

2. Austin

Austin probably doesn’t need much of an introduction. The capital of the Lone Star State has the 8th fastest growing metro area in the country with an unemployment rate that hovers below 3%.

Among other things, the city has its tech industry and the University of Texas at Austin to thank for much of its success. The latter is responsible for keeping more than 50,000 residents here, many of which graduate and stick around.

3. Denver

Denver’s unemployment rate last year was almost nonexistent, getting as low as 2.2%. That also earned it the distinction of having the lowest unemployment rate of any city with a population over 500,000.

That’s all the more impressive seeing as how Denver took the top spot on the U.S. News and World Report of Best Places to Live in 2016. It won for three main reasons:

• Available jobs
• Quality of life
• Overall desirability

Those available jobs represent a growing economy that needs more space and more apartments for new employees.

4. Durham

According to Moving.com, Durham is one of the best cities for job seekers in 2018.

The city also made it to the fourth spot on that aforementioned Best Places to Live report, which claimed that Raleigh welcomes about 80 new residents every single day.

The driving forces behind the city’s impressive employment rates aren’t going anywhere, either. Duke, Duke Medical, and Chapel Hill are all-but-recession-proof. They bring tens of thousands of people to the city and employ a large number of them, too.

5. San Antonio

Keep an eye on San Antonio, as it may see the largest increase in multifamily units in the entire country (measured as a percentage of the current number). Retail and industrial properties will follow. The office market in San Antonio also saw some excitement toward the end of last year, something which will probably continue at a slow and steady rate in 2018.

Opportunities Abound in 2018

As you can see, there’s no lack of opportunities waiting for you in CRE this year.

Across the country and different markets, commercial real estate is going to offer countless ways for savvy investors to make profitable deals.
Now that you know where those opportunities lie, you can confidently start taking advantage of these trends.