Market Growth and Observations:
- The U.S. real estate market accounts for 13% of the GDP, and most operators specialize in very select segments of real estate, creating lots of fragmentation. There’s no clear leader in real estate “tech,” but capital is flowing rapidly into the space, with $5.2 billion invested in 2018, up from $1.4 billion in 2014
- Financial services is a leading sector in the adoption of tech, specifically Artificial Intelligence, which may affect how this sector uses office and retail space in the near future as support and sales positions are enhanced by the use of AI.
- Examples include voice recognition to control building systems, biometric identification to control building access, and data-driven decision making processes.
- The Bureau of Labor Statistics anticipates 10% growth in financial occupations (773,000 jobs) by 2026, many of which will be analysts, HR specialists, loan officers, and training personnel using AI tools to enhance productivity (great for cities driven by the financial sector).
- Employment in STEM (science, tech, engineering, math) jobs are projected to grow at a rate 73% faster than the broader market through 2026
- Most of America’s road system dates from 1950 – 1970 with an effective life of 50 years. eCommerce and the increase in parcel delivery are clogging the highways and our infrastructure, which is largely at the end of its useful life, and taking a toll. Someone (likely the taxpayer) will be absorbing significant costs in the near future.
Best Bets for 2019:
- Core and Core-Plus Opportunities
- Investors remain vigilant about risk management, and while not moving significantly into tertiary markets or higher-risk properties, they are targeting markets characterized by job growth but with better pricing than prime assets in major markets.
- Think creative-office, submarkets in the path of growth, or walkable urban-suburban submarkets
- Quick Flip Value-Add
- Deals with the ability to execute and exit in 2020.
- Most will be in second-tier cities in the south and intermountain states, targeting middle market sectors where underserved demand can be satisfied
- Expansionary Markets
- With more emphasis placed on amenities, sustainability, and wellness, expansionary markets are favored where buildings have access to transit, urban-like amenities and F&B options, larger floor plates with more light, and customizable design
- This effect will be more pronounced than in previous cycles
- Anything Industrial
- Offers great risk-adjusted returns, barring a trade war of serious proportions
Issues to Watch in 2019:
- An accumulating number of triggers, rather than one single trigger, could cause the next downturn, such as labor shortages, flattening of the yield curve, a potential Wall Street asset bubble, tariff and trade tensions, and geopolitical risks.
- Cap rates have trended low, but are also convergent, with just a 30 basis point difference between office, retail, and industrial at mid-year 2018, suggesting that some deals may be pricing risk too cheaply.
- Total cost of major natural disasters in 2017 was the same as the combined previous 10-year period (largely hurricane Maria, Irma, and Harvey). The evidence of floods, wildfires, and storms in 2018 indicates the intensifying risk. Expect property/casualty insurance to rise in 2019 as insurance companies will price the massive payouts into future premiums
In conclusion, I’ll leave you with my favorite quote from the Emerging Trends Report by the CEO of a top 5 multi-family REIT, and one that applies to all sectors of business:
“What do we do that nobody else does, and the consumer can’t do for him or herself?”
As we look at the year ahead, we need to stay focused on our core competencies and what we do best, but remember that it’s our role is to ultimately benefit the consumer and to improve the built environments around us.
Jared Londry is a Director on the Charlotte Capital Markets team where he specializes in the disposition of office and mixed-use assets on behalf of institutional investors throughout the Carolinas. He has been involved in over $1.3 billion of investment property transactions in his tenure with Cushman & Wakefield.