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, according to a new report from CBRE, Los Angeles.
CBRE’s 2019 Real Estate Market Outlook anticipates that absent economic shocks such as sharply rising inflation and import costs will generate solid growth in the U.S. economy amounting to a 2.7% gain in gross domestic product across all sectors. That, in turn, will contribute to stable capitalization rates for the market as whole 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 and mergers-and-acquisition activity for the capital markets sector,” says Richard Barkham, global chief economist and global head of research. “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 for the coming year.
U.S. economy
“We see 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%,” says Barkham.
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 in low in some cases. Specifically, various secondary markets may register cap-rate decreases in 2019.
An expected, a 1.6% growth in office-using jobs in 2019 should beget a 10th consecutive year of positive net absorption. 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
With vacancy now at a historic low of 4.3% 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 multi-story warehouses in select markets and a shift to more industrial cold storage space from retail cold storage space,” says Barkham.
Strong consumer sentiment will 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 non-retail uses. The omni-channel movement will finally 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.