Insights Sep 25, 2018

5 Commercial Real Estate Trends of 2018

Real estate markets in the U.S. are in a state of constant flux and 2018 has proven to be a year of higher selling and buying activity compared to recent years. The last couple of years have been mired with political turmoil, as well as economic growth due to low inflation and low interest rates. Plus, the recently adopted tax laws and the economic uncertainty in Europe caused by Brexit have left some wondering how all that shapes up the commercial real estate market in the U.S.

Here are five commercial real estate trends you should know about for 2018.

Multifamily Market Is Growing Steadily

It was a strong 2017 for the multifamily market that has continued throughout 2018, but with moderation. Multifamily is the most active real estate segment in the country at the moment as vacancy rates are increasing slightly as new supply arrives.

About 350,000 to 400,000 units are expected to be delivered by the end of the year, according to the National Multifamily Housing Council. Plus, 625,000 units are currently under construction in the multifamily space. However, Yardi predicts that only about 290,000 units are slated to be delivered this year, a 2.2% increase compared to 2017, due to increasing construction costs and worker shortages delaying the completion date of many multifamily complexes.

Vacancy rates are also on the rise on a national scale and in most major metropolitan areas, although these figures will be below the historical average. Plus, nationwide rent growth is expected to only reach about 2.9%, which is below the historical average. This is due to a healthy labor market and lifestyle preferences, which is increasing the demand for multifamily units.

Foreign Investment Is Getting Stronger

The National Association of Realtors’ (NAR) latest report on international business trends in the commercial real estate found that most realtors in the space are located in smaller markets where the average deal is below $2.5 million. These markets are attracting more attention from foreign investors interested in smaller-sized properties due to the increased sales and leasing activity that 2018 has experienced.

World economies have been on the rebound since 2016, while the global economic output surged in 2017, resulting in higher activity from foreign investors for 2017. Plus, commercial real estate is a tried and true investment for investors around the world. About 59% of Realtors® completed a commercial real estate deal last year, while 18% said they closed a transaction for an international client.

The NAR report also found that out of the realtors who closed an international deal, 46% completed a buyer-side transaction, 13% inked a seller-side transaction and the rest closed both types of transactions. Plus, more than 60% of buyer-side sales were completed by foreign buyers who live abroad.

E-Commerce Growth to Fuel Industrial Sector

The e-commerce industry shows no signs of slowing down as more and more consumers prefer to do their shopping online. The industrial real estate market is being fueled by the growth of e-commerce as more online retailers are building warehouses to stock their items. JLL senior research analyst Mason Mularoni notes that the industrial vacancy rates are at 5.2%, marking an increase in demand thanks to e-commerce tenants.

Sales in the e-commerce space have risen 16% year-over-year and now amount for 9% all U.S. retail sales. Plus, e-commerce is responsible for roughly 12% of industrial leasing activity, as well as an additional 22% to 30% of indirect leasing through supply chain, logistics and distribution channels.

Retail Market to Rebound

It’s been a rough few years for the retail market, which has been plagued with bankruptcies and declining foot traffic in brick-and-mortar locations. However, research from Moody’s predicts that retail bankruptcies will slow down in 2018, which will allow the retail sector to rebound in the commercial real estate world.

The firm believes that the U.S. retail sector’s operating income will surge 3.5% to 4.5% by the end of the year, while sales will rise 4.5%. Large discount retailers such as Walmart, CVS and Walgreens will rebound thanks to their growth investments, cost efficiencies and bolstered front-end sales paying off. Even Macy’s and Nordstrom are slated to cut their losses by the end of the year.

Transaction Volume to Slow Down

Research from Ten-X Commercial found that the value of U.S. commercial property deals was up by 6.7% in the year’s first quarter, but transaction volume fell 14% year-over-year to $107 billion. The quarter also saw a weak 0.1% gain in commercial property prices, which marked a 1.4% slide compared to the year-ago period.

Deal volume in the office, apartment and retail sectors have taken a toll on the commercial real estate industry in 2018. Plus, technological changes to the industry is reducing the need for office and retail space, which will cause the market’s transaction volume to drop further.

A Healthy CRE Market

All in all, it’s a good time to invest in commercial real estate despite the decrease in transaction volume. Multifamily units and the industrial sector are proving to be solid investments in 2018. Foreign investment is on the rise as well, while the retail market is slated to rebound in a year plagued with uncertainties over the interest rate hike and tax code changes.

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