“We expect consumers will continue to invest more capital into private and alternative real estate assets as public markets remain at record highs across all major asset classes,” Property Passbook founder Colin Bogar told Forbes. “Comparable yield risk remains favorable to private real estate versus higher risk bonds and equivalents.”
Here are some additional trends that make commercial real estate an assured investment in 2018:
Multifamily remains strong. According to Freddie Mac, supply will increase slightly faster than demand, and vacancy rates are expected to rise at the national level, but below historical averages. Freddie says that rents will continue to grow at current levels, thanks to a strong labor market and a still-unstoppable national/generational taste for multifamily living.
Secondary markets are booming. Primary markets like New York, Los Angeles and San Francisco are starting to overheat. The action is moving to secondary markets like Seattle, Portland, Miami, Raleigh-Durham, Houston, and even Nashville. Why? Affordability for both the young workforce and the companies hiring them. The result: invigorated downtowns and urban nodes, burgeoning light rail and bike paths, and a youth explosion in formerly decaying and dying real estate markets. According to Urban Land Institute’s (ULI) Emerging Trends in Real Estate report, cities with the highest recent gross absorption were secondary cities: Dallas, Boston, D.C., Chicago, Phoenix, Atlanta, Seattle, Kansas City, Salt Lake City, and Austin. Suburban Class B net absorption of 1.7 percent of stock in the past year was the highest of the four Class A/B CBD/suburban sectors. In the past year, half of all CBD completions occurred in just three markets—New York, Chicago, and Seattle.
Eight markets accounted for half of new suburban completions—Houston, Dallas, Phoenix, Baltimore, San Francisco, San Jose, Los Angeles, and Seattle. New supply is expected to continue to be concentrated: seven markets account for half of current construction, ULI reports.
The retail apocalypse may be slowing. Nobody in the retail sector was expecting much good news in 2017, but the year ended with a Christmas miracle: retail sales were up 5.5% during the December holiday shopping season, according to the National Retail Federation (NRF) analysis of government data. That makes the biggest year-over-year gain since the Great Recession of 2010. Of course, online shopping still rules — it increased by 11.5%, but online shopping — believe it or not — still only makes up about 20% of customer purchases. The traditional brick-and-mortars saw sales increase 4.1% to its best gain in seven years. The NRF forecasted a rise of no more than 4%. In fact, every sector of retail — with the exception of sporting goods — showed improvement.
“This counters the image that retail is dying and is in an apocalyptic situation,” Jack Kleinhenz, NRF chief economist, told CNN Money.
The new tax laws benefit commercial real estate. Section 179 of the United States Internal Revenue Code, which covers certain types of depreciation deductions, has been expanded. The regulation lets taxpayers opt to deduct as an expense– rather than capitalize — the cost of certain types of property. The new law doubles the dollar limit on the amount that can be expensed, from $500,000 to $1 million.
As well, “pass-through” entities (partnerships and limited liability companies, for example) will benefit from a 20% deduction under the new law. Instead of paying a direct corporate tax, they are able to “pass through” their gains/losses to individual members of of the company or partnership. Most real estate investments are structured this way.
Millennials are finally ready to buy. Millennials — the largest generation in U.S. history — will be reaching a point in their careers where incomes are growing and they’re ready to start families. According to Realtor.com, they could make up 43% of home buyers taking out a mortgage (that’s up from an estimated 40% in 2017), based on mortgage originations. Those three percentage points could translate to hundreds of thousands of new home purchases, particularly for first-time home buyers.
Technology continues to disrupt the industry — in a positive way. Relatively new technologies like blockchain, virtual reality, drones, digital crowdfunding, robotic automation, and property management software are becoming an increasingly acceptable part of the commercial real estate business. This is remarkable for an industry that was infamously slow to change. The physical and digital worlds will continue to meld together, and traditional players will find it increasingly impossible to ignore the evolution. As a result, new opportunities, deals, and dynamics will be presenting themselves.