January 2, 2019 Maria Verdin

Looking Back While Moving Forward: CRE Outlook

charts. Business reports and pile of documents on gray reflection background

Though commercial real estate remains a popular asset class among investors, there are signs that the industry is maturing. The end of one year and start of another has led expert sources to examine what’s been going on, and what is likely to occur. Looking back at 2018, the consensus is that sales volume continues strong. Meanwhile, 2019 could be a turning point for the CRE industry.

The Review

In looking back at the previous year, Real Capital Analytics’ most recent report pointed out three things:

1) A suggested slowdown of investment activity (based on November 2018 figures)

2) The pace for 2018 is 3% higher, year over year

3) U.S. commercial property prices increased 7% in November 2018, year over year

According to RCA’s Jim Costello, the slowdown in Q4 2018 can be attributed to single-asset trades, which dropped at double-digit rates in October and November. Portfolio and entry-level transactions, on the other hand, have ended up being an important driver of deal activity through much of the past year. Though December 2018 figures haven’t yet been released, year-to-date volumes are already ahead, meaning December would have to be catastrophic not to surpass 2018 levels, Costello added.

The Outlook

Gazing into various crystal ball publications released during the past couple of months, the commercial real estate outlook can be classified by the following: Change and agility. Increasing interest rates, compressing profit margins and geopolitical uncertainty will have an impact on CRE investments, while technology advances will continue exerting an influence on the industry.

Jussi Askola, a former private equity real estate investor and writer for investment advice site Seeking Alpha, painted a bright picture for CRE investors, pointing out that prices are continuing to increase with NOI growth. Furthermore, the real estate cycle still has room for growth, meaning more investment opportunity across much of the commercial sector.

There is, however, a difference in opinion between direct real estate investors and those buying REIT shares. Askola commented that, while real estate buyers and sellers regard 2019’s potential as “half full,” REIT investors, concerned with everything from interest rate hikes to trade wars are, in Askola’s words, “running for the exit.”

Two other reports, issued in the latter part of 2018, point to some changes, as well. The Urban Land Institute/PricewaterhouseCooper’s “Emerging Trends in Real Estate,” indicated that the commercial real estate industry is “’coming off a peak’ (which) seems to be a theme” for the coming year. But, with that in mind, “coming off peak” doesn’t translate to a major correction. The peak has been high, and a correction is likely inevitable. Furthermore, capital — which is still in good supply — will be deployed to both priced-to-perfection core assets and opportunistic investments in non-core markets.

Meanwhile, Deloitte’s “2019 Commercial Real Estate Industry Outlook” suggested that “a large proportion of respondents plan to increase their capital commitment to CRE,” with the United States, Germany and Canada leading the way. Furthermore, the report noted that mixed-use properties and properties with flexible leases and spaces are likely to attract a higher allocation of investment dollars. Still, the marketing is maturing, and market participants need to make the appropriate adjustments in the coming year.

And, impacting those investment dollars and decisions, Deloitte goes on to say, will be technology. Property technology — or proptech, as it’s referred to — is a new and growing trend, which takes into account many factors of commercial real estate such as smart buildings, data collection and automation services. “Globally, almost 9 in 10 of those surveyed believe that proptechs will have a moderate to significant influence on the CRE industry,” the Deloitte report indicated.

Finally, the issue facing CRE is talent, especially talent and technology. ULI indicated that one construction company CEO is “having difficulty securing and retaining engineers, architects and estimators needed to get the most out of advancing technologies.” Deloitte, meanwhile, reminded readers that workspaces and work are becoming digitized. Additionally, most investors believe that CRE companies should do more to nurture talent.

The Deloitte report concluded with the idea that, with tech advances influencing CRE business models, CRE companies need to be more agile and innovative. The report noted that, while most institutional investors are committed to the commercial real estate industry over the next 18 months, “CRE companies will have to find ways to realign their business priorities and adapt to the new demands of their stakeholders to remain relevant.”