With the United States currently in the midst of its longest economic expansion in history, the nagging fear of recession is in the back of every commercial real estate investor’s mind.
Some wonder how the recession, along with other factors and trends, will shape the outlook for the commercial real estate market in 2020.
According to forecasts by The Urban Land Institute (ULI) and PwC published in their Emerging Trends in Real Estate 2020, the overriding sentiment from a survey of commercial real estate investors, industry insiders, and power players is that there’s no cause for alarm in 2020. Some sectors, such as multifamily and affordable housing, there’s even cause for optimism.
Here are the top commercial real estate trends for 2020:
No Need to Panic
Despite the alarm of recession indicators like the inverted yield curve for U.S. Treasury bonds, volatility in global financial markets, and an escalation of the U.S. – China trade war, the ULI and PwC report touts the industry’s ability to withstand a potential economic downturn in 2020 even in the face of the possibility of softer real estate demand.
In fact, a potentially volatile economic environment could be prime for investment in real estate since it can often provide more stable returns in a downturn than other asset classes and is still experiencing strong fundamentals.
The real estate market now is very different from the one that caused the Great Recession – the economy’s last downturn. Whereas the real estate market at the time was plagued with the underlying cancer of subprime loans and oversupply, that is not the case with the current market, which is not oversupplied or plagued by leverage issues.
Look to Multifamily and Affordable Housing
In the years since the Great Recession, the increase in home prices has more than doubled the pace of the rise in household income. That means home affordability has gotten more out of reach for more Americans who have no option but to rent.
This has created unprecedented demand for multifamily and affordable housing that is grossly undersupplied, with the gap only expected to increase in a downturn. Affordable housing is the one segment expected to thrive in 2020 should a downturn occur where rents and property values could buck the trend and rise as the rest of the economy falters.
Millennials and Baby Boomers will Drive Multifamily Demand. The growth of the Millennial workforce is not being followed with a corresponding rise in homeownership. In fact, homeownership rates of 32 percent for 25-29 year-olds and 46 percent for 30-34 year-olds in 2017, is well below the national average of 64 percent.
With most Millennials resigned to renting and many Baby Boomers opting to downsize, demand for multifamily and affordable housing will only rise in the foreseeable future.
Opportunities in Secondary and Tertiary Markets
Cap rate compression in gateway markets from foreign and institutional investors opens the door for investment secondary and tertiary markets where opportunistic and value-add opportunities still abound for those with the expertise and boots on the ground to find and exploit these undervalued opportunities.
The features that make 24-hour and even 18-hour cities coveted by Millennials have now spilled over into the suburbs and secondary markets resulting in the mass migration of skilled labor to these markets.
Gateway cities no longer have a monopoly on transit access, cultural institutions, sports teams, fine dining, walkability, or recreation options.
As a result, Southern and inland secondary markets with strong market fundamentals like the cost of living and research universities along with the infrastructure to support strong demand from an influx of labor not only boast higher cap rates than gateway markets but are expected to provide superior returns to investors than their higher-profile counterparts.
Real estate market trends make non-gateway markets like Austin, Raleigh/Durham, Nashville, Charlotte, Dallas/Fort Worth, Orlando, Atlanta, Tampa/St. Petersburg, etc. among the best places for commercial real estate investment in 2020.
Millennials and younger generations are increasingly factoring social causes into their housing as well as their investment decisions.
Environmental, social, and governance (ESG) considerations are coming to the forefront in the housing and investing choices of these generations. CRE projects that offer more than a bottom line, such as being green or community-oriented, can attract younger investors and residents alike. ESG-centered opportunities have the potential to become the most popular investment vehicles over time.
Commercial real estate as a whole is due for a correction, but some factors suggest any correction will be minor. That’s because as interest rates rise and conventional borrowing becomes more restrictive, private equity will be able to fill that void more than.
In a downturn, there should be an influx of investors, including real estate private equity funds, institutions, and family offices looking for stable, consistent returns in an uncertain and unstable economical environment. This influx should soften the drop in property values.
Some segments, such as retail, industrial, and office, could see higher drops than others, while other sectors less correlated to the broader economy, like multifamily and affordable housing, could thrive.
As we enter uncharted territory in 2020, and our economy continues its most prolonged period of expansion, there is no need to panic as the fundamentals remain strong.
Undoubtedly, commercial real estate as a whole will undergo correction in a downturn, but those investors focusing on the right markets (secondary and tertiary) and in the right segments (multifamily and affordable housing) may not only find shelter from the oncoming storm but may thrive.
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