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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2017

The Commercial Property Sector Is in Flux

Pay attention to the emerging market trends to get a jump on the future

The commercial real estate industry has displayed continuing healthy signs so far this year. Still, a number of risks and influencing factors remain.

For starters, overall activity is declining from the peak levels the industry experienced in 2015 and 2016. The commercial real estate industry is seeing less transaction volume and financing opportunities because of the current valuation and competitive nature of the market. In addition, given the length of the economic recovery and the uncertainty of tax and regulatory reform, banks have become more cautious.

As we get ready to transition into 2018, many are wondering what the future holds for commercial real estate lending. Following is an overview of the top trends across the four major asset classes, including multifamily, retail, office and industrial. Commercial mortgage brokers and lenders should pay close attention to these trends to best position themselves and their clients for the future.

Multifamily

Over the past few years, the multifamily market has experienced a great deal of lender interest, with attention on markets such as Austin, Texas; Charlotte, North Carolina; Atlanta and Dallas. Whether as a result of wage- and job-growth patterns, the changing priorities among a new generation of households or some combination of those variables, there continues to be opportunity for investors in the multifamily market.

The growth trajectory for the multifamily market, however, is slowing. Consequently, investors and borrowers, as well as the lenders and mortgage brokers who serve them, should use caution and monitor for signs of overbuilding.

On the flip side, there is a continuous, growing need for affordable housing across the country. According to the U.S. Department of Housing and Urban Development, an estimated 12 million households now pay more than 50 percent of their annual income for housing — a ratio more than 30 percent is considered cost burdened.

Why is that? The number of households needing affordable housing has grown and the supply has not kept pace. In the years ahead, the industry will need to pursue many unique financing avenues to find a solution.

Retail

Consumer spending grew at a 2.8 percent annualized pace during the second quarter of 2017, according to the Federal Reserve’s personal consumption expenditures price index. That expansion marks a return of consumer-spending momentum and bolsters the overall outlook for economic growth.

Despite this increase, the retail real estate industry has experienced significant change in recent years, and the transformation is profound and will continue throughout 2018. The convergence of brick-and-mortar and online retail will continue to create major seismic shifts in the industry. In the past year, brick-and-mortar stores have closed at a record pace, while online retailers such as Amazon continue to grow. 

Urbanization also has had a big impact on the retail real estate industry, in both suburban and metro markets. Within the suburban market, retailers may be at a risk of having too much brick-and-mortar space, given many young families are opting to live in urban areas. Retailers in urban markets are expanding aggressively to meet the increased demand of the growing population.

Given the length of the economic recovery and the uncertainty of tax and regulatory reform, banks have become more cautious.

Demographic shifts will remain an issue for the industry as a large number of retiring baby boomers give way to the wave of millennials starting careers and buying their first homes. Millennials continue to seek amenity-based housing within close proximity to stores, transportation and restaurants, driving demand for retail space in urban environments.

Office

With job growth increasing for most of 2017, office real estate space constitutes an expanding market for investment. One portion of office real estate expansion is the demand for more office space near entertainment venues and other amenities. These office buildings are relying on smaller, flexible workspaces. Co-working spaces also have become more common as professionals choose alternative working methods. 

New office projects and many existing office buildings will be constructed or re-purposed as part of mixed-use developments throughout 2018. A best-in-class example of this trend is the development of Hudson Yards  in New York City, which will include 18 million square feet of commercial and residential space, office towers, shops and restaurants.

Green buildings remain a priority for the office sector. There are many benefits to building green, including improving operational efficiency, potentially lowering energy costs and meeting building-code requirements. Tenants place a high demand on green buildings, because they have a positive impact on health and productivity.

Industrial

Consumer-buying behaviors are not only impacting the retail real estate industry, they also have significant influence on industrial properties.

Consumers’ need for immediacy and convenience is driving demand for additional distribution centers across the country.  A majority of retailers and e-commerce sites are pursuing distribution centers within close proximity to the biggest U.S. cities.

According to the U.S. Census Bureau , the trajectory of e-commerce sales will continue to rise, creating a continued need for industrial real estate.

• • •

Ultimately, macro-economic signs point to a healthy financial landscape as we transition into 2018. Changing market trends, however, including global and political uncertainty, are expected to have a significant impact on the real estate and business communities going forward, as well as on commercial mortgage brokers and lenders dependent on the dynamics of the real estate industry.

Owners, borrowers, investors and the brokers who serve them should closely monitor these changes, and maintain an open dialogue with financing partners to ensure that strategies can be revised as the market environment shifts in the coming years.


 


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