Many experts within the real estate industry believe the market will continue a path of slow, steady growth into 2020. Urban land Institute and PwC’s recently released Emerging Trends in Real Estate 2020® report indicates that the current economic environment is prime for investment in real estate because it often provides more stable returns than other asset classes.
The report included input from 750 Commercial Real Estate (CRE) executives (owners/ operators, developers, brokers, investors, lenders, advisors, etc.) and over 1,500 other respondents. The report learned that tenant experience is rated as top priority, and that the benefits of IoT and AI technologies are valuable not just for improving tenant experiences, but also lowering costs and raising operational efficiency.
Other developing trends include a shift in office and retail spaces to allow for more flexible, mixed uses. Offices that become more people-focused achieve greater productivity. Large companies are utilizing coworking spaces to accommodate commuters and facilitate flexible schedules. Traditional shopping centers are transforming into mixed use consumer centers that might include a blend of stores, medical, grocery, eatery, office, and residential spaces.
All About Demographics
The Emerging Trends in Real Estate 2020® report also identified several trends that described how demographics will impact real estate. Millennials are moving into suburban areas from the urban centers but want to live in communities that emulate that live-work-play vibe, which is becoming a higher priority as it evolves into “hipsturbia.” Developers are building suburban mixed-use developments that emulate a cool vibe of large cities. Three of these communities are located in Maplewood, Hoboken, and Summit, NJ. These areas are becoming more diverse and walkable as they offer a blend of retail, recreation, and transportation access.
The baby boomer generation continues to age – and it’s caught the attention of developers and investors alike. Many aging baby boomers gravitate toward 55+ communities which offer activities and amenities specifically tailored to their generation. While many may think of “senior housing” as independent or assisted living, or memory care and nursing home facilities, the active adult communities are an emerging class that deserves attention. Different from conventional multifamily units, these communities tend toward a lower number (120 – 160) of units.
An increase in coworking is leading businesses to revisit their office space to determine the most practical, flexible use. As telecommuting continues to gain popularity, the need for office space may diminish. The growth in technology (and shrinking technological barriers) that facilitates videoconferencing, online shopping, and ease of telework may very well alter office real estate economics.
Larger enterprise users use coworking space as either a specific solution for individuals or as a short-term lease for fluctuating space needs. There’s also been a shift from owned to leased office spaces, leading some companies to dedicate part of their real estate portfolios as flex space to more easily respond to and accommodate changing needs.
“One size fits all” no longer applies to this real estate market, as shopping centers become customized, some retailers move from brick-and-mortar to online platforms (even as other retailers recognize the need to build out that physical store footprint), and shopping patterns of some of the largest demographics (millennials and generation X) evolve. The retail space is growing to include other components, like:
- Experiential and entertainment centered on activities like art, amusements, food, pop-up experiences
- Food and beverage, with more food halls and a trend toward healthier, more convenient food options in lieu of traditional fast food
- Fitness, health, and wellness uses, like boutique and value gyms, high-end workout dealers, and even expanding medical offices and clinics that have moved into retail spaces
- Coworking and shared office spaces – in malls! While still in its infancy, the model shows signs of strong growth potential, since malls have built-in amenities like easy access to parking, food, and even healthcare centers and gyms
Technology and Sustainability
Technology innovation and sustainability are driving how the real estate investment community develops its strategies. A PwC report recommends that real estate managers should plan for accommodating greater sustainability in building design. The concept will likely expand to include creating places where people live and work that feature green spaces, good air quality, and areas for socializing and recreation. Green offices will incorporate renewable energy technologies, waste reduction, and increased use of natural light. Buildings that earn green labels from Energy Star or LEED, for example, may command higher price premiums.
Developers are also taking advantage of the technology advances which make eco-efficient building more practical and affordable. Smart appliances, smart meters, smart building management systems, integrated distribution management systems, and city-wide energy management systems are already transforming the residential and commercial real estate landscapes.
Continued Growth in 2020
In a 2020 forecast, Richard Barkham, the Global Chief Economist and Head of Americas Research says, “We’ll see resilience across asset classes such as office, retail, and multifamily as demand continues to buoy those sectors.”
The report projects the flexible office sector to grow 13% and flex office inventory to grow to 87 million ft2 by the end of 2020. Other trends nationwide include:
- The continued trend of converting malls to mixed-use complexes
- Overall vacancy rates of multifamily units to hit about 4.5 percent
- Alternative investments — including self-storage, data centers, medical offices, life sciences facilities, student and senior housing — to grow (it hit a 12/5% share of all commercial real estate investments in 2019)
As low unemployment rates continue, a report from Marcus & Millichap indicates that the Class-C multifamily are experiencing an increase in leasing. Because wages haven’t grown quickly, demand for affordable rentals — as opposed to mid-market Class-B and luxury Class A rental properties — is higher. Experts caution that the real estate industry should exercise discipline and lend more responsibly than in past years that led to the last recession.
While the economy continues to expand and the property market flourishes — thanks to a robust job market, low interest rates, and good consumer confidence — demand will continue within the office, retail, and multifamily sectors. Some experts and researchers anticipate that transaction volumes and capitalization rates will remain relatively stable. Additionally, they predict that:
- Rents and net absorption will likely post small gains thanks to a decrease in new retail construction
- Supply is expected to outpace demand by 20 to 30 million ft2 in the industrial and logistics sectors, keeping vacancy rates very low, and increasing rents an average of 5%
- The trend to convert malls into mixed-use complexes will continue into 2020