Alternative, multifamily and office space are expected to run the show in the new year
2020 will be good, but not great.
In the 2020 Real Estate Market Outlook by CBRE, chairman of Americas research Spencer Levy says it could be a pivotal year for the U.S. commercial real estate industry, with a keen focus on geopolitical, economic and local regulatory issues.
CBRE is predicting more growth, although the pace of expansion could slow compared to 2019. With federal rate cuts, a solid property market, strong growth and continued low rates, it should be another good year. But 2020 won’t come without its challenges.
“We expect some risk of oversupply in industrial and Class A multifamily, but secular shifts that have heightened demand far in excess of historical norms should mitigate material impact on fundamentals, which are expected to stay strong,” said Levy in the report.
While investors are increasingly cautious, investment capital remains abundant.
“With global bond yields expected to remain extremely low and equity markets likely weaker and more volatile, the stable, solid returns of U.S. commercial real estate will be even more attractive,” Levy wrote. Foreign investment is also expected to rebound after a significant slowdown this year.
Office and industrial demand continues
Demand for office space will remain strong in 2020. Tech tenants are expected to dominate leasing activity, which isn’t surprising as the tech industry accounted for 21.6% of leasing activity in the first half of 2019. Interest in flexible office space will continue to grow, but at a much slower pace than previous years due to drawbacks at WeWork.
“Occupier demand for flex space should remain strong in 2020 as companies deal with headcount uncertainty and decentralized workforces,” according to the report. Speed, flexibility and low capital will continue to drive the demand for flex workspace in the new year and beyond.
CBRE is predicting a dramatic shift in 2020 as tight market conditions cause more renewals in industrial spaces. Rents in the industrial space are expected to rise by 5% in the new year, despite supply outpacing demand. This is the first time there will be an overhang of space since the 2008 recession.
“The vacancy rate may increase slightly but should remain near historical lows in 2020.” Overall, the market will remain stable, largely due to the growth of e-commerce.
A return to retail?
U.S. retail is expected to stay pretty steady with unemployment at a 50-year low, but growth will slow as consumers become more conscious with the upcoming U.S. election, issues of affordable housing and fears of rising costs due to the U.S.-China trade conflict. Mixed-use spaces will surpass retail-only as coworking, co-living, recreation and greens spaces are merging to complement shopping and dining venues.
“2020 will be a landmark year for how the industry challenges, amends and restructures these often decades-old REAs to successfully integrate new uses,” the report stated.
The Gen Z population will also spark a return to brick-and-mortar retail spaces due to their interest in experience-based shopping. They want a seamless shopping experience, where they can research and compare online, but fulfill that same order in-store. The report sites another study that found 81% of Gen Z prefers to shop in-store. “While the store experience offers Gen Z brand connection and immersion into the trifecta of product, service and customer experience, it also serves as a form of ‘retail therapy,’ providing respite from constant digital engagement.” The report goes on to say that 2020 will be a pivotal year for reinventing the retail landscape.
Modern demands on multifamily
Multifamily will continue to thrive, according to the report, but will experience a bit of a cooldown due to new supply outpacing demand. The vacancy rate will go up, but still stay below the long-term average of 5.1%. Due to slower economic growth, apartment demand is projected at 240,000 units in 2020, which is about 20% less than what was estimated for 2019.
“Millennials will continue to move into homeownership, albeit at a modest pace due to affordability issues,” the report stated. While development will continue in both urban and suburban areas next year, there is a shift in focus to suburban locations. “Buying or building in the suburbs will remain the best bet based on market performance and investment returns,” according to CBRE.
The report predicts that investors will be particularly interested in alternative spaces in 2020, like self-storage, data centers, medical offices, and senior and student housing.
“Preliminary data for 2019 shows the alternatives’ market share rose to nearly 13% of total commercial real estate investment.” The increased interest is driven by yield premiums, rising market demand, expanded product availability, portfolio diversification and transparency. According to the report, greater transparency will continue in 2020 to attract investors less familiar with the space. Some challenges include scale and limited product availability, oversupply and operations.