Meridio’s 2019 Commercial Real Estate Outlook
As Meridio continues tokenizing assets in 2019, we’re going to be paying close attention to market conditions to determine investor appetite for asset types and regions. Below is a summary of overall market trends we see emerging.
A report by Cornell University’s Baker Program in Real Estate and Hodes Weill & Associates found that global institutional investors plan to increase their allocations to real estate next year, ticking up from 10.4 percent in 2018 to 10.6 percent in 2019. Similarly, a survey by Deloitte found that 97 percent of respondents plan to increase their capital commitment to CRE over the next 18 months.
But while real estate remains in favor, certain asset types will receive preference in the coming years. We’ve gathered data of the various property types to provide some insight from investors on their outlook going forward.
Industrial property remains an attractive asset class, as demand for space outpaces supply. The average cap rate for US industrial assets now sits at a record low of 7.0 percent and is likely to continue compressing due to economic expansion and growth in e-commerce. According to Emerging Trends in Real Estate® 2019, investors find Brooklyn particularly attractive given businesses’ need to find last-mile industrial assets in the vicinity.
Office assets continue to struggle as smaller markets grapple with sluggish local economies and bigger markets face unforgiving demand and supply factors. Vacancies have stalled at about 16% over the past three years. The shift to open-floor plans, increased remote work culture, and less need for physical space has left the segment oversupplied. With unemployment already at record lows and the economic cycle likely near its later stages, many investors consider the office space to remain cool.
Retail continues to struggle in the face of growing e-retail, which now comprises 14.7% of total retail sales. Retail bankruptcies and downsizings have been a dominant theme, resulting in a large supply overhang especially in Class B and C malls. At the same time, dominant brands such as Amazon, Casper, and Warby Parker have announced additional physical stores. The common link is these are digitally-native companies who have put technology first for consumers, suggesting the retail industry will continue to evolve in this direction.
Demand for multifamily assets remain strong in part to a strong labor market and rising wages. However, supply is beginning to catch up — new completions have outpaced absorption for six straight quarters, and though vacancies remain low at 4.7%, they are at the highest levels since 2012. Demand will likely remain strong, though, as the steady rise of mortgage rates and a number of other generational shifts will likely spur potential home buyers to continue renting.
Hotels are forecasted for its tenth consecutive year of growth, according to CBRE. A report predicts hotel occupancy will rise to 66.2 percent next year, primarily due to a projected 2.1 percent increase in demand compared to a net supply increase of 1.9 percent of the year. Given hotel revenues are correlated with the strength of the overall economy, it is likely this asset class will continue to perform well as long as the US economic cycle remains firm.
Among nontraditional CRE assets, most investors are looking to increase capital allocation towards data centers, health care, and mobile towers. This reflects the macro view of the impact technology and data will continue to have on business and society, as well as the aging population.
2019 will be an exciting year for real estate and Meridio. While many see a recession ahead of us, it is not clear how that will affect real estate and specific asset types. Stay tuned for more updates as we’ll be sharing our research more frequently as we continue to bring real estate into the digital age.