For the past five years, my company, Standard Management Company, has cooperated with any number of universities, financial institutions, real estate companies, and industry leaders to produce an all-day conference that is, at heart, more of a conversation than a conference on the direction of the real estate industry. This year, in January, we will tackle what we believe will be the prevailing topic in the real estate sector in the coming year: As the face of commercial real estate continues to change, what disrupting forces should you expect?
Participation in This Conversation Requires a Little Bit of Background
There is a multi-point conversation to be had on this topic. Here, I’ve laid out the points, factors, and some debate-worthy conclusions I believe have emerged in the commercial sector in 2018 and will continue to influence commercial real estate in the coming year.
Topic #1: Real Estate pricing
Factor 1: As has been said many times, “The future is not ours to see.” However, based on past experiences and trends, I expect the leveling off of the rise in both commercial and residential real estate prices.
Factor 2: There will continue to be a shortage of housing. Many proposals to solve this problem will be made, both on the industry level as well as by government agencies. Adding to the shortage of residential housing will be the continued efforts to impose rent control, which often contributes to a housing shortage.
In other words, rent control is not a cure but a part of the problem. It discourages growth in housing stock and has been shown in many areas to actually reduce the amount of available housing.
Factor 3: Mobile home parks and pre-built housing will help to fill the housing shortage at affordable prices.
Developing Trend in the Conversation: The trend towards renting versus single-family-home purchases will continue due to cultural changes and millennials favoring later marriage and procreation.
Topic #2: Commercial Product Evolution
Factor 1: Multi-family property has been the number-one choice for investors for some time. Concerns about the growth of online retail and other factors has caused movement away from acquiring retail, resulting in cap rates increasing in the retail sector and decreasing in the multifamily sector.
Prediction: Retail property will continue to be successful if well located. There seems to be a trend away from power centers and malls with the focus more on locally oriented centers, as people still want to go to the market to see what they are buying. While there may be a small increase in home delivery of groceries, supermarkets will continue to be a traffic draw for local services.
Factor 2: Fashion and specialty food products will continue their growth in online popularity.
Factor 3: The gap between cap rates for multifamily properties and local shopping centers is already dramatic and should continue through 2019. Opportunities will be most easily found for investors looking locally.
Developing Trend in the Conversation: The factors which affect returns and success will continue to be different in each product type. The most important, for example, in multifamily is generally the school system. Better schools bring higher prices and occupancy in multifamily. With retail, it is more a matter of traffic and population concentration. At Standard Management Company, the “acid test” for shopping centers is how many cars per day go by the center, whereas the school system is our number one factor in sorting out potential multifamily purchases.
Topic #3: Interest Rates, Inflation, and Real Estate Values
Factor 1: It would appear that the government is dedicated to continuing gradual increases in interest rates – at least for now.
Factor 2: Usually when interest rates rise, cap rates will rise as well. In this cycle, that has not been the case. In fact, the opposite has happened.
Factor 3: We are in an inflationary economy, and the cost of everything going into construction will continue to increase over time.
Developing Trend in the Conversation: The only thing we can say for certain is that in the long run, the value of real estate will increase. There will be various periods of recessions but after the recession the replacement value goes higher.