Commerical Real Estate Development

Commerical Real Estate Development

Challenges in Real Estate Development

  • The U.S. economic news has been so positive, in fact, that many investors today worry the economy could be due for a downturn. As this current bull market nears its 10th straight year and could become the longest-running period of economic growth in U.S. history, concerns about a correction may grow.
  • An expanding economy could lead to new business formation and the growth and expansion of existing businesses, all of which can also lead to increased demand for real estate. The converse, however, might also be true: A weakening economy can hamper demand for real estate, which can put downward pressure on the performance of existing commercial properties.
  • As Forbes has written, rising interest rates can signal a strong, growing economy, which often suggests that real estate is expected to continue to perform well. It is important to keep in mind, however, that the U.S. economy has enjoyed historically low interest rates for years, and a sudden or significant spike in rates could slow available capital for commercial real estate development, which could undermine some real estate-based initiatives.
  • As the national unemployment chart in the introduction shows, joblessness has been held below 5%, which economists have historically considered a mark of “full employment,” for more than a year. If this trend continues, it is a good indicator that more businesses will require real estate, a potential boon to REITs invested in commercial properties such as office buildings, manufacturing plants, and other facilities that house a business’s workforce.

18 Commercial Real Estate Trends To Dominate In 2019

  • Industrial real estate demand soared to new heights this year, and CBRE Head of Industrial Research David Egan expects more of the same in 2019. Net absorption resulting from e-commerce growth is expected to average between 75M SF and 94M SF, same as this year, according to CBRE’s 2019 Outlook report, and a lack of new supply has driven vacancy levels down to 4.3%, a historic low.  
  • With the retail industry stabilizing in 2018, CBRE Head Of Global Retail Research Melina Cordero expects retailers to begin reinvesting in their physical footprints to achieve the perfect omnichannel shopping experience for consumers. In addition, digitally native (or e-commerce only) retailers will increasingly shift to open physical stores to grow their business and retain more customers, Cordero said.
  • Commercial real estate professionals — from owners and operators to brokers and architects — can no longer deny the impact technology is having on the industry. More real estate firms are embracing the latest innovations to streamline work tasks and create a more paperless, transparent approach to sourcing deals, managing assets, analyzing data and closing transactions.
  • It comes as no surprise that industrial real estate assets would be an anticipated favorite for investors in 2019, along with multifamily assets, according to ULI’s 2019 Emerging Trends report. Deep-pocketed investors like Blackstone Group continue to gobble up entire portfolios of industrial assets at a rapid pace this year, such as its purchase of industrial REIT Gramercy Property Trust for $7.6B, a portfolio of last-mile logistics assets from Harvard University for nearly $1B and a portfolio of 41 warehouses from FRP Holdings Inc. for $359M.
  • Rising construction costs were the No. 1 real estate and development concern for respondents that participated in ULI’s Emerging Trends in Real Estate 2019 survey. On a scale of one to five, five being of the greatest importance, construction costs ranked 4.59, with land costs and housing costs and availability following close behind at 4.14 and 4, ULI reports.

2019 Commercial Real Estate Industry Outlook

  • New business models and competition, extensive use of technology, and changing tenant and investor expectations are redefining the commercial real estate (CRE) industry. Fundamentally, CRE companies should gain a thorough understanding of the changing usage pattern of the built space.
  • Technology has permeated every aspect of the CRE business. Companies are adopting a variety of advanced technologies, albeit at a relatively slow pace compared to some other industries.14 Compared with the rate of technological advancement, the industry continues to play catch-up. In fact, nearly 53 percent of respondents believe that technology advancements will have the greatest impact on legacy properties within the next three years, and 15 percent believe that the impact is already visible.
  • Proptechs are increasingly popular with investors and are expanding their coverage across the real estate value chain. Consider this: Globally, almost 9 in 10 of those surveyed believe that proptechs will have a moderate to significant influence on the CRE industry. Given the investor preference for proptechs, there is merit in CRE companies becoming knowledgeable about areas of proptech that may create value for their businesses. Proptechs are using existing and developing technology to nurture new, innovative ideas that enhance operational efficiency, tenant experience, and information flow.