Seven Reasons to Still Be Bullish on Commercial Real Estate in 2019
“The only way to get ahead is to find errors in conventional wisdom.”
– Larry Ellison
Choosing not to invest in commercial real estate because we are at the peak of the market is a safe way not to lose money. It’s also a great way to not make any.
Ten years into the real estate boom following the 2008 financial crisis, the markets are predicting a softening, and a potential market correction on the horizon. However, when conventional wisdom is weighted so heavily in one direction, opportunity emerges.
Investing in commercial real estate, even as it’s at the peak of the market, can be a lucrative and stable investment. The odds are even more in your favor if you are forward-thinking in your approach. In this three-part series, we will offer seven reasons why you should (still) be bullish on commercial real estate in 2019.
PART 1: Evolving Demographics & Technological Changes
BABY BOOMERS, MILLENNIALS CONTINUE TO DRIVE DEMOGRAPHIC TRENDS
Baby Boomers and Millennials represent nearly half of all Americans, with a combined population of over 150 million. These two groups continue to drive demographic trends, which impact real estate patterns and opportunities.
Urban areas have experienced an unprecedented boom in the past decade, due to demographic groups flocking to cities with easy commutes, plentiful jobs, and an abundance of cultural options. As Boomers look forward to retirement and Millennials begin to settle down with families, both of their requirements for real estate remain remarkably in-step with the migration patterns.
Quality of life, affordable housing, convenient outdoor recreation, high-quality health care, engaging retail experiences, and workplaces within walking distance or near public transportation are radically changing both of these demographic groups. It’s no wonder that cities like Nashville, Portland, Austin, Boise, Denver, and Reno have experienced rapid and continued growth.
With the oldest Baby Boomers and Millennials reaching 70 and 35, respectively, these trends present forward-looking real estate investors opportunities that should continue for years to come.
RETAIL HAS TAKEN A LOT OF MEDICINE
Retail isn’t dead, but the way Americans shop is changing before our eyes.
Unhealthy retailers with too many locations, too much square footage, and debt-loaded balance sheets have shuttered stores, creating redevelopment investment opportunities. Between 2015 and 2017, Macy’s brought in over $1 billion cash from selling off its corporate real estate. Opportunistic developers are transforming those properties into a higher and better use, and more such sales are on the horizon.
Meanwhile, many remaining retailers have adopted omni-channel strategies and are tapping into the emerging logistics infrastructure for shipping direct to consumer. As the industry matures, physical structures dedicated to shopping, sorting, shipping, and transporting will continue to evolve. Savvy commercial real estate investors will benefit as they buy, renovate and build in advance of these trends.
“With retail shifting gears into an age of rampant experimentation and evolution, store design and development has quite the task ahead if it’s to keep up with the rapid transformation to come.” – Retail Spaces July 26, 2018
Retail is still alive and well in many parts of the country where shopping options are convenient and designed as a destination. Demographically strong markets like Los Angeles are seeing thriving retail markets for several reasons.
First, active retail spaces with well thought out co-tenancy are driving traffic to malls and commercial strips. Second, retail owners have become savvier about leasing space to thriving restaurant concepts, which bring people to centers for reasons other than just shopping. More time spent at malls increases foot traffic, which leads to more shopping. Lastly, retailers are becoming more geographically targeted in their store placement, benefitting from the pockets of wealth that abound in Los Angeles. Los Angeles may be unique, but a walk down Vine Street in the Over-The-Rhine neighborhood of Cincinnati proves that crowded, upscale shops aren’t unique to wealthy coastal markets. It also offers a blueprint of how to turn “a neighborhood that in 2009 topped Compton in Los Angeles for the ‘most dangerous’ title into something that looks and feels like Greenwich Village.”
E-COMMERCE CONTINUES TO DRIVE INDUSTRIAL BOOM
Some of us are old enough to remember when Amazon just sold books. Now that it sells everything and continues to upend the way we shop, the entire retail landscape is rapidly evolving in its wake.
With e-commerce representing only 10% of total domestic retail sales, we are in the early innings of the shift from a “go buy it” economy to the “have it shipped to me” one, which already feels so ubiquitous.
Industry experts suggest that selling goods online requires three times more warehouse space than traditional retail selling. This fact alone explains why industrial property has become the darling of commercial real estate investors, and why Blackstone plowed almost $10 billion into industrial property in 2018.
Sprawling logistics facilities are popping up along major transportation routes and commanding record-breaking rents, while shortages of trucks and drivers are driving up transport costs. New startups like Next Trucking are already stepping in to solve these problems. Industrial rent growth is expected to slow in the coming years, but rapid absorption of new supply has kept warehouse vacancy at all-time lows. Meanwhile, retailers, distributers, and property developers are trying to crack the code of truly urban logistics plays.
With Amazon’s purchase of Whole Foods in the summer of 2017, it became clear that big money was betting on the value of direct distribution channels within cities. Innovative developers are launching the first U.S. multi-story distribution centers in Seattle, New York, Miami, and San Francisco. Expect innovation in robotics, autonomous vehicles, and artificial intelligence to enable the construction of small, efficient logistics centers where they’ve never before been feasible.