Trade wars are finally coming to an end and the risk of rising interest rates is on hold. Although many economists expect the economy to take a breather next year – in part due to record low unemployment – commercial real estate stakeholders remain optimistic.

The U.S. remains the world’s safe haven for property investment, and with over $200 billion in global equity earmarked for U.S. commercial real estate in 2020, there’s plenty to look forward to.

In this article we’ll look at the trends to watch in all CRE asset classes and learn which markets are best for commercial real estate in 2020.

Multifamily

In the firm’s most recent U.S. Multifamily Outlook, Yardi Matrix reports that investors remain bullish on the multifamily sector as demographics and lifestyle choices motivate developers to meet rising demand.1 Although absorption and rent growth will remain healthy, multifamily investors will need to be nimbler as we enter a new decade.

Two of the biggest trends affecting multifamily investors in 2020 are the rising demand for affordable rental property and the favorable fundamentals of suburban multifamily property.

Rent control will grow

The current trend of rising home prices and rents has been great for investors, but not so good for tenants, especially minimum wage workers. According to a recent report from the National Low Income Housing Coalition, the fair market rent for one-bedroom rentals is unaffordable in 99% of the counties in the U.S.2

Five states currently have some form of residential rent control.3 Going forward, the Urban Land Institute (ULI) describes local rent-control and other regulatory tactics that are surfacing as a “transformational business wildcard” for multifamily housing investors.4

When the ULI asked over 2,200 CRE stakeholders for their views on the 2020 trends for apartment investment, moderate/workforce housing and lower-income apartments received two of the highest “buy” recommendations. High-income apartments were on the opposite end of the spectrum, with nearly 50% of those surveyed suggesting owners hit the “sell” button for property commanding high rents.

Suburban multifamily will outperform urban property

Multifamily investors looking for strong market performance and better investment returns next year may want to look in the suburbs instead of the city. According to CBRE’s U.S. Annual Real Estate Market Outlook 2020, suburban multifamily will have lower vacancy and higher rent growth compared to urban investments.5

The top four major metro growth markets for 2020 are Austin, Atlanta, Phoenix, and Boston. Smaller metro areas with populations of 2 million residents or less are also on the radar for multifamily investors.

Favorable supply/demand fundamentals combined with moderate levels of new construction activity in markets such as Albuquerque, Memphis, and Tucson are making these areas likely candidates for outperformance in 2020.

Top 10 metropolitan multifamily markets in 2020

The Urban Land Institute predicts that these metropolitan areas will be the best markets for multifamily investment in 2020:

  1. Orlando
  2. Tampa/St. Petersburg
  3. Raleigh/Durham
  4. West Palm Beach
  5. Inland Empire
  6. Tucson
  7. San Jose
  8. Jersey City
  9. Austin
  10. Jacksonville

Office

Globalization and the aging American worker are two of the biggest office trends for 2020. As Inc. Magazine recently pointed out, competition from around the world will hit small and medium-sized businesses the hardest.6

Unfortunately, these are the same businesses driving the growth and innovation of today’s knowledge-based economy. Employers who don’t offer staff the experience they expect will find workers less loyal and more likely to leave for another job.

Focus on the workplace experience

The competition among companies of all sizes to attract and keep top talent is rapidly growing worldwide. It’s a big reason why businesses are searching for office space that encourages collaboration, increases efficiency, and provides employees with a work/life balance.

As Cushman & Wakefield notes in Office Outlook 2020, “It’s an employee’s world. Place drives experience.”7 Smart buildings, amenity-rich environments, and a sense of community will keep driving the demand for coworking and shared office space in both urban and suburban locations.

Changing demographics of the workforce will also force investors to focus on flexibility. In fact, as Baby Boomers stay in the workforce longer, it’s possible employers will have up to five different generations of staff using the same office space.

Medical office demand driven by demographics

Aging Baby Boomers in the U.S. are also creating a “demographic tailwind” that’s underpinning the demand for medical office investment, according to ULI.8 By 2028, there will be over 70 million Americans aged 65 or older, an increase of about 15 million compared to today.

That’s one reason why nearly 40% of the CRE stakeholders surveyed by ULI give medical office property a “buy” recommendation, compared to about 26% for central-city office property and less than 20% for suburban office buildings.

Over the past year the amount of new medical office space completions declined by 24%, with only 9.6 million square feet of new inventory added to the U.S. market. The limited amount of medical office development has helped keep vacancy levels low and rent growth rising.

In fact, for the past several years the strong absorption of medical office space has kept vacancy rates at about 8%, while rent growth increased 2.7% (outpacing the 2.4% growth of traditional office space).

Top 10 office markets in 2020

The Urban Land Institute predicts that these metro areas will be the best markets for office investment in 2020:

  1. Oakland/East Bay
  2. Raleigh/Durham
  3. Los Angeles
  4. Nashville
  5. Orlando
  6. Tampa/St. Petersburg
  7. San Jose
  8. Austin
  9. Boston
  10. Salt Lake City

Retail

The “Orwellian future” of the 21st century has finally arrived for the retail industry, according to the National Retail Federation (NRF).9 However, the future of retail isn’t necessarily as dismal as that description might seem.

Similar to the office sector, successful retail assets will be powered by the “experience economy” and the emotional connection that operators make with customers and tenants. When almost anything can be purchased online, retailers are refusing to be boxed in and are branching out into hospitality, rentals, and coworking.

Gen Z returns to the mall

While Baby Boomers and Millennials are creating the “silver tsunami”, their kids are returning to the mall. Older Gen Zers (aged between 16 and 21) spend about $143 billion each year and are helping to drive traffic back to the malls in 2020.10

This generation has never known a world without the internet, and they absolutely love Amazon. However, they prefer shopping at brick-and-mortar stores even more because of the time they have to do things with their friends.

Over the next five years, retail markets with a forecasted rent growth of 2.5% or higher include Nashville, West Palm Beach, Portland, Ft. Worth, and Atlanta, according to CBRE. Perhaps unsurprisingly, these cities are located in some parts of the U.S. that are most attractive to Generation Z.11

Big shopping malls are superfluous

Business Insider reports that more than 9,300 stores are expected to close by the end of 2019, nearly double the number of stores that closed in 2018.12

Regional malls, power centers, and outlet centers all have “sell” recommendations from ULI’s Emerging Trends in Real Estate 2020 survey. On the other hand, over 70% of the survey respondents suggest buying or holding neighborhood centers, urban/high-street retail, and lifestyle/entertainment centers.

The Urban Land Institute notes that the greatest store losses are in Class B and C mall-based retail assets. A significant number of regional malls will also disappear over the next few years, helping to rationalize the amount of retail space in the U.S.13

Top 10 retail markets in 2020

These are the top markets for retail investment in 2020, according to the Urban Land Institute:

  1. Nashville
  2. Chattanooga
  3. Raleigh/Durham
  4. Boise
  5. Charlotte
  6. Tampa/St. Petersburg
  7. Austin
  8. Milwaukee
  9. Orlando
  10. Dallas/Fort Worth

Mixed Use

When retail property disappears, it doesn’t completely go away. Instead, struggling regional malls and supersized power centers are transitioning into mixed use property.

As CBRE notes, that’s because many retail assets are located in the heart of communities where residents want to work, live, and play, offering the perfect opportunity for repositioning and redevelopment.14

Community matters

There’s no magic formula for the proliferation of mixed use from retail, simply because every portfolio and region of the U.S. is different. Because each mixed use development is unique to individual areas, it would be misleading to attempt naming top markets for mixed use projects since they come in all shapes and sizes.

However, some of the most common uses being integrated into property that was formerly retail-only include, sports and university facilities, public event space, along with retail and multifamily residential components.15

Some examples of “mega” mixed use projects coming to life in dense urban areas with premium land pricing include Port Covington in Baltimore, The Gulch in Atlanta, Schuylkill Yards in Philadelphia, Water Street Tampa, and the 30-acre River District in Chicago.16

Coworking + coliving

Real estate developers have traditionally built communities that treat users as a customer rather than a person. Examples of this narrow-minded approach include ‘resort’ communities, ‘retirement’ communities, and ‘continuing-care’ communities.

In the past, this approach may have made business sense for the developer. But it also created isolation by ignoring the relationship of residents with the community at large. Today, the need to overcome isolation is growing in importance, creating what the Urban Land Institute describes as a shift of generational importance.17

One of the best examples of how the needs of people are being met is the trend of coworking combined with coliving. Coworking was originally created to provide office space to gig economy workers while offering the opportunity to network with likeminded peers.

Co-living appeals to people in their 20s and 30s – the same demographic as many coworking users – and provides cost savings in living arrangements for peer groups with common values and interests.

However, coliving isn’t just for Millennials and Gen Z. The AARP reports that companies such as SpareRoom, Silvernest, and Roommates4Boomers are providing “Golden Girl” and coliving options for people in their 50s, 60s, and older.18

Industrial, Distribution & Logistics

Net absorption of industrial and logistics space will decline in 2020 – but for all of the right reasons, according to Commercial Property Executive.19 Vacancy rates are already near historic lows and options for relocation are limited. This keeps existing tenants in place while at the same time rents continue to rise.

Warehouse and fulfillment are red-hot

The ULI lists three reasons why demand for warehouse, fulfillment/distribution, and logistics space will remain red-hot in 2020:20

  • Economic growth is accelerating, driving the demand for faster flow of goods.
  • Distribution networks continue to expand as suppliers strive to meet rising service-level expectations.
  • Import activity is being pulled forward with inventory levels being boosted due to concern about the economy.

Last year, about 277 million square feet of industrial space was absorbed, the 2nd-highest annual total in the past 10 years. Supply chain shifts will continue to boost demand, with several large users of warehouse and fulfillment space planning to spend billions in distribution network investments.

While the manufacturing, flex, and R&D sectors rank as “good” investments, the over 2,200 CRE stakeholders who spoke with ULI rank fulfillment and warehouse as “excellent” investments. In fact, over 56% say now is the time to “buy” fulfillment real estate, while over 44% give warehouse a “buy” recommendation.

New construction and infill drive rent growth

CBRE predicts the U.S. industrial market will witness some dramatic shifts in 2020.21

Net absorption will remain low as limited supply keeps tenants where they are at higher-than-normal renewal rates. As the growth of e-commerce puts pressure on businesses to reinvent supply chains, outsourcing will continue to grow, in turn creating increased demand in the logistics sector.

High-quality, first-generation Class A warehouse space will rent at premium rates, while average industrial rent growth in 2020 will average over 5%. In fact, this is the first time in 30 years that average asking rents have grown by 5% annually for five years in a row.

ULI reports that the six most dominant major markets for new industrial supply are Dallas, the Inland Empire, Pennsylvania, Atlanta, Chicago, and Houston.

According to CBRE, the top secondary markets offering strong liquidity and high income returns in 2020 for industrial investors will be Charlotte, Cincinnati, Denver, Louisville, Orlando, Portland, St. Louis, and Tampa.

Top 10 industrial markets in 2020

The Urban Land Institute analyzed industrial, distribution, and logistics investment activity across all major and secondary market in the U.S. These are the ULI’s top 10 picks for the best industrial markets in 2020:

  1. Austin
  2. Washington D.C./Northern Virginia
  3. Charlotte
  4. Oakland/East Bay
  5. Louisville
  6. Inland Empire
  7. Nashville
  8. Orange County
  9. Dallas/Fort Worth
  10. Tampa/St. Petersburg

Land & Development

In Real Estate 2020: Building the future, PwC lists five fundamental changes that will have profound implications for real estate investment and development:22

  • Huge expansion in cities
  • Long-term population shifts creating changes in real estate demand
  • Secondary and emerging markets mean more competition for the same assets
  • Sustainability is transforming building design and development
  • Technology is disrupting the economics of the traditional real estate business model

These long-term land and development trends for 2020 and beyond will create new opportunities and challenges as developable land becomes scarce and cities and suburbs continue to evolve.

Land in A and B suburban areas in demand

Even though population growth in the U.S. has slowed over the last generation, the country still requires about 1 million new housing units each year to meet demand.23 However, the U.S. has only added about 735,000 units annually, resulting in a consistent housing shortage.

According to Builder and Developer Magazine, developers are scrambling to meet demand for housing that is affordable to tenants and homeowners, and attractive to investors, while competing for prime land in suburban locations. Unfortunately, the supply of land is going down while prices are rapidly rising.

After the last recession, affordable C and D land and lots were quickly swept up and developed. All that remains today is land in A and B suburban locations that is heavily in play. Single-family homebuilders are effectively shut out of the market as land pricing adjusts upward for buyers willing to pay more for the highest and best use.

In 2020 and beyond, developers and builders of multifamily housing, student housing, and senior living facilities will continue to dominate the land market in the best suburban areas.

Rise of Hipsturbia

Twenty-five years ago, the concept of the 24-hour city where residents lived, worked, and played was just beginning to develop. Today, “hipsturbia” has finally arrived, and it looks like this mixed use form of development is here to stay.

The Urban Land Institute reports that “cool” downtown hipsturbia models first began appearing in dense cities like New York, Chicago, and San Francisco. Secondary cities and suburban communities near metro areas with vibrant downtowns are now creating hipsturbias of their own.

Tempe, Arizona – home to Arizona State University – Hoboken and Maplewood, New Jersey, and Yonkers and New Rochelle north of Manhattan are helping to make suburban living popular again. All of these smaller areas have several things in common, including excellent mass transit access to urban centers, strong walk scores, and a plentiful amount of retail, restaurants, and recreation.

Nontraditional Specialty Properties

Although the demand for commercial real estate is growing throughout the U.S., investors are also becoming more selective. Oftentimes, demand is higher for property at the leading edge of emerging business models supported by strong underlying macroeconomic trends.24

In 2020, CRE investors will continue to seek out nontraditional specialty properties as a way to diversify portfolios while generating higher returns.

Alternative investment sectors

Over the last five years, annual investment volume in specialty properties has accounted for 12% of all CRE investment, representing about $59 billion in annual transactions. In fact, the market share of alternative investments has more than doubled since 2007, according to CBRE.25

These are the eight main alternative investment sectors, listed by market share of all alternative investments and the annual average investment volume from 2014 to mid-year 2019:

  • Senior housing and care – 31.3% share of all alternative investments / $17.2B annual average transaction volume
  • Medical office – 22.1% / $12.2B
  • Student housing – 13.3% / $7.3B
  • Life sciences – 11.8% / $6.5B
  • Self-storage – 9.0% / $5.0B
  • Manufactured housing communities – 6.3% / $3.5B
  • 55+/Active adult communities – 3.2% / $1.7B
  • Data centers – 3.1% / $1.7B

In the firm’s 2019 Investor Intentions Survey, CBRE found that 40% of the practitioners surveyed are actively pursuing alternative investments.26 In fact, the firm forecasts that the amount of capital invested in nontraditional specialty property in 2020 will match the $59 billion annual average of the last six years.

Lure of alternative investments

There are five main reasons why investment in alternative CRE assets is growing so rapidly:

1. Yield premium and higher cap rates offered by specialty property helps to offset the effect of cap rate compression from mainstream traditional assets.

2. Rising market demand due to fundamental structural changes in business, technology, demographics, tenant experience, and ESG criteria (environment, social, governance).

3. Expanded product availability as developers meet investment demand from both national and international capital markets.

4. Portfolio diversification for investors currently holding traditional mainstream assets such as multifamily, office and retail, and industrial.

5. Transparency in pricing, operations, and overall market performance continues to improve in 2020, helping to make nontraditional CRE investment more appealing to a wider-range of investors.

Capital Markets

GlobeSt.com reports that GDP growth next year will be 1.7% while predicting that CRE volumes in 2020 will decline to $415 billion, a decrease of $35 billion compared to 2019.27

CBRE agrees that while the expectations for slower economic growth shape the capital markets, but also notes there is still an abundant amount of investment capital available. In fact, the firm forecasts liquidity will remain high as the U.S. remains a haven for CRE investment.28

CRE investment allocations will increase

The U.S. will remain a safe haven for national and foreign investors in 2020.

In the U.S. Real Estate Market Outlook 2020, CBRE says the solid and stable returns of commercial real estate in the U.S. will become even more attractive to investors in 2020 as global bond yields remain low and country-specific markets become more volatile.

Debt markets remain robust as traditional banks, debt funds, mortgage REITs, and alternative lenders vie for the ability to boost returns in 2020.

On the equity side, nearly $210 billion earmarked for commercial real estate investment in North America is currently sitting on the sidelines. However, these funds will need to be deployed in 2020 to meet promises made to investors.

CBRE also sees a significantly higher level of investment capital in 2020 than GlobeSt.com reports. The firm predicts CRE investment volume will be in the range of $478B to $502B, about the same as this year.

Cap rate spreads over the risk-free rate of return from the 10-year Treasury bond will also widen slightly, offering CRE investors a yield premium of between 2% and 3% compared to the current T bill rate. Cap rates in 2020 for the multifamily and office sectors are expected to remain unchanged compared to 2019, while industrial and retail will trend slightly upward next year.

Top U.S. markets for CRE investment in 2020

In the Emerging Trends in Real Estate 2020 report, ULI analyzed the way capital flows are being influenced, how CRE values are supported, and the trends to expect over the next 10 years.29

Top 10 markets with the best overall real estate prospects:

  1. Austin
  2. Raleigh/Durham
  3. Nashville
  4. Charlotte
  5. Boston
  6. Dallas/Fort Worth
  7. Orlando
  8. Atlanta
  9. Los Angeles
  10. Seattle

ULI also analyzed the flow of investment capital into each U.S. commercial real estate markets. These markets accounted for over 17% of the total US. transaction volume in the last three years, and over 15% through mid-2019:

  • Manhattan
  • Chicago
  • Inland Empire
  • Northern New Jersey
  • Houston
  • Phoenix
  • San Diego
  • Oakland/East Bay
  • Miami

The Next Home Run

The strong job market and consumer spending in the U.S., a solid stock market, and a low interest rate environment are driving investors to seek out opportunity in every commercial real estate asset class.

While some investors are sticking to proven business plans and property types, others are looking for the next home run with alternative investments or secondary markets. One thing that’s certain is the global demand for commercial real estate in the U.S. remains strong.

In fact, for many CRE stakeholders, the challenge is finding strategic investment opportunities to stay one step ahead of the competition.

Search for a property!

References

1. https://www.yardimatrix.com/media/downloads?signup=false#gp_10

2. https://reports.nlihc.org/oor

3. https://www.nmhc.org/research-insight/analysis-and-guidance/rent-control-laws-by-state/

4. https://ulidigitalmarketing.blob.core.windows.net/emergingtrendspdfs/ET2020FallMeeting.pdf

5. http://cbre.vo.llnwd.net/grgservices/secure/US%20Real%20Estate%20Market%20Outlook%20Annual%202020.pdf?e=1576251480&h=fc9cd0ac2f86f552e78804132b340744

6. https://www.inc.com/comcast/your-office-in-2020-a-glimpse-into-the-future.html

7. http://www.cushmanwakefield.com/en/research-and-insight/2019/office-real-estate-outlook-2020

8. ibid 4

9. https://stores.org/2019/12/02/coming-soon/

10. https://www.emarketer.com/content/what-retailers-need-to-know-about-gen-z

11. https://www.gobankingrates.com/investing/real-estate/best-cities-gen-z-to-live-well-on-budget/

12. https://www.businessinsider.com/stores-closing-in-2019-list-2019-3

13. ibid 4

14. ibid 5

15. https://www.nreionline.com/brokerage/breaking-down-cbre-s-2020-market-outlook

16. https://www.constructiondive.com/news/6-mega-mixed-use-projects-across-the-country/541441/

17. ibid 4

18. https://www.aarp.org/disrupt-aging/stories/info-2019/living-with-friends-in-retirement.html

19. https://www.cpexecutive.com/post/cbre-2020-cre-outlook-is-optimistic/

20. ibid 4

21. ibid 5

22. https://www.pwc.com/sg/en/real-estate/assets/pwc-real-estate-2020-building-the-future.pdf

23. https://bdmag.com/ten-land-market-trends-2019-2020/

24. https://www.bizjournals.com/kansascity/news/2019/11/21/key-take-aways-a-commercial-real-estate-outlook.html

25. ibid 5

26. ibid 5

27. https://www.globest.com/2018/09/27/what-cre-will-look-like-in-2020/

28. ibid 5

29. ibid 4