Industry Insights

Economic trends that could impact CRE

Industry Insights

Economic trends that could impact CRE

January 8, 2020

We recently attended the Commercial Economic Issues and Trends Forum at the Realtors Conference & Expo. After listening to the three speakers, we pinpointed a few important takeaways that will impact the CRE industry in 2020. Here's what we learned:

Experts have differing views on whether a recession is imminent, but job growth should have a positive effect on CRE.

Key takeaway

Experts differ on whether the U.S. is facing a recession in the next two years. Uncertainty surrounding trade with China, tariffs, the upcoming election, and the tech start-up bubble are all factors in play. Increased job creation, wage growth, and high consumer confidence are positive signs for the economy, but there’s been a contraction in business investment, as many companies are taking a cautious approach.

What it means for CRE

An increase in job creation has a positive effect on CRE, as demand for office spaces and apartments rises. Property management will benefit from high occupancy rates, and job growth will lead to an increase in leasing. With low interest rates, commercial prices will likely see some gains.

What might change as a result

A recession, or the possibility of one, can impact the level of real estate investment. If some of the economic uncertainty settles down, business spending could increase, further boosting job and wage growth. In the meantime, those who own commercial properties will likely focus on leasing to more credible, stable tenants.

Micro-apartments may be an answer to rising development costs and rental prices in urban areas.

Key takeaway

In cities like San Francisco—which has the highest construction costs and highest rental prices in the world—micro-apartments are an area of innovation. Not only do they reduce development costs, but they could also help alleviate housing shortages and offer lower-cost rental spaces as job growth continues.

What it means for CRE

Micro-apartments extract the most value from every square foot. Some developers are designing studio apartments that are one-fifth the size and 40% of the cost of a typical studio, netting out to as little as 175 square feet. Standardized designs and “pre-fab” or modular construction cut development costs and shorten construction time, meaning developers could reduce expenses and start generating rental income more quickly.

What might change as a result

With standardized floor plan designs, commercial buildings would only offer two to three layout options. This translates to smaller units, more units per building and lower rental prices. As a result, there will be more affordable housing options which can also foster a sense of community in booming urban areas.

The industrial market is hot, while the retail market is struggling.

Key takeaway

The industrial market is seeing high real estate returns (13% to 14%) in comparison to offices and apartments (5% to 7%) and retail (as low as 1.4%). Thanks to what some call “the Amazon effect,” e-commerce is leaning on warehouses to deliver products directly to consumers, bypassing the retail store completely and resulting in double-digit real estate returns for the industrial market.

What it means for CRE

The industrial vacancy rate is extremely low—below 5% in many cities, even 1% to 2% in some areas. Meanwhile, internet sales are cannibalizing traditional retail spaces, such as department stores, malls, and shopping centers. A unique (and ironic) part of this changing market is the emergence of “click-to-brick” retailers—that is, e-commerce sites that are establishing small retail stores in key areas. These spaces don’t carry much inventory, but they give customers the opportunity to interact with physical products and place an order.

What might change as a result

The demand for warehouse space will lead to new construction. While we may continue to see retail store closures, some malls and shopping centers are already experimenting with new offerings and try to appeal to consumers who seek experiences, not just shopping. 

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