Creating and maintaining agility in commercial real estate portfolios will be a key strategy for real estate occupiers and investors in 2018 as the U.S. economic expansion continues but becomes less predictable, according to CBRE’s 2018 Real Estate Market Outlook report.
CBRE maintains an optimistic outlook for the U.S. economy in 2018, forecasting moderate economic growth, slowing employment gains and flattening capitalization rates for next year. However, anticipated federal changes to the tax code, immigration policies and infrastructure spending could have substantial, sometimes offsetting, impacts on the economy.
“We are optimistic about the U.S. economy in the short-term, but agility is more important than ever for investors and occupiers,” said Spencer Levy, CBRE Americas Head of Research and Senior Economic Advisor. “We’re now confronting a wider range of possible outcomes for the economy, depending on how various initiatives such as federal policy changes play out.”
CBRE’s Outlook report includes perspectives on the 2018 trajectories of the economy and 11 real estate sectors.
Investors should shift to focusing on income gains rather than appreciation as their primary source of returns as cap rates flatten out or, in some cases, start to rise.
Suburban submarkets with diverse housing choices and amenities are well positioned to appeal to maturing millennials. Growth will continue, but at a slower pace due to rising completions. Investors will fortify their capital structures by extending maturities and constantly communicating with equity investors.
Occupiers, constantly seeking an edge in the hyper-competitive labor market, covet amenity-focused and technology-driven environments and often favor flexible offerings for their facilities.
The industry’s bifurcation, i.e. “the barbell effect,” will continue as consumers and subsequently retailers gravitate to either the discount and off-price sectors or luxury. This may create weakness – and, in many cases, investment opportunities – in secondary and suburban markets.
Industrial & Logistics
Robust demand, especially from e-commerce users, will drive rents and values for warehouses, distribution centers and other industrial properties. Investor interest has expanded from big-box facilities to smaller, urban-infill warehouses handling e-commerce distribution.
Construction, while still robust, will dip from 2017’s peak, providing a bit of relief for investors. More than a quarter of multifamily units now under construction in the U.S. are in urban-core markets.
U.S. hotel demand will grow while shifting more to leisure travelers than business travelers. Select hotel markets likely will need to adapt to fluctuations in international travel.
The full 2018 Outlook report is available upon request.