Commercial Real Estate

2020 Real Estate Opportunities You Should Consider Now

Riding the tide of low interest rates and a strong US economy, the commercial real estate sector appears well-positioned to sail through a potential downturn.


 

Originally published by Commercial Observer on January 7, 2020.

Heading into 2020, there’s good news for commercial real estate (CRE) investors with recession worries: this business cycle has lacked the kind of excesses that caused the subprime mortgage crisis of 2008. And even bad news could turn in investors’ favor. Despite the gap between available residential housing and rising populations, if a market correction emerges soon, there’s unlikely to be an overabundance of unfilled residential space because the industry has largely avoided overbuilding.

“Demographics will continue to be favorable for the next decade when it comes to renter population trends. Even for the handful of markets where there has been some overzealous multifamily building over the last year or two, we are seeing supply growth ease substantially by 2020. This is a favorable mix for multifamily fundamentals, whether or not we run into a recession,” said Victor Calanog, Chief Economist for Moody’s Analytics REIS.

In short, it’s an especially favorable market for CRE investors, supported by the Fed’s recent interest rate cuts and a sub-4 percent unemployment rate.1 Even though analysts don’t anticipate rate hikes in the near term, now is a good opportunity to lock in a low rate as a natural hedge against inflation. Aside from rates, owners and investors should be thinking about other ways to capitalize on the trends and opportunities facing the industry at the top of the year.

Demographics will continue to be favorable for the next decade when it comes to renter population trends.

Victor Calanog, Chief Economist for Moody’s Analytics REIS

Steady Consumer Trends to Watch

Many of the macro CRE trends seen in 2019 will continue in 2020, including:

The retail glut: Nearly 90 percent of retail activity still occurs in brick-and-mortar locations, so the steady rise of e-commerce isn’t the whole story behind struggling retail properties.2 The category simply got overbuilt even as online sales became a bigger source of competition. Class C malls in particular are facing a downward trend—they’re the properties that will be difficult to sell and are less likely to become attractive spaces for purely retail purposes. One solution is to repurpose the land for mixed use, constructing apartments to pair with an anchor store or other commercial area.

 

Urban living: Demand for units close to the urban core where residents work, shop and go out continues to be good news for CRE owners and investors with properties in vibrant urban areas. It also presents opportunities in previously underdeveloped city neighborhoods, as younger generations seek homes with the ideal balance of proximity, total space and cost.

 

Amenities for the way we live now: With a few phone taps, it’s easier than ever to perform tasks like ordering new shoes or getting takeout. To keep up with this change, multifamily apartment owners should consider amenities that attract today’s tenants. Adding lockers to securely receive packages can appeal to frequent online shoppers. In units where space is limited, constructing smaller kitchens may make more sense if tenants aren’t cooking at home as often anymore. By staying in tune with the market, owners can better satisfy renter priorities.

 

Industrial space for the last mile: In addition to its effects on residential and retail properties, e-commerce is creating continued demand for warehouse space. This is especially the case in urbanized areas where concentrated demand for online shopping deliveries has led retailers to house stock nearby to shorten delivery times.

 

The rise of rent control: The growth in urban living and the affordable housing crisis have made rent control regulation a new reality in several markets. California’s recent passage of a statewide rent control law—capping annual increases at 5 percent plus the cost of living—is a prominent example. In the end, investors and landlords worked constructively with government leaders and other community stakeholders to balance profitability and unit affordability, a model CRE stakeholders should follow in other high-demand markets.


 

Successful CRE investors started preparing for 2020 a decade ago.

 


Preparing for a Potential Downturn

Whenever the next recession hits, CRE owners and investors have reason for optimism because there generally hasn’t been overbuilding across asset classes in the current cycle—which means a downturn is less likely to severely affect CRE. For example, although the 2008 recession was more severe, the 1991 recession was worse for CRE because the speculative building boom of the 1980s left owners and investors overleveraged and unable to weather the correction.

Successful CRE investors started preparing for 2020 a decade ago. With a potential correction in mind, CRE owners and investors should remember these two principles:

  • Stick to the markets you know best. At this point in the cycle it can be tempting to seek more lucrative properties in secondary markets, but chasing yields can be risky. Smaller markets often deliver a higher yield because they’re higher risk—and they may struggle when a correction comes. It may be more prudent to wait for opportunities in your established markets.
  • Don’t squeeze every last dollar out of your buildings. Leave some equity in your properties so that you have the liquidity to buy in a big way when a downturn hits. A correction can be a positive buying opportunity, so you want to be able to seize it when it arrives.

1 US Bureau of Labor Statistics, November 2019. 2. Quarterly retail e-commerce sales for 3Q 2019, US Census Bureau, November 2019.

Alfred R. Brooks, Managing Director, Chase Commercial Real Estate

Al Brooks

Alfred R. Brooks, Managing Director, Chase Commercial Real Estate

Alfred (Al) Brooks is the Head of JP Morgan Chase Commercial Real Estate. He is responsible for executing Commercial Banking's real estate strategy for Commercial Term Lending (CTL), Real Estate Banking (REB) and Community Development Bank (CDB). With a portfolio of $100 billion and annual originations exceeding $30.7 billion, Al maintains the largest multifamily portfolio in the nation. In addition, he is a member of the Commercial Banking Executive Committee and the JPMorgan Chase Real Estate Council.

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