Every commercial real estate professional knows it’s essential to stay ahead of market trends.
To help people understand the industry’s evolving dynamics, the Urban Land Institute (ULI) and PwC recently published their seminal Emerging Trends in Real Estate report.
From the enormous disruption in the retail sector to industrial’s seemingly unstoppable growth, 2018 promises to be a year of change and opportunity. While ULI’s report covers many developing trends, we decided to hone in on four of the most significant.
1. Retail is at an inflection pointAlthough e-commerce has been disrupting retail for years, that process really accelerated in 2017. Retailers are filing for bankruptcy at a record rate and brick-and-mortar sellers need to adapt to survive. Much of that adaptation has to do with creating experiences.
Brick-and-mortar retailers that offer experiential services, such as restaurants, entertainment centers and gyms, are expected to be largely immune to e-commerce in 2018. Everyone else is racing to transform their business through omnichannel offerings, many of which are tied to social media.
The report says CRE professionals need to actively manage their retail properties to effectively adapt by being as entrepreneurial as the businesses to whom they lease. While brick-and-mortar retailers are not facing extinction, they do need to evolve, and passive investors hoping for low-risk investments should look elsewhere.
2. Industrial isn’t going to cool offOver the last four years the Emerging Trends survey ranked industrial as the top property sector. That’s true again this year, and fundamentals have only gotten better. Industrial is expected to outperform all other sectors over the course of 2018 as market vacancies sit at historic lows and occupiers continue to show their willingness to pay a premium for space that fits their supply needs.
Although supply is finally beginning to catch up with demand, many markets still lack enough high-quality assets, leaving plenty of room for future development. That’s especially true for last-mile distribution centers. And demographic trends and e-commerce’s booming growth should keep pushing rents up. While potential long-term technological changes, like autonomous vehicles and advances in artificial intelligence, could disrupt the sector sometime during the next decade or two, all signs point to robust growth and continued demand in the foreseeable future.
3. Don't ignore senior housingIn 2016 around 15% of the U.S. population was aged 65 or older. By 2030 that figure will grow to 21%, or some 75.5 million people, according to the U.S. Census Bureau. Thanks to this demographics shift, ULI said senior housing offers some of the best investment and development prospects in 2018.
That’s largely due to the tremendous diversity of intragenerational needs, a diversity that’s creating opportunities across market niches and geographic locations. From age-targeted communities to different levels of living assistance and health care facilitates, the real estate world has the opportunity to meet the changing needs of seniors as they age through their 60s and beyond.
Senior housing has long been considered a specialized investment segment, but that mentality is changing as investors move to capitalize on the inevitable demographics shift. That’s creating a rising liquidity in the marketplace, making it easier for investors to both enter and exit the sector. While Baby Boomers will not reach 80 until 2026, between 2017 and 2025 the cohort of people most likely to use senior housing properties will grow 29%. As if that isn't enough of an incentive, private-pay senior housing properties have consistently generated higher total returns than apartments, retail space, offices, hotels and even industrial properties. That trend is expected to hold throughout 2018.
4. There’s unmet demand for affordable rental unitsIn recent years developers largely focused on building high-end luxury rental units. As that market approaches saturation, there remains unmet demand for more affordable rentals. Millennials are driving much of that demand, and given that they’re the largest generation in the U.S., that’s creating plenty of opportunity.
ULI said there are unmet affordable housing needs in diverse markets all over the country, from Charleston to Sacramento, and whether it’s mid-rise rentals in core markets or garden apartments in the suburbs, developers that meet that demand should be well positioned throughout 2018.