CBRE Forecasts Solid 2019 for CRE

Although specifics differ widely across sectors, most major categories should continue to benefit from favorable economic conditions.
Spencer Levy, Chairman of Americas Research & Senior Economic Advisor, CBRE

All signs point to a continued expansion of the U.S. economy, which means further success for the commercial real estate sector, according to CBRE’s 2019 Real Estate Market Outlook. The firm’s new report outlines another positive year across the industry’s main sectors.

While CBRE’s forecasts for the office, industrial, retail and multifamily sectors differ in specifics, there is a common theme. Summing up the outlook, Spencer Levy, chairman of Americas Research & senior economic advisor with CBRE, told Commercial Property Executive that the general expectation is for a “strong late-cycle environment: low-cost capital and limited overbuilding.”

Sector-by-sector preview

A full 37 million square feet of net absorption is on tap for the U.S. office market in 2019, per the report, which would constitute 10 consecutive years of positive absorption. Job growth will be a key factor—again.

“We didn’t anticipate job growth to have continued strength through the end of the year; we thought that would taper,” Levy said. “But the late cycle fiscal stimulus—the tax plan in particular—along with general business and consumer optimism gave us an upside surprise.”

With ongoing employment growth, demand will remain strong for office space. And employers’ desire to attract and retain the best and brightest won’t wane, so the call for state-of-the-art accommodations will keep the supply-demand dynamic in check.

In the industrial/logistics sector, there’s no end in sight to strong demand, which has pushed the vacancy rate down to a record low of 4.3 percent. The proof of the market’s historic strength is in the numbers: For the last nine years, demand has outpaced supply by an average of 94.1 million square feet. Occupants, however, will be increasingly challenged in the pursuit of additional wiggle room in 2019, as the pool of space offerings will become more constrained. Low supply and high demand will inspire landlords to raise asking rents.

Retail sales growth has been robust in 2018, and more of the same is on tap in 2019 as the perfect storm—high consumer confidence, solid job market, lower taxes and wage growth—is not expected to relent. The retail sector as we know it, however, is in for a change over the long term.

“Continued retrenchment in the department-store industry will lead to more retail property owners filling or replacing big boxes with entertainment uses, food and beverage, fitness uses, offices, hotels and other non-retail uses,” according to the report. “The omnichannel movement finally will make significant inroads in the food and beverage category, with restaurant and grocers investing to improve the melding of their online and in-store operations.”

For the multifamily sector, the road is being paved for a greater balance come 2020, as new deliveries are expected to remain high in 2019 but not quite as high as in 2018. Cyclical trends should bolster the ongoing healthy demand, which will keep absorption at positive levels. But not all conditions are expected to remain the same. The vacancy rate is slated to begin a slow increase and rent growth is likely to hover beneath the long-term average.

The what-ifs

There are those unknowns that could impact the commercial real estate market in 2019.

“(The next year) also has upside-surprise potential if we cut a reasonable trade deal with China early in the year,” Levy noted. “The two keys to watch are inflationary pressures—wage inflation in the monthly jobs report—causing the Fed to act faster, and this trade deal, which are probably the two biggest factors that would precipitate a material upside or downside surprise.”

Image courtesy of CBRE