It is the time of the year when many professionals in the CRE community look for major predictions for the industry. Recently,
Paramount Capital Corp.’s executive managing director, Joseph J.
Ori, shared some of his thoughts on the business with GlobeSt.com,
Real Estate Forum’s sister website. From industrial markets continuing to sizzle to apartment rents remaining moderate, here are
10 trends and developments he expects for the next 12 months.
Industrial markets will continue to sizzle. The sector will continue to be favored, with robust demand, growth and investor capital. This boom has been the result of strong economic growth,
record consumer optimism, low-interest rates and the growing
demand for products by e-commerce next day delivery. Average
rent growth during the last two and a half years through Q2 2018
was a strong 7.8%. In 2018, industrial cap rates fell by .5% to 1% to
a national average of about 6.25% and through the first six months
of 2018, 128 million square feet of industrial space was absorbed.
Apartment rents will continue to moderate. Apartment rents that
have increased by 50% during the past few years in some hot West
Coast and Northeast markets will continue to moderate as national
rents increase by 1% to 2.5%. Many more markets will begin offering “free rent” as the more than 1. 5 million new units built during
the past five years begin to further soften markets.
More net asset value REITs will hit the private market. The moribund non-traded REIT sector was brought back to life in 2017 with
the introduction of the Blackstone REIT, one of the first to allow
investors to buy shares at a monthly NAV rather than the standard
$10 per share initial offering price. Blackstone has raised more than
$3 billion through Q3 2018 and it’s likely the vehicle will ultimately
raise at least $10 billion. Blackstone REIT’s success with real-time
NAV pricing has prompted others, including Nuveen, Starwood
Capital and JLL, to bring similar REIT funds to the market.
Interest rates will continue to rise. Although interest rates have
dropped the past two months, with the 10-Year Treasury sliding
from 3.22% in September to 2.9% in December, we continue to
believe the trade skirmish with China will be settled, stock market
volatility will subside, and the economic boom will continue. The
Fed may pause on raising rates in 2019, but the long end of the
curve will increase with the 10-Year at over 3.5% by this summer.
Opportunity zones will draw billions in capital. This is the first
part of the current administration’s infrastructure spending policy
that will benefit many blighted urban areas with new low and
moderate-income development. Treasury Secretary Steven
Mnuchin estimates that as much as $100 billion in private capital
could be invested in opportunity zones through the program.
Public REITs will see solid returns.
The sector, which will end 2018 with a
5% to 6% total return (including dividends) will post higher yields in 2019,
estimated at 10%, with 4% in a dividend
and 6% in price appreciation. Though
the expected increase in long-term rates
in 2019 will hurt REIT NAVs in the short
run, the long-term outlook is positive.
The average annual return for the FTSE-NAREIT All Equity Index was 11.69%
during the past 10 years, as per NAREIT.
Class B malls will generate robust
returns. Thse assets have generally been
battered during the past four years with
many public REITs like CBL, Site
Centers (formerly DDR), Brixmor and
Washington Prime Group selling well
below private market NAV. Many class B
malls are now trading at 7% to 10% cap
rates, which are deep value plays in this
market. With most retail bankruptcies
behind us and less competition among
the large national retailers, retail tenants and their landlords should expect
to see higher sales per square foot,
along with increases in occupancies,
rents and property values.
Shadow CRE lenders will increase
market share. Non-bank CRE lenders—
public and private mortgage REITs, private funds, mortgage bankers and
CMBS conduits—will benefit from
slower loan growth by commercial
Top 10 Commercial Real Estate Predictions for 2019
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This area is nearby Miami but it differs from
that de facto condo headquarters for one
major reason: density. Coral Gables has a
hybrid lifestyle that combines a suburban
setting with a downtown feel.
Cristo Brown, co-developer of the luxury
condo Giralda Place, says this “fortress mar-
ket” also has long-term resiliency because it
remains unaffected by fluctuations in the
economy, unlike Downtown Miami. Because
it traditionally attracts end users, it isn’t as
dependent on major fluctuations from for-
eign investment and capital like other sub-
markets such as Brickell and Downtown.”
For investors and users, it also has far less
of a condo supply. When comparing Coral
Gables’ condo inventory levels between
January and November 2017 and the same
period in 2018, data from EWM Realty
International shows that total inventory only
increased by 5%, compared to Miami-Dade
overall, which had an 11% increase.
The more conservative nature of both the
city and development community
have allowed Coral Gables to
deliver product at a steadier pace,
he adds. For condos priced at $1
million-plus, the market’s
26-month supply is far less than
Miami-Dade’s 60 months’ supply.
Also, Coral Gables’ lifestyle, with
its fusion of dining and shops, is
unlike the condo-packed markets
of Brickell and Downtown Miami.
Its reputation as a walkable community with top-rated schools also
helps to draw in long-term buyers.
Located at 2222 Ponce De Leon Blvd.,
Giralda Place is a nine-story high rise with
just 33 units priced between $899,000 and
$1.7 million.—David Wilkening
The Fortress Condominium Market
LOCAL SPOTLIGHT: CORAL GABLES