At this moment, 2020 looks well positioned for further growth for
commercial real estate, albeit perhaps not as much as the pace
seen in the last few years. Following are 10 investment predictions
for the year that will help shape this year’s growth.
1. Rent Control Will Spread in the US
New rent control laws were enacted in Oregon, California and
New York in 2019 and will spread to other states in 2020 and
beyond. Look for IL, NJ, MD, VA, MA, MN and other states to
adopt new and disastrous rent control laws in the next few years
with the US apartment market eventually evolving into two tiers.
The A tier will be states without rent control and pro-real estate
policies and the B tier will be the states with rent control and anti-real estate policies. Cap rates will rise 1.0%- 1.5% in the tier B
states due to the negative effects of rent control.
2. Interest Rates Will Increase
Due to the booming economy, low unemployment and higher
inflation expectations, long term interest rates will rise. The
10-Year T-Note which is currently 1.84% will increase to 2.75%-
3.0% in 2020.
3. REIT Returns Will Soften
REIT returns for 2019 as measured by the FTSE-NAREIT All
Equity Index will be up over 26% and one of the highest returns
since 2014. This is up from annual
returns of - 4.04% and 8.67% in 2018
and 2017, respectively. We expect 2020
returns to moderate with a total
return of 10%
consisting of a 3.5% dividend and 6.5%
price appreciation. Although returns
will decline, all individual investors
should allocate 10%-20% of their 401K
or total portfolio in a diversified equity REIT fund.
4. CRE Investment Returns Will Decelerate
The high and robust returns in CRE the last several years will
begin to decline as many properties are overpriced, especially core
assets, which are trading at sub 4.0% cap rates. Many properties
have seen rents double or triple since the Great Recession and
some of these high rents are not sustainable. The retail sector in
Manhattan is one example of ultra-high rents that are coming
back to reality, with rents on the storied Fifth Ave. and Park Ave.
sections, down by over 20% during the past year.
5. Consolidation Among Data Analytic/Software Firms Will
The CRE data analytics and software sectors will see more con-
solidation as the larger and well-capitalized firms gobble up their
smaller and weaker competitors. The larger firms see acquisitions
as a quicker way to scale their business and cross-sell their suite of
products. In the data analytics space, look for two public firms to
be the industry leaders and acquirers, CoStar Group and Real
Page. In the property management software space, look for Yardi,
MRI, Skyline and Real Page to be the key players. So far this year,
over $1 billion in deals have been completed with CoStar’s acqui-
sition of Smith Travel Research, the largest hotel data/consulting
firm, for $450 million and Real Page’s acquisition of Buildium, a
property management software firm, for $580 million.
6. Cap Rates for Apartments in CA Will Increase
Cap rates for apartments in CA will increase .5% to 1.0% due
to the new rent control laws and higher interest rates. Many
long-term apartment owners in the state will be net sellers in
2020 and the ensuing years to realize profits before cap rates
begin to rise.
7. The Shadow Lending Market Will Take More Market Share
from Regulated Lenders
The shadow lending market in the US is comprised of CRE lenders that are unregulated and include; REITs, private loan funds,
hard money lenders, mortgage bankers and CMBS originators.
The shadow lending market which typically provides short term,
bridge, permanent, mezzanine and high yield construction loans
will increase its market share from approximately 15% of total
loans to 20% of total CRE loans. The total volume of new loans
originated in 2018 was a record $574 billion with the shadow
lending market accounting for approximately $75 of the total.
See also, the section below on the collateralized loan obligation
8. 2020 Will be Another Record Year for New CRE Transaction
and Loan Activity
In 2018, $574 billion in new loans were originated and overall
transaction volume was $811 billion, both records. We predict that
the 2020 amounts for both loans and transactions will rise by
about 5% to new records. This is very good for the real estate brokerage industry as exemplified by the stock prices of the two largest brokers, CBRE and Jones Lang LaSalle, which are at or near
9. National Cap Rates Will Rise
Due to the booming economy and higher inflation and interest
rates, average cap rates will rise across the U.S. We expect the
increase in cap rates to be 1.0%- 1.5% depending on the property
type and location. This will be good news for buyers and the $200+
billion is capital that is sitting in private equity funds looking for
10. The Retail Apocalypse Will Begin to Subside
The retail apocalypse of store closures and bankruptcies will
begin to moderate. There were major retail bankruptcies in 2019
including; Sears, Payless Shoes, Barneys, Forever 21, Shopko,
Gymboree and many more. According to Coresight Research,
store closings in 2019 will hit approximately 10,000, while store
openings will be about 4,000. Most analysts and research firms
expect 2020 store closures to dip to around 5,000 and store openings to be about 4,500.
Joseph J. Ori is executive managing director of Paramount Capital Corp.
Top 10 CRE Investment Predictions
By Joseph J. Ori