What’s in store for real estate in 2019?
Despite global pressures things should be slow, but steady
With 2018 in the rearview mirror, let’s take a retrospective look at the year and a look forward into 2019.
Last year was more of the same for commercial real estate. All sectors advanced except retail. However, there was tightening in multifamily and office. This is measured by lease rates, which were softening but mostly with additional concessions and sweeteners such as additional free rent, turnkey fit-ups, etc. It is also measured by rising cap rates on sales of investment properties. We continue to see more money chasing fewer solid properties.
Technology upgrades and tighter office environments continue to shrink leased footprints. There is still some more of this ahead. We now see standard office parks (and buildings) “under-parked.” The historical norm was four parking spaces for every 1,000 square feet. Today, we see requirements for six, seven or eight parking spaces for every 1,000 square feet of office space. Older properties simply do not have the land to achieve this and parking decks are expensive.
The numbers are not out yet, but the clear sense is that office transactions are mostly current tenants in the market relocating, trading up. We are not seeing many new tenants, and those we do see are smaller. This has been a trend for a while.
I just returned from a trip with the Greater Concord Chamber of Commerce to Hong Kong and Thailand. They love President Trump over there – anyone who pokes a stick at China is a fan of theirs.
The cost of housing in Hong Kong is in the stratosphere --- about $650,000 for a 700-square-foot flat. The density of is overwhelming. We stayed in a “small” 1,362-room hotel. Most new apartment buildings are 71 stories!
The big takeaway: There are millions of people working very hard in Southeast Asia to earn $3,000-$4,000 a year. So far, textiles have largely migrated to Vietnam, Laos, Cambodia, Thailand (and Bangladesh). But light assembly and some manufacturing has followed. The word is most countries would rather deal with these “tigers” than China. The key reason is trust, specifically the pirating of software and intellectual property.
Ironically, as Jeff Fuhrer of the Boston Fed pointed out, it is exactly what we in the U.S. did in the 1800s – we “imported” the Industrial Revolution from Great Britain.
Looking ahead we see record low unemployment, which is likely to drive up wages –,in turn could push up inflation.
At the national Counselors of Real Estate meetings I attend, the pundits are closing the window – the “correction” in the markets and overall economy is coming, now forecast for 14 to 20 months. It is a “correction,” not a recession (two consecutive quarters with negative growth). Time will tell.
While the U.S. continues to sputter along, the rest of the world is limping - Brexit, the EU, Turkey and continued deceleration in China. This all puts the Federal Reserve in a tough spot. Too much tightening is not good, nor is too little. One big factor is another $300 billion of debt that is going to be added to the 2018 federal deficit. These are all tactical moves for the Fed and Congress while long-term and strategically we have serious financial imbalances – the mismatch of young graduates, both high school and college, with job openings; ongoing rising costs of healthcare; underfunding of Medicare, Medicaid and Social Security; as well as $1 trillion-plus annual deficits.
It is not a pretty picture, but the U.S. remains the safe harbor and continues to attract global money.
So, once again, we see 2019 being more of the same - a sluggish, tepid moving forward with 2 percent GDP growth. For commercial real estate, not much change, slow-but-steady forward motion.
Bill Norton, president of Norton Asset Management and an honorary member of AIANH, is a Counselor of Real Estate (CRE) and a Facilities Management Administrator (FMA). He can be reached at email@example.com.