Real estate can be a refuge.
Your New Year's celebrations aren't complete without a portfolio review. As stocks continue to fizzle and pop, real estate investment strategies may look more promising. Historically, real estate has outperformed the stock market, acting as a stabilizer for investors when volatility takes hold. These eight real estate trends are the ones to watch in 2019.
Residential undergoes a generational shift.
Home ownership may have a new face in 2019 as younger buyers enter the market, while older homeowners make their exit. "Many millennials have recovered from the 2009 crash and have managed to find jobs that will allow them to afford homes," says Nick Giovacchini, director of client services at AlphaFlow in San Francisco. As baby boomers age, they may be looking to trade down from larger homes to more affordable options, such as smaller rentals or senior living facilities. Giovacchini says high-end home sellers may have to reduce prices as millennials increase demand for more affordable housing. He says opportunities for investors lie in senior living housing, entry-level homes and condos.
Opportunity zones heat up.
Created by the Tax Cuts and Jobs Act, opportunity zones are new territory for real estate investors. Peter Muoio, executive vice president and chief economist at Ten-X Commercial, an online transaction platform for commercial real estate, says opportunity zones are on track to be the hottest trend in commercial real estate for 2019. "With valuations at cycle highs and fundamentals waning, the tax incentives offered by these programs are massively attractive, especially as not all of these zones are created equal," Muoio says, acknowledging numerous cities may prove to be diamonds in the rough. As capital flows in, certain submarkets could see increased volume, and "increased liquidity is a positive for the commercial real estate environment."
E-commerce remains a disruptor.
The retail landscape is in a state of flux as brick-and-mortar stores attempt to stem the e-commerce tide but 2019 may bring even stiffer competition. "Many consumers find it easier to purchase goods online," says Jonathan Lewis, founder and CEO of JLJ Capital, potentially threatening traditional retail's survival. "E-commerce is forcing many retailers to close store locations because they money they take in isn't enough to cover the cost of their rents." Lewis says real estate investors who want to maintain a position in traditional retail should consider hair and nail salons, restaurants, yoga studios and gyms -- services not accessible via e-commerce and may be better positioned to survive market downturns.
Rising rates may trim commercial real estate returns.
"One of the biggest headwinds facing the commercial real estate market in 2019 is the combination of rising interest rates and slowing appreciation," says Dianne Crocker, principal analyst with EDR Insight. "This means borrowers face a higher cost of capital at the same time that assets may not necessarily be showing higher yields to accommodate those costs." The Federal Reserve raised rates four times in 2018, with at least two hikes projected for 2019. Investors will be looking for value-add opportunities but rates will have more impact on investment decisions. "Rigorous due diligence is critical at this late stage to ensure investors aren't overreaching at exactly the wrong time," she says.
New construction gets pricier.
Construction prices inched up 0.5 percent in October, reflecting a 7.9 percent increase year-over-year, according to the Bureau of Labor Statistics Producer Price Index. That's something investors should be watching closely in the year ahead, says Lee Roberts, managing partner of SharpVue Capital in Raleigh, North Carolina. "In addition to supply-demand factors, there is a large policy component to this," Roberts says. "Not only are interest rates being driven higher by the Fed, but materials costs are being affected in part by trade policy, while labor costs are moving higher in part due to immigration policy."
Tech increases efficiency.
The tech train continues to glide along in 2019, with some unique implications for commercial property investors. "Commercial real estate is on the cusp of moving from a potentially inefficient industry to one that is notably more efficient, largely due to the growing volume of data that isn't yet being tapped," Crocker says. "Thanks to growing traction of technologies like machine learning, data analytics and platforms, the entire commercial real estate ecosystem will soon have better tools for decision-making." Crocker says one of the most exciting possibilities that lies ahead for commercial real estate investors is the application of tech to support property risk management.
Build-to-rent gains momentum.
Build-to-rent is a relatively new trend, says George Maravilla, vice president at Tower Capital in Phoenix, but poised to expand. "These newly built and to-be-built rental communities have a lot of the conveniences and amenities of an apartment but feel more like a home," Maravilla says, and as more developers move into this space it's likely to join the mainstream of CRE asset classes. Build-to-rent communities are designed to fit the privacy and affordability needs of younger buyers shopping for a mortgage loan and boomers looking to downsize. Maravilla says build-to-rent represents a new frontier for investors with a pioneer mindset looking to diversify into non-traditional housing.
Offices get smart.
Smart technology is increasingly becoming standard for new homes and gaining ground in the office space sector as companies move toward digital tools and remote work. Franco Castaldini, chief commercial officer at Toronto-based ThoughtWire, expects increased experimentation with smart tech. "Owners and operators will learn from tech companies and adapt what works to a variety of tenants," Castaldini says, to facilitate smoother operations. Additionally, "property owners will leverage use cases for preventing equipment failures and costly system replacements, responding to emergency events and automating routine workflows to mitigate initial technology investment costs." Looking beyond 2019, Castaldini says smart tech may have an even wider impact in other real estate sectors.
Real estate investment trends you can expect in 2019.
To recap, here's what real estate investors should be prepared for in 2019.
-- Younger home buyers
-- Opportunity zones
-- Rising interest rates
-- Increased construction prices
-- Big data
-- Build to rent
-- Smart technology
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