Get Ready for a Strong Commercial Real Estate in 2019

The State of the Market panel drew some of the biggest names in commercial real estate to the stage.

If you sell commercial real estate and liked 2018? You’ll probably enjoy this year, too. That’s because the odds are high that commercial real estate will remain strong in 2019, according to some of the biggest names in the industry.

Photo Credit:   Johnson Controls

Photo Credit: Johnson Controls

The speakers on the State of the Market panel at the 17th annual Commercial Real Estate Forecast all agreed: This year will pose challenges to commercial real estate professionals, but it should also be a strong 12 months, a year similar in many ways to 2018.

And 2018? That was a pretty great year for commercial real estate.

“We had a good year even with multiple interest-rate increases,” said Kenneth Szady, executive director in the Chicago office of Marcus & Millichap. “Multifamily and industrial were the real darlings of the industry. And that seems to be holding steady.”

The State of the Market panel is always a highlight of REjournals.com’s Commercial Real Estate Forecast. This year was no exception. The grand ballroom at downtown Chicago’s Hyatt Regency was packed as more than 900 CRE professionals both attended the conference and, seemingly, crowded into the room to hear Danny Nikitas, managing director with the Rosemont, Illinois, office of Avison Young, moderate a panel of five of the industry’s biggest names.

Panelists covered everything from rising interest rates to the continued strength of the multifamily market to last-mile industrial issues and the growing obsolescence faced by too many suburban office buildings.

But the consensus was clear: There are plenty of opportunities for CRE professionals in 2019.

Jim Pape, who as senior vice president and market manager with TCF Commercial Bank leads commercial real estate teams in Illinois and Wisconsin, gave an example of how strong the commercial real estate industry is today: He told attendees that for the first time ever, he closed a commercial loan on New Year’s Eve last year.

“We ended 2018 with a strong surge in business,” Pape said. “This is the first time in 25 years that I’ve closed something on December 31. The end of the year was that strong.”

Nikitas set the tone early, when he opened the panel by predicting that demand for commercial real estate will remain solid this year. And, he said, this is the case not despite the volatile stock market we’ve recently seen but partly because of it.

“Stock market volatility helps hard assets like commercial real estate,” Nikitas said. “And the Feds are taking a modest, unscripted approach to interest rates. That approach seems to be easing investor’s concerns.”

The one thing to watch out for? Politics. Nikitas and his fellow CRE experts said that political uncertainty, and maybe global unrest, could slow the commercial real estate market.

Barring that, though, panelists were upbeat.

Molly McShane, chief operating officer with The McShane Companies in Rosemont, Illinois, pointed to the continuing strength of the Midwest’s industrial market. Demand for industrial space remains strong, with spec developments filling quickly, she said.

“As we head into 2019, I’m very optimistic about industrial,” McShane said. “The demand is still there. We are, of course, keeping an eye on cap rates. We always keep an eye on those. But I expect this year to be another very strong one for industrial.”

Part of the reason? Companies are still working hard to deliver products as quickly to their consumers as possible. This has resulted in an increasing demand for last-mile warehouses and distribution centers located close to urban areas.

Last-mile, though, doesn’t mean that companies are only building industrial facilities close to major cities such as Indianapolis, Chicago or Minneapolis. It also means they need facilities near busy suburbs, too. After all, plenty of suburban residents order products online, too. They want these products delivered just as quickly as those living in major cities do.

As McShane explained, if you have customers in the Chicago suburb of Glencoe, last-mile could mean building a warehouse near that suburb in addition to locating ones close to the city of Chicago itself. With this ever-growing need for new warehouse and distribution facilities, the future looks strong for the industrial market in 2019, McShane said.

There are challenges, though. Take the comments from Rand Diamond, managing principal with GlenStar Properties in Chicago. His company looks to invest and reposition properties that it can add new value to. GlenStar has been doing this for the last 12 years or so, Diamond said.

The challenge today? It’s getting more difficult to find those value-add opportunities.

“The obvious ones have been done already,” Diamond said. “It’s harder now to find the right properties. There are not as many obvious ones.”

This means that companies like GlenStar will become more creative in 2019 and beyond as they seek opportunities, Diamond said.

Consider the suburban office market. There are opportunities here. But not all suburban office properties represent good investments. The ones that do? They offer urban-type amenities and are located in walkable areas that have that pedestrian-friendly feel to them.

The strongest suburban markets in the Chicago area today? Diamond pointed to the Evanston and O’Hare submarkets.

“Those are really good markets,” he said. “We hope that as the rents start to rise in those submarkets the institutional capital comes back to them.”

While the panelists agreed that 2019 will be a good one for multifamily and industrial, and at least steady for office, they did share concerns for retail.

Last year was filled with negative retail headlines, with several major brands declaring bankruptcy or disappearing. However, that doesn’t mean that 2019 will be a terrible year for the retail sector, panelists said.

Instead, those retailers who are creative will survive. They just need to engage with customers who are continually changing their shopping habits.

Jeff Berta, senior director of real estate with Chicago’s Structured Development, said that mixed-use developments will be key in 2019. These projects, which can feature a mix of retail, residential, office and hospitality, have become attractive to consumers looking for destinations.

“There has been a change in the retail landscape,” Berta said. “Mixed-use is the opportunity as we go forward in 2019. I’m looking at this year with optimism.”

Another challenge in 2019? Construction and materials costs continue to rise. McShane pointed to the rising costs of steel and lumber, both of which are impacted by the tariffs imposed against them last year, as leading to a jump in overall construction costs.

Article Resource: RE Journals