While residential and commercial real estate experienced unprecedented growth and low interest rates in 2018, market experts anticipate a correction of some sort in 2019 due to the development of new technologies, demographic shifts, the housing affordability crisis, retail uncertainty and increased relevance of emerging markets. Millennials are moving away from the congestion of big cities while the baby boomers are downsizing for their later years in life. Despite where you may stand, one thing remains unchanged, there is wealth to be made in real estate for the savvy, knowledgable investor – as long as one can navigate and find solutions for the potential issues in the market.
2018 saw the emergence of several potential issues: threats of trade wars, housing affordability, increasing interest rates, macroeconomic concerns and a bear stock market. 2019 will largely be spent finding solutions to these roadblocks while continuing to build your brands, your businesses and your portfolios. The first step to finding those solutions is to identify what those disrupters could be.
Tech and new real estate start-ups are threatening to disrupt the housing brokerage process through companies such as www.opendoor.com and www.homesnap.com that offer simplified and transparent processes for buying and selling residential properties. This won’t eliminate brokers, but will force them to reevaluate their practices and become more transparent if they hope to retain their customer base.
Logistics will continue to see immense growth in 2019. The desire for companies to adopt the just-in-time method of product delivery and the increased demand for free shipping has spurred the industrial market to see unprecedented numbers. As long as Amazon and the plethora of e-commerce stores that seem to be popping up daily keep growing their businesses, there will be a high priority need for warehouse space and distribution centers.
The highly anticipated retail crisis has been met head on by innovative developers and owners who have spent tremendous time and money finding out what will bring the consumer back to the physical store. Adaptive reuse has been the buzz phrase of 2018 and will likely be used just as much moving into the new year. Another aspect of retail that’s transforming is the structure of leases. With the volatility of retail shoppers and their shopping habits, tenants are opting for shorter leases – some going so far as to have a pop-up store in a location for only a weekend or two. Landlords are being forced to rewrite their leasing language if they hope to fill large or underutilized spaces, and this is happening all over the country.
Mortgage rates will continue rising despite the climb we have seen over the past couple years. Fixed rate 30-year mortgages are expected to reach 5.8%, a rate in which we have not seen since the somber days of 2008, when banks were doing everything they could to recoup money in response to the housing crisis. Although this will tighten the room for error, investors should still be able to find sound investments if handled with the right research and due diligence.
The exponential growth of baby boomers retiring will continue to be something to keep an eye on moving into the new year. As they near retirement and begin planning for the future, they will likely be downsizing from the two story houses they bought years ago to single story ranch style homes that can be easily navigated and requires little maintenance as they age. Single story homes in middle to upper class markets will increase in both demand and value.
2019 will be the year we start to see abandoned big box retailers make the switch from shopping malls to multifamily. Redeveloping these spaces into a livable community will take immense time, planning, rezoning efforts and countless hours of research, but the benefit of solving both the affordable housing and mall vacancy concerns with one action would be an incredible feat. Kimco Realty has already began this process in San Francisco as a response to the growing housing issue in the Bay Area. Seeing the outcome and return on investment from these sample cases will give us an idea as to the feasibility of the transformation moving forward.
The macroeconomic environment we’re currently living in has resulted in increased developmental costs due to labor shortages in the construction industry as well as federal tariffs on materials and increased difficulty borrowing money. The price of steel, lumber and electrical components have all gone up more than 10% year-over-year. The National Association of Homebuilders stated that 69% of it’s members encountered delays due to a shortage of qualified workers. This issue will undoubtably continue to raise construction costs, and in turn, the overall cost to purchase a property.
According to the Department of Housing and Urban Development, over 50% of all renters pay more than 30% of their income to housing, and home affordability has dropped 15% since 2015 due to increasing prices and mortgage rates. Despite their being an increase in residential construction in 2018, most of that is skewed towards the higher end of the market and can create an effect called gentrification. This occurs when a group has been living in a community for many years, but due to new construction and increased rates, they are forced to leave their homes and find somewhere they can afford.
As we step into 2019 we must ask ourselves: Do we think these trends will create more options for small business owners while improving competition and efficiency, or will it assist the industry giants in pushing out the smaller players?
Terry Ooten II