Commercial Real Estate Is Strong … If You Know Where to Look
July 8, 2019 | Resource
You assess the lay of the land: buildings all around you are rising from vacant turf. Commercial real estate appears strong, but investing for the future requires more than broad generalizations.
- Fizzling fundamentals may get life from Fed cuts
- Macro moderation should be on your radar
- Varying public-private valuations require your assessment
Fizzling fundamentals
There’s one caveat to slowing growth: a Federal Reserve rate cut would lengthen the runaway another 3-to-6 months. However, in general, Wall Street euphoria has masked slowing real estate fundamentals for some time. We classify them as muted and mature, a typical description that should alter any long-term investing strategy from a focus on appreciation to one on cash flow.
Market RevPAF (revenue per available foot) is a single measure that combines changes in market-level occupancy and rent. After several years of slow declines, this metric is projected to stall at one percent through 2023 – far off the seven percent weighted average from 2007.
There are some notable exceptions. Industrial, manufactured homes, and senior housing are all being boosted by secular shifts in supply and demand. Industrial demand has exploded with the rapid growth of ecommerce, while manufactured homes are an affordable option for would-be homeowners who are typically priced out of the housing market. The U.S. is aging, and these Boomers are increasingly opting for the comfort and convenience of assisted living facilities.
Meanwhile, core sectors like office and retail may struggle. Office supply is growing, especially in some gateway markets, and co-working is forcing a re-pricing of risk. Retail is being hit even harder by ecommerce growth and a shift in consumer spending habits from goods to services and experiences.
Click here to dive deeper into the factors impacting commercial real estate.
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