What’s Next for Commercial Real Estate

The National Association of REALTORS®’ Strategic Thinking Advisory Committee on Wednesday released a new report, Commercial Real Estate ALERT: Analysis of the Latest Emerging Risks and Trends, which aims to function as a sort of D.A.N.G.E.R. report for the commercial industry. NAR commissioned Stefan Swanepoel’s T3 Sixty Inc. consultancy to create the report, which is a compilation of thoughts and data from interviews with more than 20 senior industry executives between November and February, as well as a wealth of reports and research from all corners of the real estate industry.

The data was collected after the contentious election of President Donald Trump, so the report reflects attitudes toward an unpredictable future for real estate. “There’s a lot of uncertainty about what’s going to happen,” Swanepoel told members of NAR's Commercial Committee during a presentation at the REALTORS® Legislative Meetings & Trade Expo in Washington, D.C.

Some respondents in the report told T3 Sixty researchers they believed that the new president's policies increase the risk of another recession, while others said they will not dramatically impact the economy or commercial real estate. Swanepoel said his company worked to synthesize different points of view and research outcomes: “This does not cover our opinion; this is your opinion.” 

Some of the major trends and shifts to watch include:

1. Low interest rates and strong economic indicators in the United States indicate the country will continue to be a safe harbor for international investors. The report also predicts more foreign capital will flow into smaller cities and secondary markets.
2. The report predicts uncertainty will persist in commercial lending as regulations are slowly rolled out over the coming years. New regulations will likely increase borrowing costs and reduce credit capacity, which may price many lenders out of the market.
3. Crowdfunding portals appear to be gaining ground and could become a principal method for developers to gain access to capital. Whether it disintermediates real estate professionals or offers cheaper, faster credit to more investors is still an open question in this largely untested market.
4. Technology—particularly in the forms of increased connectivity, better data analysis, and smarter buildings—will transform the way commercial real estate professionals use, build, assess, and sell properties. Blockchain technology will offer increased automation and enable faster transactions. Autonomous vehicles will blur lines between urban and suburban areas and offer new development opportunities in transforming excess parking in the urban core.
5. With e-commerce sales continuing to take up greater shares of the retail marketplace, demand for “last-mile” distribution points in major cities will continue to grow. While this development will impact retail spaces negatively overall—one study indicates roughly 20 percent of all anchor space in U.S. malls will close over the next few years —it’s likely to be a net positive for industrial real estate, as brands will buy up more logistics space in order to serve customers more efficiently.
6. Shifting demographics will result in increased demand for flexible commercial spaces. While aging boomers will drive up demand for senior housing and medical office buildings, the lifestyle preferences of millennials will challenge all sectors of the commercial real estate industry. The report cautions against discounting the influence of the smaller Generation X, as it sets the tone for the transition between millennials and boomers.
7. Although many in commercial real estate are currently focused on short-term cost saving rather than a long-term environmental strategy, sustainability will become a more important factor in evaluating property as energy and water shortages accelerate.
8. With the new presidential administration, some worry about what the potential loss of 1031 exchanges and carried interest could do to the industry, while infrastructure spending could improve manufacturing and industrial real estate. Changes to international trade agreements and financial regulations are also important political discussions for REALTORS® to watch.