CRE Forecast for 2019: Positive and Slower

Private commercial real estate continues to produce steady returns, in line with long-term expectations, according to the recently released UBS US Real Estate Summary. The authors report that CRE investors expect returns to slow in line with historical performance. With rent growth positive and the economy growing, expectations are for continued growth through 2019, though at a less robust rate than last year.

The UBS report points out that while the private CRE market isn’t immune to factors creating uncertainty in the headlines, most of the uncertainty is short-term in nature—for instance, the recent volatility in equity and bond markets and the partial government shutdown. Demand for space is supported by economic expansion and a strong labor market. New construction levels are meeting strong demand, resulting in relatively stable occupancy rates and positive rent growth.

Total U.S. CRE sales volume was $458 billion in calendar year 2018, up slightly compared to 2017. During 2018, sector trends were similar to 2017, if more pronounced, with sales of retail and office properties decreasing and sales of apartment, industrial, and hotels increasing.

Regarding office and shopping center performance, UBS reported the following:

• Office rent growth outperformed inflation during 2018, with Downtown's 3.8 percent growth overtaking Suburban office's 2.8 percent rent growth. Average office vacancy decreased 40 basis points over 2017. The gap between Downtown office vacancy at 10.5 percent and Suburban vacancy at 13.7 percent remains wide.
• Consumers are doing well. Increased disposable income and low unemployment should support retail sales in 2019. Store closures, however, will continue for weak and over-leveraged retailers, especially in Malls. Capital requirements increased in the retail sector, implying that the long-anticipated transition to mixed-use centers is underway. At 9.0 percent, availability in Neighborhood, Community & Strip (NCS) retail is down 50 bps since the end of 2017. In 2018, NCS rents grew at a pace of 4.8 percent, more than double inflation. Stability in high-quality properties is offset by deterioration in others.