Investors might be expecting a slowdown in the commercial real estate market this year. But that doesn’t mean that they don’t still view commercial assets as worth investing in.
The 2018 Altus Group Real Confidence Executive Survey found that investors consider commercial real estate a solid investment. The survey found, too, that real estate executives are especially bullish on industrial real estate.
Midwest Real Estate News recently spoke with Chuck DiRocco, director of research for Altus Group, about what makes industrial such an attractive CRE investment. DiRocco also spoke about how the Trump administration’s plans for infrastructure spending and immigration reform could impact the CRE market.
Here’s what DiRocco had to say.
Midwest Real Estate News: What is it about industrial that makes it such a favored investment type today? Chuck DiRocco: In our survey, industrial remains king for the second year in a row. Industrial continues to be the biggest driver in the industry. A lot of this is driven by ecommerce. The growth in ecommerce is fueling the industrial demand that we are seeing. We continue to see that happening for at least the next couple of years.
Unfortunately, ecommerce, while it helps industrial, is hurting the retail sector. We saw almost 7,000 major store closings in 2017. But since everyone is shifting a bit to the ecommerce side of things, we are seeing more demand for warehouses and fulfillment centers. The rise in ecommerce has created more pipelines across the board to fulfill all those online orders.
MREN: The rise of ecommerce is certainly changing the way companies have to arrange their distribution networks. DiRocco: We do have what I call the spoiled shopper these days. Customers have become used to two-day or same-day delivery. To keep up that pace, companies need more locations. The pipelines need to be filled, not only in secondary or tertiary markets but now even more into those primary markets. It’s hard to ignore industrial in 2018 and probably a couple more yes yet to come.
MREN: We’ve written a lot about last-mile industrial. Do you expect to see a continued push for industrial facilities closer to population centers? DiRocco: We will. The space needs are great for industrial. Industrial users need a lot of space. To do it in a more affordable way, many industrial users had moved to the outskirt type of locations. That is now starting to change. With the demand for quicker delivery and with the cost of trying to get these shipments to these more urban locations, you will see more development closer to these city centers overall.
MREN: What kind of markets are attracting commercial real estate investors today? DiRocco: We are at a late-running cycle for real estate as a whole. Where is there left to invest? Cap rates are compressed across the board in primary markets. Are investors ready to move into secondary and tertiary locations? We asked investors in our survey what they thought were the best real estate investments for 2018, primary, tertiary or secondary markets. A total of 50 percent said primary markets and 41.7 percent secondary. That was a lot closer than I had expected. The fact that a lot of real estate in primary markets is overprice moves them to invest in secondary markets.
MREN: Do you think the infrastructure spending sought by the Trump administration will be a positive for the commercial real estate industry? DiRocco: That spending would be good, if it can get done. That’s the big question. How much of it will actually happen? Infrastructure spending is needed. The American Society of Civil Engineers gave our infrastructure a rating of D+. We need to revive our roads, tunnels and bridges. We need to find ways to reduce congestion. It needs to be done. It would be good for real estate. I don’t know if this current proposal will be the one. Spending is already at an all-time high. I don’t know how much further you can go with it. We can’t take on more debt right now.
One thing I did like from the State of the Union was the president’s emphasis on reducing the regulation and red tape on a state-by-state basis for getting projects done. Infrastructure projects can take a long time to complete. If he can get some of these things passed or completed, it could be a big boost for commercial real estate.
MREN: What about immigration reform? That’s obviously another big issue. Can immigration reform have much of an impact on commercial real estate? DiRocco: Immigration reform could have a huge impact on commercial real estate. Job growth has been fantastic since the end of the Great Recession. We’ve hired back 17.5 million people since the recession ended. We are still knocking out more employment. At some point, if you cut immigration, we are going to run out of labor. We are running out of employees across the board already. It will be even more difficult to find skilled or unskilled labor.
That is the biggest concern as far as immigration goes. You lose that labor, and that has a big impact on the growth of our economy. We don’t know if the president will get a lot of these changes through. But if immigration is curtailed, it could make it even more difficult for companies to find that labor they need.