Throughout the year, commercial real estate investors have signaled cautious optimism and 2018 rewarded that outlook. Will the same hold true in 2019? As real estate investors seek out the prime opportunities to improve their yields, there are specific market, asset and financial concerns to take into account.
Projections indicate that national investment sales will be down for the third year in a row once 2018 shuts the books. That’s a grim prognosis for a market about to turn the page on another year, and it has many investors attempting to gauge what degree of concern they should apply to this trend nationally, as well as within the Chicago market.
“I do believe that investment sales are slowing down from their peak in 2015 and the rise of interest rates has tempered investment demand,” said John Homsher, CCIM, principal at Podolsky Circle / CORFAC International. “The real estate velocity will not be as robust, however institutional investors continue to raise funds and pension funds are increasing their allocation to real estate. Some asset classes will outperform their peers and I think the national trends will apply to Chicago investment sales.”
Aside from location, investment type is paramount. Industrial returns have led all other asset classes for the last few years, urged along by e-commerce and logistics. The time will come when the sector will downshift, but 2019 probably won’t be that year.
“Industrial real estate will continue to be strong and a preferred investment alternative due to the market demand from tenants and investors for this product type,” said Homsher. “Supply and demand seem to be in balance and spec industrial deliveries are being leased with strong tenant demand.”
As for the other asset types, next year will bring a variety of results. Unlike industrial, there have been a declining number of office, retail and multifamily deal transactions over the past few years, depending on the market.
“I think office and multifamily will still be in demand and we are seeing more demand for suburban office which had been out of favor compared to CBD office,” Homsher said. “Retail is a mixed bag with grocery-anchored centers still in demand. Malls are going through a repositioning period. Triple-net-leased retail is still attractive, but cap rates are increasing along with interest rates.”
The ultimate question, then, is whether borrowers can expect a similar lending climate next year compared to 2018. Rising interest rates, for example, may make financing harder to come by.
“Interest rates have ticked up this year and there could be more increases next year which will affect investors’ underwriting and cap rates,” said Homsher. “Banks are very disciplined and have tightened their lending standards.”