Hope springs eternal, especially with the dawn of a new year. Developers and owners alike approach the 2018 commercial real estate market with cautious optimism. There will be growth, albeit in non-traditional sectors, such as a heightened focus on the impact of technology in commercial real estate projects and a slow-down of multifamily products. At the same time, we can expect an increase in the development, acquisition and leasing of other types of commercial real estate assets and pushing away from city development into suburban areas. The commercial real estate market continues to demand flexibility as the type of product sought by investors continues to change.
The importance of technology is evident and prevalent in the commercial real estate industry. From staying connected to others, to creating a better and faster product, to existing in an environment controlled by technology to maximize comfort and productivity, we use technology all day, every day, in our work lives and personal lives. Cutting-edge hotels implement “smart rooms,” such that a guest’s experience is customized by the push of a button to specific lighting, heating and media preferences. This trend will trickle down to become more a norm in the hospitality industry. Offices outfitted with certain technologies are able to connect employees and clients located physically in separate areas as if everyone is physically part of the same meeting, and use technology resources to control costs, such as lighting and heating, based on individual employee’s preferences and working hours.
The retail sector can harness this advancing technology to provide the customer a retail experience personalized to that specific customer. Perhaps surprisingly, we expect a rebirth of the retail sector, based strangely enough on stores carrying less product. Popular retail stores will attract more customers offline and into physical stores, for more personal attention and the ability to touch, view, customize and personalize shopping choices in-store while relying on customer service and technology, with product actually stored off-site in warehouses.
While retail may experience an uptick in 2018, the multifamily sector will likely slow. As the year begins, major cities such as Washington, D.C., carefully toe the line so as not to cross into oversupply, which looms precariously close. With a slow-down of multifamily growth, a corresponding rent depression may occur as developers and owners seek to fill the constructed apartments and condominiums. Thus, the 2018 market may become a renters’ market as the year progresses.
The retail rejuvenation may pull up the popularity of another asset type for investors, namely warehouses. Retailers focusing on the shopping “experience” concept need a place to store goods, benefitting the warehouse/industrial market. However, finding ample space in an urban environment is more difficult than looking out to the suburbs. While some developers investigate infill areas for warehousing opportunities, suburban areas continue as attractive options for warehouses, utilizing available space while not located too far from city centers.
“Suburban creep” remains an issue for the commercial real estate industry in 2018. As certain industries look for commercial space in the suburbs, employees look to establish their residential lives closer to their place of employment. The traffic in the Washington, D.C., area is some of the worst in the nation, and as businesses move out of the city into the suburbs, employees look to limit their commuting time and follow their place of employment out of the city.
Another factor contributing to suburban creep is the population inhabiting the new, cool, hip multifamily housing in the city, eventually looks to move to the suburbs to develop their family life, more spacious housing, educational benefits and similar reasons. To stem the flow of suburban creep, city planners must include and encourage commercial properties such as grocery stores, outdoor spaces such as parks, and continue to focus on the well-being of the educational system, to keep people in the city to live, work and play.
Starting the year with a positive growth outlook is always a “feel-good” when looking at the potential for the commercial real estate market. Developers, investors and lenders will find opportunity in the retail and industrial/warehouse sectors, while the multifamily market slows. The commercial real estate market continues to demand flexibility as the type of asset sought by investors continues to change. Combatting suburban creep remains an issue, so that our cities are able to maintain businesses and people within their borders, thus enabling cities to innovate and thrive in 2018.
Barbara Anne (“B.A.”) Spignardo is a member of Washington, D.C.-based law firm Shapiro Lifschitz & Schram’s Real Estate and Business practices, where she represents lenders, borrowers, developers, sellers and institutional investors in sophisticated, high-dollar commercial real estate transactions. She may be reached at (202) 689-1900 or by email.