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The Commercial Property Sector Is in Flux

Pay attention to the emerging market trends to get a jump on the future

By Gregg Gerken

As we get ready to transition into 2018, many people are wondering what the future holds for commercial real estate lending. Here is an overview of the top trends across the four major asset classes: multifamily, retail, industrial and office.

Multifamily

Lenders have been very interested in multifamily housing over the past few years, especially in markets like Austin, Texas; Charlotte, North Carolina; Atlanta and Dallas. Whether it's due to wage- and job-growth patterns, changing priorities among a new generation of households or some combination of those variables, there continues to be opportunity for investors in the multifamily market.

But growth in the multifamily market is slowing. Investors, borrowers, and the lenders who serve them should use caution and watch for signs of overbuilding.

On the flipside, there is a continuous, growing need for affordable housing across the country. According to the U.S. Department of Housing and Urban Development, an estimated 12 million households now pay more than 50 percent of their annual income for housing — a ratio more than 30 percent is considered cost burdened.

Why is that? The number of households needing affordable housing has grown and the supply has not kept pace. In the years ahead, the industry will need to pursue many unique financing avenues to find a solution.

Retail

Consumer spending grew at a 2.8 percent annualized pace during the second quarter of 2017, according to the Federal Reserve. That expansion marks a return of consumer-spending momentum and bolsters the overall outlook for economic growth.

But the retail real estate industry has experienced significant change in recent years, and the transformation is profound and will continue throughout 2018. The convergence of brick-and-mortar and online retail will continue to create major seismic shifts in the industry. In the past year, brick-and-mortar stores have closed at a record pace, while online retailers such as Amazon continue to grow. 

Urbanization also has had a big impact on the retail real estate industry, in both suburban and metro markets. As many young families opt to live in urban areas, suburban retailers may find themselves with too much brick-and-mortar space, while retailers in urban markets are expanding aggressively to meet the increased demand of the growing population.

Demographic shifts will remain an issue for the industry as a large number of retiring baby boomers give way to the wave of millennials starting careers and buying their first homes. Millennials continue to seek housing within close proximity to stores, transportation and restaurants, driving demand for retail space in urban environments.

Industrial

Consumer buying behaviors are not only affecting the retail real estate industry — they also have significant influence on industrial properties.

Consumers’ need for immediacy and convenience is driving demand for additional distribution centers across the U.S. A majority of retailers and e-commerce sites are pursuing distribution centers within close proximity to the biggest U.S. cities.

According to the U.S. Census Bureau, e-commerce sales will continue to rise, creating a continued need for industrial real estate.

Office

With job growth increasing for most of 2017, office real estate space is an expanding market for investment. One area of increased demand is office space near entertainment venues and other amenities. These office buildings are relying on smaller, flexible workspaces. Co-working spaces also have become more common as professionals choose alternative working methods. 

New office projects will be built and many existing office buildings will be re-purposed as part of mixed-use developments throughout 2018. A best-in-class example of this trend is the development of Hudson Yards in New York City, which will include 18 million square feet of commercial and residential space, office towers, shops and restaurants.

Green buildings remain a priority for the office sector. There are many benefits to building green, including improving operational efficiency, potentially lowering energy costs and meeting building-code requirements. Tenants place a high demand on green buildings, as they have a positive impact on health and productivity.

Ultimately, macro-economic signs point to a healthy financial landscape as we transition into 2018. Changing market trends, however, including global and political uncertainty, are expected to have a significant impact on the real estate and business communities going forward, as well as on commercial mortgage lenders dependent on the dynamics of the real estate industry.

Owners, borrowers, investors and the brokers who serve them should closely monitor these changes, and keep an open dialogue with financing partners to ensure that strategies can be revised as the market environment shifts in the coming years.

Gregg Gerken is executive vice president and head of U.S. commercial real estate at TD Bank