After a year that was predicted to be — and by many accounts was — a “Goldilocks” economy in Charlotte, commercial real estate researchers, investors and developers are a bit more cautious looking ahead to 2019.
That was a key takeaway from the 12th annual Outlook on the Commercial Real Estate Market event, co-sponsored by Katten Muchin Rosenman and Cushman & Wakefield, on Thursday evening at The Ritz-Carlton, Charlotte. Revathi Greenwood, Americas head of research at Cushman & Wakefield who delivered last year’s keynote address, returned this year as one of two keynote speakers along with David Smith, the firm’s senior director of occupier research for the Americas.
Economists and those who work in real estate and other industries have been looking around the corner, wondering when the next recession will hit. Anxiety has ramped up lately, with stocks on a roller-coaster ride and some uncertainty over last year’s rising interest rates. Greenwood noted that while there are several things investors should be keeping an eye on, economic expansions on the whole have been getting longer.
“We are all tracking recession indicators,” Greenwood said, adding five primary things should be monitored: the stock market, which has experienced a great deal of volatility recently; the yield curve, which, if inverted, is said by many to be a primary recession indicator; fundraising for commercial real estate, currently at an “all-time high”; skill and labor shortages; and opportunity zone funding, a hot topic in commercial real estate after a federal incentive to encourage development in economically distressed areas was included in 2017’s tax overhaul.
Greenwood said about $100 billion in capital is waiting to invest in opportunity zones, with an eye toward secondary markets outperforming national averages.
Charlotte, like many Sunbelt cities, is such a market, Greenwood said. And an increased diversity of industries leasing office space in Charlotte is another healthy indicator for the market, Smith said.
“If you look at all (office) tenants with over 20,000 square feet, half of that is split pretty evenly between manufacturing, financial services, business services and professional services,” Smith said. That will make the Charlotte office market more stable and less prone to whims in the economy, he added.
Smith predicted multifamily will continue to be in demand here, with some slowdown compared to what’s been seen over the past few years in the apartment sector. The industrial market, too, will continue to do well — here as well as in other markets, Smith said, noting that 14% to 16% of all retail is e-commerce today, a percentage expected to grow.
Drilling down more specifically, panelists from a range of real estate sectors described what they’re keeping an eye on in 2019, where they’re investing — and what keeps them up at night. Dan Huffenus, Charlotte office managing partner and head of the real estate practice at Katten Muchin Rosenman, moderated the seven-person panel.
“Supply is relatively in check, so we think there’s still a bit of runway,” said Chris Nelson, managing director at Goldman Sachs & Co.
But, panelists on the whole agreed, real estate groups have to get smarter about picking the very best locations in any of the major product types — locations that would have some protection during an economic downturn.
Brian Purcell, managing director at Asana Partners, said his firm invests in a niche retail sector — what he called “street retail,” in infill sites and urban neighborhoods. Asana, based in Charlotte, has become a heavyweight in urban retail both locally and nationally, having invested here in places like South End, NoDa and uptown and, elsewhere, in Los Angeles, Boston, Atlanta and metro Washington, D.C.
Purcell said Asana was likely one of the few early groups to institutionalize urban retail but, as that trend has played out successfully, more players are entering the space.
“What we continue to see in our portfolio is the capital demand is certainly intensifying, but it pales in comparison to tenant demand,” Purcell said. Areas like South End and NoDa have hardly any available supply or vacancy for retailers seeking walkable real estate, which prompted Asana to enter those submarkets and provide that supply, he said.
Nelson, too, is bullish on infill — his favored product type right now is “boutique, jewel box, bite-size office with cool retail on the ground floor,” another type of project popular in Charlotte’s South End.
“If I could do 20 of those a year, I would,” Nelson continued.
Even industrial, a sector that has seen steady demand and interest, is looking to have something of an infill story of its own, with industrial groups seeking more last-mile distribution locations than ever before. But the hurdle there continues to be availability and pricing of land, said Britt Winterer, managing director and head of U.S. development at Gramercy.
Winterer said a “flight to quality” will also continue to be prevalent in the warehouse sector, with groups spending more capital on complicated deals — but, ultimately, well-located assets will see the most rent growth and have downside protection in the long run, Winterer continued.
Michael Cohen, head of Southeast and Mid-Atlantic originations at Citigroup, echoed that sentiment, highlighting in particular the corridor between Washington and Atlanta. Paired with infrastructure projects like highway widening and airport growth, the industrial sector is expected to continue to see big growth and remains a good bet for investment, Cohen continued.
On the apartments side, John Gray, managing director of LMC Investments, said multifamily is “middle of the road” right now when considering supply and exit costs. Value-add multifamily continues to be hot, he continued, something seen clearly in Charlotte with dozens of apartment communities 10 years or older having traded to institutional groups that invest millions in unit and community renovations, increase rents, then list them on the market for a return.
What has Gray concerned in the multifamily world? A lack of disruption.
“I think the short-term rental space with Airbnb could be a disrupter but it’s scary that it hasn’t been disrupted yet, and it will at some point,” Gray said.
In a similar vein, Chris McGibbon, head of Americas at Nuveen, said owners need to pay attention to disrupters and technology — how it will impact their real estate portfolios — and be honest with themselves about long-term viability.
Originally Published on January 18, 2019 at 08:30PM
Article published originally via “opportunity zones” – Google News https://www.bizjournals.com/charlotte/news/2019/01/14/what-to-watch-in-2019-commercial-real-estate-pros.html