written by Claire Matten, Sterling CRE Advisors
With growing speculation of a market correction after almost 10 years of low interest rates and steady growth, many commercial real estate investors are wondering what their opportunities will look like in the coming year.
Will rising interest rates continue to put pressure on cap rates? What will emerge as 2019’s strongest asset class? How should one prepare to adjust their investment strategy?
While nothing will ever be certain, keeping a close eye on the following trends will no doubt assist in making educated investment and operation decisions:
1. Rent growth is expected to slow compared to previous years. There is mounting concern of “peak” purchasing in an era of moderating rent growth in many primary markets. Secondary and tertiary markets, which are considered higher risk to many investors will likely continue to be sought out in 2019. The expected yield in these markets, which include many Montana cities, are more favorable than current primary market returns.
2. Alternative sectors will continue to gain popularity. Concepts such as co-working, data centers, assisted living, student housing, and self-storage are expected to get more and more looks as investors attempt to search beyond the traditional asset classes.
3. Industrial/Flex Warehouse space will remain in high demand in many emerging cities. While many investors are looking to break into secondary and tertiary markets, many users are following suit. Missoula is a prime example of a tertiary market with high demand for flex distribution space from occupiers looking to re-locate to the area. Quality industrial product should see healthy absorption figures in 2019 based on the demand levels we are currently tracking.
4. Many investors still leery of the retail wild card. Many developers are using the current oversupply of empty retail boxes to attack the adaptive reuse concept. There has been wide speculation that with growing healthcare needs in the United States, retail could make an absorption push toward re-builds for medical office use. Although a lot of retail exists which isn’t as bad as the headlines state, the effect of e-commerce on big box retailers has undoubtedly had an impact on investor perception of the asset class.
5. Economically efficient asset management will be vital to navigating the coming year. While most investors and operators always keep asset management toward the top of their list, concern over reinvestment risk in the event of a sale in the coming year should shift even more focus on fine-tuning the economic performance of current assets. Any means to extract additional value out of existing holdings will contribute to yield growth in an era of slowing transactional velocity.
For a full report on Missoula’s market performance in 2018 and what to expect in 2019 please register for our annual Market Watch event this Wednesday, March 20th, at 4:00 pm at the Mercantile.
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