Looking ahead to 2019 – six predictions for real estate in the new year part one
As the year winds down, it is time to start looking ahead to 2019. The real estate market experienced its fair share of ups and downs in 2018. Though home prices rose and a flurry of new construction began going up across the country, large retail closings such as Sears and Toys “R” Us left thousands of commercial spaces vacant, clearing the way for the next phase of successful retailers. Looking at the current real estate landscape as a whole, both the good and the bad here is part one of my top six predictions for retail and real estate in the new year.
1. Urban continues to drive returns
If you are looking to invest in retail real estate in 2019, consider investing in the markets where people are already living in high numbers or where they are looking to relocate. The top five markets are still the high-barrier to entry markets: New York, Philadelphia, Chicago, Los Angeles and Washington, D.C. These are the core high-income markets, where most of the people live and where most of the money resides. Investors looking to invest in more affordable cities should look at 2019’s growth markets, primarily located in the southeast and the center of the country. These include Texas, Tennessee, the Florida Panhandle, and Denver, Colorado. Investors can expect a reasonable return on investment in both of these areas.
Currently, there are more than 29 million Americans living in urban areas—17 percent of the total population. As a result, urban residential rental inventory has increased by 32 percent since 2010. People are trending away from having a big house with a backyard with two-car garage into denser high-amenity living. Today’s residents want to live in buildings that have everything that can be found in a suburban shopping center. This could include a car rental in the basement, or a dry cleaner, restaurants, an urgent care, hair salon, urban-scaled department store and a gym on the first floor. Everything people used to drive to, they now want in their building at their fingertips. However, my personal opinion is that it’s not a forever trend. When the baby boomers are gone and the millennials no longer want to live on top of pizzerias, they’re going to go back to the suburbs because they remember throwing a ball in their backyard during their birthday party and they want their kids to do it too. The older sector of millennials are already headed there.
2. Technology takeover will disrupt real estate
While many industries have stayed current with new technology, real estate is an exception. However, I believe we are at a turning point. Existing technology is being curated and targeted towards the real estate industry. One technology that will start to really impact the real estate industry is ride-hailing services such as Uber and Lyft. I think we are going to start seeing parking lots full of Uber delivery drivers picking up goods. Developers will need to keep this in mind when building parking lots. Currently, for every 1,000 square feet of retail space, four or five parking spots are needed. Moving forward, I believe that two out of every five parking spots will need to be reserved for Uber deliveries to accommodate this growing trend.
Additionally, online real estate platforms such as Zillow will likely expand into the commercial real estate space. These platforms have changed the way people shop for homes, however, very few of these real estate portals have touched the commercial real estate space. The commercial industry is highly fragmented. The stakes are higher and it’s a lot more proprietary and secretive on commercial real estate pricing – retail lease economics are just not that transparent. More of these real estate platforms will come to incorporate analytical tools that determine the best location for your retail business based on demographics, price, space, geolocating, and access. Algorithms using artificial intelligence (AI) will be able to identify likely sites for a retailer or draw comparisons to other top-performing sites. For example, Target has over 1,800 stores. Perhaps these algorithms will be able to identify 10 common profile characteristics that these locations share. That’s going to revolutionize our business and while this is not a new technology, it’s an existing technology that will infiltrate our business in the next two to five years.
3. Only the strong will survive
It is no secret that online shopping has changed the way that brick-and-mortar stores have operated. This shift has disrupted the commercial real estate space and left many retailers scrambling. Smart retailers need to strike a balance between online and brick-and-mortar stores. It is a one-two punch. Retailers can no longer have just an online presence or only have brick-and-mortar stores – they need to utilize both in order to reach their consumers, create revenue and ultimately survive. The two biggest acquisitions in the retail space last year was an online store buying a bricks-and-mortar retailer (Amazon bought Whole Foods), and a bricks-and-mortar retailer buying an online retailer (PetSmart bought Chewy).
Take Wayfair, for example – an e-commerce company specializing in home goods and furniture. To deepen engagement with customers, Wayfair is opening up physical pop-up shops for the holiday season and opening outlet stores by 2019. This company is reinventing itself and doing whatever it takes to stay relevant. I think we will see more and more retail companies following Wayfair’s footsteps and making this shift in order to survive.
Despite the departure of a few large retailers, a strong GDP and job market in 2018 set the stage for solid real estate demand and absorption in 2019, according to the ULI Real Estate Economic Forecast.
Be sure to check back for part two where I’ll dive into three more real estate predictions including the future of big-box retail spaces and how retailers can continue to appeal to younger generations.
Check out our Here + Now Video where Tom Londres highlights the flight into urban areas, how technology will continue to disrupt real estate, and why only the strong will survive. Hear from Tom what the “one-two punch” means for brick-and-mortar and online retailers next year: