SAN DIEGO—Concerned about investing in retail properties as the sector remains forced to create new draws for consumers in light of e-commerce? Don't be, Spencer Levy, head of research and senior economic advisor for CBRE, told attendees at Wednesday's CREW San Diego lunch event, “2018 Economic Insights.” Levy told the crowd during the lunch event at the University Club atop Downtown San Diego's Symphony Towers that the sector has been reinventing itself for millennia, and it will continue to do so, meaning now may be the time to buy more retail properties.
As retail focuses on experiences over goods, Levy said it won't be e-commerce that destroys the sector, but rather demographics. Finding that which is appealing to consumer demographic groups continues to be the key to success in this category—and it manages to adapt to these changing groups eventually. Case in point: microbreweries, which have sprouted up all over San Diego and in other markets where Millennials pervade. The craft-beer movement is another manifestation of the retail market adapting to changes, from technology to recession.
And speaking of recession, Levy agreed with what experts have been saying about the next national recession hitting sometime around 2020, barring a Black Swan event, and he maintained that recessions are both good and bad for the economy: they're bad because people lose jobs, but they're good because they're clearing events that help us break out of stagnating economic growth. In fact, he blamed Europe's high percentage of non-performing loan balance on the market not experiencing a recession.
On the subject of other countries, Levy acknowledged the drive toward globalization, praising it and technology like bitcoin, but he said, “Maybe we went too quickly with globalization,” which has been responsible for us growing too slowly—and that has led to us doing things like electing Donald Trump. We grew impatient for economic growth, and that is what Trump promised.
Levy said decreasing CRE returns due to cap-rate compression reaching its limits can be remedied by lowering the cost of capital by bringing in foreign capital to our markets. He said one of San Diego's flaws as a market is that it needs to attract more international capital by appealing to international students to attend its many fine universities, sparking an investment interest in this market from the parents of these students.
Another adaptation has been the growing legalization of marijuana in some states, such as Denver, which has enjoyed new life in its class-B and -C industrial properties for the cannabis industry. Levy predicted that we will see cap-rate compression in the marijuana, beer and retail sectors going forward.
And the tax plan? Levy said this type of stimulus is rarely seen at this point in the cycle, but most economist think it is a good thing because it will increase spending. It has also been positive for CRE since it didn't get rid of 1031-exchange benefits or change the tax on interest income to equal that of regular income. He said retail and manufacturing should do better because of it, and office and industrial will do better if the other sectors improve.
On the office side, Levy said the pendulum is beginning to swing the other way with allowing employees to work from home; some firms like IBM are telling employees who work from home to find a place at the office or risk losing their job. And there's growing pushback against technology as people see their privacy being chipped away by the large tech companies.
The future, Levy said, lies in healthcare, given the silver tsunami, the fact that people are living longer and the fact that people spend more money on healthcare in the latter part of their lives than during any other period in their lifetime. He also said what drives markets now is talent—not infrastructure, as one might believe—and those markets that offer a live/work/play environment will continue to attract the talent necessary for those markets to thrive.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
