2020 Vision for What’s Ahead Next Year
Ian Formigle, vice president of investments with CrowdStreet, recently shared his observations and predictions for commercial and multifamily real estate markets heading into 2020.
HOUSTON—As the year draws to a close, most are pondering what is in store for the commercial real estate industry next year. Some, namely Ian Formigle, vice president of investments with CrowdStreet, have 2020 vision when it comes to 2020. He recently shared his observations and predictions for commercial and multifamily real estate markets heading into 2020.
Half of US renters or 21 million households spend 30% or more of their income on housing. Formigle says the lack of affordable housing will continue to intensify and the US housing affordability crisis will intensify during the next five years. In response, developers will seek out opportunities to refresh aging 1970s and 80s vintage multifamily housing.
Roughly 1 million new households per year through 2035 are projected. And, three out of four new jobs in the US are relatively low paying which is producing more renters than homeowners, and specifically, those renters will need affordable housing, according to Harvard’s Joint Center for Housing Studies.
Average lifespans are increasing as well as the average age of an assisted living resident. Senior housing demand is materializing more slowly than many expected with continued headwinds in certain markets in 2020, Formigle says.
Moreover, memory care is proving to be a struggle to lease. Families want to leave loved ones in an assisted living environment if possible to save money but this is creating a short-term obsolescence of certain floor plans, i.e., too heavily weighted to memory care and not enough assisted living in the unit mix.
“Affordability is a real issue,” Formigle tells GlobeSt.com. “The market missed the mark a bit on what the families were willing and able to pay.”
Low Interest Rates
While interest rates have gone down, cap rates are stable. As debt goes down, net cash flow goes up, Formigle says. This is most evident for multifamily, given low rates on agency debt.
“Certain types of deals underwrite better today than eight months ago,” he says. “Purchasing multifamily and leveraging it conservatively with cheap 10-year fixed rate debt is an attractive strategy for 2020. If you can find a solid multifamily asset in a growing location, this strategy can insulate you against uncertain risk over the next few years and position you to exit during the next cycle.
Walkable Inner Suburbs
The majority of Millennials are now 30 years or older and beginning to think about things such as schools and enough space for a family. Millennials want affordability as well as walking distance to dining, shopping, entertainment and jobs.
As a result, they are gravitating to suburban communities that have been coined Hipsturbia by the Urban Land Institute. Some examples include Hoboken, Maplewood and Summit, NJ; Yonkers and New Rochelle, NY; Evanston, IL; Santa Clara, CA; and Tempe, AZ.
Climate Change is Altering Market Selection
Investors/homebuyers are becoming increasingly wary of locations that are subject to heavy storms, fire and other climate-related events. As a result, investors are actively looking at low-lying locations or locations that are less susceptible to severe storms to minimize investment risk.
“Elections are going to insert uncertainty,” says Formigle. “Despite increasingly grave reports about the impact of climate change, there have been little to no policy steps and process reviews necessary to deal with the coming challenges.”
An estimated 300,000 residential and commercial properties will likely face chronic and disruptive flooding by 2045, threatening $135 billion in property damage and forcing 280,000 Americans to adapt or relocate, according to a 2018 report by the Union of Concerned Scientists, “Underwater: Rising Seas, Chronic Floods and the Implications for US Coastal Real Estate.
18-Hour Markets are Heating Up
These cities are on the rise with higher-than-average urban population growth and lower costs of living and doing business. They are attracting companies such as Amazon and Millennial residents, which is resulting in growth of investment projects.
For example, office property values are trending down in New York City while they are rocketing to new highs in Austin. In the US, 24-hour cities translate mainly to the coastal gateway cities of Boston, Los Angeles, New York, San Francisco and Washington, D.C. 18-hour cities have many of the same benefits of transportation, amenities and jobs without operating on a 24-hour basis. Examples include Seattle, Portland, Charlotte, Denver, Austin and Nashville.