Fundamentals in the real estate market continue to be strong; however, at this late stage in the business cycle, investors need to be cautious as they venture into the development of more third-tier markets. Changes in demographics will also influence real estate as more people opt to rent, e-commerce grows and the density of offices’ increases amid an increasingly mobile workforce. In housing, homebuilders’ profits are being squeezed, due to tariffs, lack of land and most significantly, a shortage of labor. Concurrently, any additional purchasing power for buyers driven by wage growth is being offset by interest rate hikes and the new state and local tax laws. Interest rate hikes are having a two-fold effect: Existing homeowners are reluctant to move and take on a higher interest rate, and would-be homebuyers are priced out of the market.
Multifamily dwellings will continue to be top performers, with the exception of senior living, which continues to outpace current demand. Long term, this will stabilize as the baby boomers continue to age. Steady growth in e-commerce and the resulting closures of big-box stores raise the question of whether brickand-mortar is dead. The answer is no, but it is evolving. Retail real estate investors will continue to diversify into experiential and omnichannel concepts with smaller footprints. In addition, mixed-use projects that reduce concentration risk, and cater to the desire to live, work and play in one location will dominate investments in this area. Also, the quest for the last mile will continue to drive valuations in industrial assets.
The office market has reached a point of oversupply in many regions, with the exception of those driven by the technology, life sciences and media sectors. The market is near full employment, and the last millennials are entering the workforce. This will lead to a plateau in employment, as there will not be enough new workforce entrants to offset the retiring baby boomers. In addition, employers continue to make offices denser with more employees as they promote workforce mobility. These factors will continue to drive office vacancies in many markets, which have already seen a significant amount of supply come online in the past few years.