Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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COMMERCIAL INVESTMENT REAL ESTATE 26 January | February 2018 once they have graduated," Nordby says. "There are real labor force constraints." Legal immigrants to the U.S. typically are those with the highest skill levels who can pay the most taxes and grow the economy. It is becoming harder for those people to enter and stay in this country, he adds. Some economists point to factors that counteract the labor shortage. Increased automation is eliminating some lower-level jobs. In addition, trade groups and community colleges are working to improve training and marketing of alternative jobs and careers in fields such as advanced manufacturing or 3D printing. The total U.S. unemployment rate, including recent col- lege graduates, underemployed workers, or those that have been unemployed for more than a year, is about 8 percent. "That tells us that we do have the capacity in the workforce, but our gap is how we get them the skillset that they need to participate," Conway says. Mixed Economic Signals Overall, most agree that the commercial real estate market is in a mature stage of the cycle, with decelerating growth, higher property values, and lower returns. Those mar- ket conditions make investing more difficult, as investors look to achieve higher returns, while still being mindful of mounting risks. "It's not like it was a few years ago when you could pretty much buy anything in a healthy city, and it was likely to perform reasonably well," Thorpe says. "At this stage of the cycle, real estate is intensely local. Within certain cities, some submarkets will thrive, and others will struggle." Each of the four core property sectors — multifamily, office, industrial, and retail — are at different stages of the cycle and face different headwinds and tailwinds. Industrial continues to be the darling of the industry, with plenty of room to run. Although rent growth is slow- ing, the sector is still experiencing high absorption levels. Vacancies are expected to maintain below-average levels between 7.7 and 7.9 percent for the next two years, accord- ing to the ULI Fall 2017 Real Estate Economic Forecast. E-commerce has been a big engine for industrial growth. "Our industry seems only to talk about e-commerce, but ultimately it is linked to the consumer," Thorpe says. The demand is increasing for a multitude of products from clothing and groceries to electronics and building materials. E-commerce only accounts for about 20 to 25 percent of all leasing. The rest of it is all linked directly to the consumer for manufacturing, shipping, and storage of goods. "There are many engines driving the industrial boom, and not just one," Thorpe says. Office fundamentals are expected to remain relatively stable. The ULI Forecast calls for vacancies to tick up slightly higher from 13 percent at the end of 2017 to 13.4 percent by the end of 2019, while rents will continue to grow at a rate of about 2 percent per year for the next two years. The key message in office is "go new or go home," Thorpe notes. Since 2012, more than 70 percent of the office space absorption has been concentrated in new, high-quality Class A space. That is clearly what tenants prefer. In addition, central business districts will continue to outperform, as it is where most people, including millennials, want to work. Millen- nials gradually will shift to the suburbs, but that transition is still five or six years off, he adds. Challenges Ahead Multifamily is under more scrutiny, as vacancies have started to tick higher, and a big load of new projects has been com- pleted in 2017 or underway for 2018. Reis's 2017 Q3 data showed that vacancies increased in 50 of 79 markets. Sources: 2001–2016, Real Capital Analytics; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected $450 billion, $450 billion, and $430 billion respectively, for 2017, 2018, and 2019. Sources: 1997–2016 (Q4), CBRE; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 8.0%, 8.0%, and 8.4%, respectively, for 2017, 2018, and 2019. Commercial Real Estate Transaction Volume $371 2005 Billions of Dollars 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 $432 $572 $178 $70 $150 $235 $299 $364 $434 $547 $496 $450 $427 $414 Actual Forecast 16-Year Avg. (294) Industrial/Warehouse Availability Rates 9.8% 9.6% 9.7% 11.6% 14.0% 13.9% 13.0% 12.2% 10.7% 9.6% 8.7% 7.9% 7.7% 7.9% 7.7% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Actual Forecast 20-Year Avg. (10.2%)