As we identify the top 10 trends likely to drive the commercial real estate world in 2018 and beyond, we'll start with big picture drivers. Check back soon for the second half of the top ten, which will focus on specific product types.
1. The Economy Will Remain Strong
2018's overall economy is likely to be driven by ongoing expansion in the overall economy. While there will be regional differences, a combination of strong corporate performance, business-friendly tax policy and consumer demand and spending should make 2018 another year in this current record-setting expansionary cycle.
2. Infrastructure is Coming
Now that Washington has passed a tax reform bill, its next priority is likely to be a major infrastructure project. Early projections indicate the potential for $200 billion in Federal spending over a ten year period, tied to over $800 billion in additional private, local and state government spending. While $1 trillion in new infrastructure could cause pressure on the labor market for construction workers, the advantages to businesses who will be able to occupy commercial real estate served by new rail systems, roads and bridges, are significant.
3. Property Income to Drive Value Growth for Landlords
One of the impacts of our current expansionary cycle coupled with low interest rates is that the prices that landlords pay for commercial real estate assets relative to the income they generate remain at or near all-time highs. Analysts feel that the multiples of income that buyers pay for commercial real estate in 2018 could come down.
This means that the only ways for a landlord to increase the value of a piece of real estate are to either increase the rental income or to spend less on the building's operation. Owners can no longer depend on the capital markets to achieve growth in their building's value. With this in mind, expect landlords to be even more keenly focused on maximizing their net operating incomes. This could take the form of aggressive leasing of vacant spaces, increases in rents and reimbursements or attempts to control building expenses that are not reimbursed by tenants.
4. Connectivity Continues Being The Key Amenity
More than almost any other amenity, businesses look for high quality connectivity in the spaces that they occupy. This need is particularly pressing in the office sector. Buildings that enjoy high speed and low latency fiber connections have significant advantages over those that lack them, and strong cellular service throughout tenant and common areas are also necessities to attract tenants.
5. Office, Retail, Residential Lines to Continue Blurring
Projects like the addition of high end office space to the University Town Center shopping mall in the suburbs of San Diego are examples of how the lines between different types of commercial real estate are getting more and more blurry. Tenants looking for space in 2018 are likely to focus more on the total experience that they can have from the building in their space than on the type of building they occupy.