Top 7 Issues Affecting Commercial Real Estate in 2016

Dec 6, 2016

1. The Global Economy

The global market is experiencing a fair amount of volatility and is on a downward trend at present.

Political and military conflicts in combination with declining exports, soft energy prices, and BREXIT add volatility to the global commercial real estate market. Although the U.S. dollar is still strong, it is still likely to be affected by currency devaluation in other countries.

2. Urbanization

Urbanization, or the desire to live in a walkable community or live-work-play neighborhood, is becoming more popular around the world.

Both Millennials and Baby Boomers are attracted to urban areas, which offer more jobs and plenty of socialization opportunities. This is starting to affect property in the suburbs as fewer younger families are interested in living the suburban lifestyle.

Shopping malls are also affected and are turning to specialization, opting for luxury or discount outlet centers.

3. The Shrinking Middle Class

The rising specter of income inequality has led to a wide gap between the rich and the poor. The Pew Research Center’s statistics reveal that a majority of adults throughout the U.S. are no longer middle class.

Although this is not a new observation, it was once thought to be confined to those metro areas hard hit by a tough economy. The numbers now show that this is a “pervasive local phenomenon” and that even smaller cities which were largely middle class are showing the same drop.

For investors, the disappearing middle class opens up opportunities as more people opt to rent instead of buy. Investors can take advantage by considering multifamily apartments that cater to this growing demographic, especially those located in urban areas, or by investing in urban land initiatives.

4. Competition For Capital

funding commercial real estate

Slowdowns in the U.S. economy combined with global economic instability, volatility in the energy market, and regulatory changes have caused lenders to be more cautious in funding commercial real estate. While this might allow other less regulated lenders to enter the market, it will also result in increased competition for funds.

5. Unstable Energy Markets

The troubled state of the oil and gas industry is having less of an impact on the commercial real estate market than was predicted earlier on in the year.

While oil and gas producers have not only cut costs but have deferred almost $400 billion in capital expenditure and the clean energy market has exploded, most commercial markets continue to do well outside of those cities whose major economic driver lay in oil.

Retail and hotel, for example, are doing well, as are multifamilies, except in oil-rich cities. Office properties are still going strong as well, though there seems to be a slight softening in demand.

At the same time, lower prices on oil and gasoline act as a stimulus in the consumer market by encouraging travel and additional spending.

6. Changing Demand For Office Space

office space

New technologies, the increase in consulting and freelance work opportunities, as well as the increase in companies who support flexible working options, has radically changed office space demands.

While many companies still maintain corporate headquarters, many are downsizing the size of satellite offices and choosing to house employees in flexible workspaces. Although the definition of what constitutes co-working, co-working spaces are poised for growth and have nearly doubled their numbers.

Co-working spaces cater to a variety of niches and have found success in focusing on a variety of niches instead of relying on an income stream from just one type of business. Not only does this diversity appeal to solopreneurs and small businesses, but corporations are placing a portion of their workforce in a co-working space specifically for the purpose of collaborating with startups.

For commercial real estate investors, this opens up the possibility of re-purposing other types of commercial properties to appeal to this demographic, or of offering a portion of office space – with amenities- to this rapidly growing percentage of the workforce.

7. Aging Population

The number of people over age 65 now makes up for one out of every seven Americans, which is over 46.2 million people.

This along with the Affordable Health Care Act will affect numerous commercial real estate markets, increasing demand for everything from medical offices to senior housing to retail sales.

As this number continues to grow, it will also indirectly affect the CRE market as the investors among this group start to withdraw funds from their portfolios in order to fund their retirement and pay for health care.

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