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Predicting 2020: Politics, From The Election To Rent Control, Will Loom Over CRE

While any presidential election year figures to be heavy on political talk, this year, many commercial real estate industry titans believe politics will dominate the commercial real estate conversation, far beyond the battle for the White House.

Predicting 2020: Politics, From The Election To Rent Control, Will Loom Over CRE

The United States is already in a contentious election cycle, and the House of Representatives has already voted to impeach President Donald Trump. Unpopular policies in real estate circles, including rent controlvacancy fees and inclusionary zoning, are gaining steam in the country’s biggest cities.

But some say commercial real estate will shrug off all the political nastiness as it continues to chug along. After all, the industry has already overcome the omens of potential economic recession last year, including the inverted yield curve — when short-term bonds offered better returns than the 10-year Treasury — a moderating gross domestic product and a decline in business spending.

“The punchline is we have been studying these types of events for over 50 years. These types of geopolitical events don't have any material impact on the economy over a length of time,” CBRE Research Chairman Spencer Levy said. “People overreact to it.”

But if there’s anything real estate investors hate, it’s uncertainty. And the political uncertainty at play has caused many in the market to hold off on making major capital decisions, calculating that it is too risky to make any big moves.

“I think the elections could, with so much divide in the country ... people are just so mad about it,” said Michael Bull, the founder of brokerage Bull Realty and host of the radio program America’s Commercial Real Estate Show. “That could slow down some expansion and some growth.”

CBRE Americas Research Chairman Spencer Levy
CBRE Americas Research Chairman Spencer Levy

Where commercial real estate will feel most of the effects of politics, though, will be on the local level. Some areas of the country have already seen a grassroots backlash against generous tax incentives and abatements for private developments.

“I do [believe] we'll see smaller incentives or incentives that go away altogether for big projects that truly don't impact disadvantaged areas,” OA Development partner Brian Granath said.

Peebles Corp. founder Don Peebles also said developers may need to expect to have less political persuasion on a local level because of not only a growing backlash against municipal tax largess, but also the widening disparities with income in many cities. Plus, politicians are harnessing the power of social media to raise campaign funding from individuals instead of relying on large donations from business leaders and developers.

“The influence on the political process the industry has had for many decades is diminishing and very rapidly,” Peebles said. “More [backlash] is coming and the developers aren't going to even be able to fight it off.”

Politics is the connective thread for many of Bisnow's 2020 commercial real estate predictions, after interviews with nearly a dozen national experts:

1. Rent Control Becomes More Prevalent

Three states instituted rent control measures on apartments last year, and a host of major cities are forcing developers through zoning regulations or as part of an incentive package to hold rents down on some of their new units.

While many experts contend that the answer to affordable housing is to build more and otherwise get out of the way, the push for regulated rents will only gain momentum in the new year, especially as when many municipal officials are up for election, according to CBRE's 2020 outlook.

“It's a politically charged topic,” Conway said of housing affordability. "So where do you get the most immediate relief? Rent control."

Avison Young principal Kirk Rich — who was recently tapped by Atlanta Mayor Keisha Lance Bottoms to serve on the Atlanta Housing Authority's board of commissioners — said governments are compelled to grapple with ways to curb housing cost escalations near schools and jobs in urban centers.

“The pressure surrounding any affordable housing within any major urban market is increasing and troubling,” Rich said. “We have priced-out workforces as well as other diverse communities that deserve access to housing close to jobs and schools and other things most others take for granted.”

Already, apartment investors are shying away from New York City and certain places in California due to rent control, pushing investors to cities with looser regulations, Bull said. And developers may be strapped from building more housing in cities where steeper affordability requirements are in place as well.

“[Government officials] are trying to get elected and trying to make everyone happy. Mostly, they're not real estate experts,” he said.

Predicting 2020: Politics, From The Election To Rent Control, Will Loom Over CRE
Multifamily construction will jump in 2020.

2. Multifamily Construction Rebounds

Apartment developers will likely continue to ride the jet stream of optimism that younger millennials and even baby boomers are more inclined to rent over buying homes.

Developers are expected to unleash 330,000 new apartment units in 2020, up from 303,000 this past year, according to Yardi Matrix Senior Research Analyst Tara Jeffcoat. But this time, developers will likely outstrip demand.

Apartment demand is projected to be 240,000 units, a 20% drop from 2019, according to CBRE. That would shrink rent growth to 2.4% and elevate the vacancy rate to 4.5%, still below the historical average, CBRE reported.

Transwestern Eastern Region President Bruce Ford, however said the fresh stock of college graduates may help boost apartment rent rolls.

“I think what we're going to witness in the April to June time frame, with this graduating class across the country … many of those students will have already secured jobs before they entered the market to rent and lease their housing,” Ford said.

3. Modular Construction Becomes More Popular

Rising construction and land costs and a continued labor crunch will have another effect other than rising development costs in 2020: development innovation.

The growing need for affordability in housing especially will have more developers using modular construction and other prefabricated methods to building apartments, hotels, low-rise offices and even some retail, Conway said. And in an effort to boost housing stock, more developers may be willing to chance manufactured housing, where building costs are substantially lower.

Verified Market Research predicts that the total value of modular construction will be $131.9B in 2020 and more than $181B by 2026.

“I think we're going to see a lot of innovation in affordable housing,” Conway said. "With modular, it's not just a residential story, it's a commercial story."

Co-working space, open office, open-plan office, coworking

4. Office Demand Will Slow Down

Even with the debacle that became the WeWork meltdown late last year, few see any major changes to office demand across the U.S.

“I think the good news is our headline for 2020 from a commercial real estate perspective, it's going to be a good year, similar in many ways to 2019,” CBRE's Levy said.

In its 2020 outlook, CBRE is projecting companies will absorb 20M SF across the country, well down from the total projection this year of 37M SF. As of the third quarter, companies leased 29.6M SF more than they emptied in the U.S., according to Newmark Knight Frank.

CBRE is projecting some 51M SF of new office completions this year, down from 59M SF in 2019. 

Technology companies should continue to be the force behind the majority of the leasing activity, according to CBRE. As has been the story for much of this past decade, the central business districts in major cities are expected to keep winning the majority of corporate America's office attention and demand.

But there will be a shift that will accelerate next year: Some companies begin to eye smaller cities that mimic the amenities and walkability seen in larger urban cores, Levy said.

“We think that the reurbanization in the U.S. and globally will continue into the next decade,” said ULI executive director of sustainability and economic performance Billy Grayson.

Predicting 2020: Politics, From The Election To Rent Control, Will Loom Over CRE

5. Industrial To Stay Strong

Industrial real estate should continue on its hot streak again in 2020, thanks in large part to the continued retail evolution to online shopping. Levy said that the question of whether the U.S. is finally at the top of its hot industrial market has been asked repeatedly for years, and is being asked again this year.

“The short answer is, 'Not yet,'” Levy said.

Still, developer exuberance may race ahead of actual tenant demand. CBRE predicts that developers may unleash upward of 30M SF more industrial space than actual demand in 2020. But new supply addressing niche needs, such as cold storage and last-mile distribution, should do well regardless, Levy said.

E-commerce demand for last-mile facilities of 150K SF or less will accelerate in 2020 as “companies race to offer same-day delivery to customers,” with continued rent appreciation as well, CBRE's report stated.

“I don't think industrial is going to slow down for 2020. I think everyone is still pretty much in on industrial,” Jeffcoat said.

Predicting 2020: Politics, From The Election To Rent Control, Will Loom Over CRE
Transwestern Eastern Regional President Bruce Ford

Transwestern's Ford said there is one particular potential for headwinds in industrial, namely the continued waging of the trade war, not only against China, but even the push to renegotiate the North American Free Trade Agreement with Mexico and Canada.

“What does trade do in terms of an economic slowdown in terms of manufacturing and agriculture? That's the primary concern,” Ford said.

6. Capital Will Flood U.S. CRE

In a flight for yield and investment-grade quality, commercial real estate investors will continue to flock into the U.S., warts and all, thanks to the spread of negative interest rates throughout the globe.

While yields on U.S. commercial real estate continue to get squeezed, even a return of 4% to 5% is more appealing than staying in some European banks where storing money in an account actually costs customers.

“I think that the United States, and by extension the United Kingdom, are the two cleanest dirty shirts in the laundry,” Levy said.

Granath said he expects the Federal Reserve to cut rates one more time this year, but avoid dipping into negative territory.

“I think they lower rates one more time and I think we're entering into dangerous territory ... cut to a point where if we do enter a recession, there's nothing we can do left to help the markets," he said. "Because entering negative would be ... a sign that the markets are worse off than they actually are."