Commercial real estate executives have been discussing for years the surprising length of this growth cycle, and in July the U.S. officially entered the longest-ever period of economic expansion. The previous record was 121 months; December puts the U.S. in month 126.
This deep in, real estate fundamentals largely still look healthy, and many experts have told Bisnow they don’t see anything in particular that would make it all come crashing down. (In fact, many said even if the general economy takes a hit, CRE will be fine.) But that didn’t stop CRE experts from speculating about and preparing all year for a downturn.
There are some key indicators — such as the inversion of the yield curve, which has since reverted — that one may be imminent, and many experts predict the market correction will come next year … or in 2021.
Rent control measures reached a breaking point globally in 2019.
In the face of rising rents and insufficient availability of housing, three states enacted laws implementing or bolstering some form of statewide rent control — Oregon was the first ever in February, followed by California in September. In New York, a package of laws passed strengthening rent regulations that industry experts called "devastating" and "irresponsible" and are fighting in court.
Those in the commercial real estate industry pretty universally oppose these measures and say they will be detrimental to the cause of adding affordable housing. There have been some negative effects of the new laws; cap rates have risen in these markets, the U.S. Treasury Department has said it will restrict multifamily lending in markets with rent control and real estate executives in Philadelphia and Washington, D.C., said they have received increased interest from multifamily investors who are looking for alternatives to investing in New York.
But a CBRE study in December said there hasn’t been a discernable impact in Oregon’s multifamily market since rent control was implemented, and California hasn’t seen any knee-jerk sales or difficulty, though its law takes effect in January and local experts expect there will pain in the market afterward.
Other states are considering rent control measures — Illinois and Colorado have taken serious steps to repeal rent control bans, and a Florida legislator proposed rent control in a bill in October. Rep. Alexandria Ocasio-Cortez (D-NY) introduced a bill in September that would implement nationwide rent control. The movement is growing overseas, too, with many major international cities like Berlin and Barcelona enacting rent control in 2019 and markets including London strongly considering it.
The coworking pioneer started the year with a splash — on Jan. 8, it rebranded its empire as The We Company and announced a $6B investment from SoftBank, a large infusion but far less than the $16B it had expected to receive. The investment valued it at $47B, which for a time made it the most valuable privately funded company in the U.S.
Its years-long rapid expansion through leases, building acquisitions and new business lines continued through 2019 with the launch of coworking/retail hybrid Made by We, a smart cities initiative and food startup incubator WeWork Food Labs, and acquisition of coworking rival Spacious, software company Euclid, workplace management company Managed By Q and analytic software company SpaceIQ. WeWork was the fastest-growing office tenant in multiple major global cities this year, and the largest office occupier overall in Manhattan and London.
It took its first official steps toward an IPO in April, a move it had hinted at since 2017 and one which was supposed to help it open all those locations it had leased. Then The We Company released its IPO prospectus in August and everything fell apart.
Once investors and landlords got a peek into the company’s financials and corporate structure (in particular the power granted to CEO Adam Neumann and his alleged self-dealing), they balked, and We’s stated valuation started plummeting, from $47B at the beginning of the year to $20B in September. In September, We announced it was delaying its IPO by a month, and a week later, Neumann was ousted, capping off three months of executive exodus. A week after that, We halted its IPO plans altogether.
The company was taken over by SoftBank in October at an $8B valuation. It has new leadership, a 90-day turnaround plan that began in November and a fresh, $1.75B line of credit from Goldman Sachs. It is looking to undo some of Neumann’s efforts, including looking to sell some of the companies under its umbrella (including Managed by Q), halting a partnership with Ivanhoé Cambridge to deploy $3B of equity into building acquisitions and reportedly angling to back out of up to 100 leases.
But WeWork has continued to finalize new leases and deliver the huge backlog of new locations it had previously announced. Though the bloom is off the rose and the drama will be immortalized on screens big and small, most landlords and office experts think the coworking revolution WeWork started — if not the company itself — will continue to be successful.
The commercial real estate world waited all year for final regulations to the opportunity zone program, but the calendar is turning over to 2020 — and a crucial deadline is passing — with no final word from the Treasury Department.
Developers have been hesitant to launch projects in OZs without the certainty of the final guidelines, and as time has passed, exuberance over the program’s potential to spur development in disinvested areas has faded into skepticism, accusations of abuse and calls to revamp or kill the program.
While property values spiked in designated zones and a lucrative cottage industry has sprung up around OZs, most investors have too many questions about the program’s details to feel comfortable launching projects.
"Without more regulatory clarity, the marketplace is somewhat frozen," Steve Glickman, who helped design the program, said at the rescheduled public hearing in February.
Also working against the program's widespread adoption: its benefits aren't viewed as being enough to be worth taking on extra risk, which critics say is accelerating gentrification without helping the neighborhoods that truly need it.
Dec. 31 is the deadline to make an investment in a qualified opportunity fund and get the full benefit of deferred capital gains tax. Activity appears to be picking up to meet that deadline, and investments made next year and beyond will still get tax breaks. But whether the program will ever take off as hoped remains to be seen.
Amazon and New York City had a wild year. In November 2018, Amazon selected New York City and Northern Virginia to split HQ2, its major headquarters expansion out of Seattle.
NYC was to get 25,000 jobs and up to 8M SF of new development, but as the deal — including $3B of incentives to the internet giant — was being hammered out, residents and local politicians started pushing back. On Valentine’s Day, Amazon broke up with the Big Apple, to the deep chagrin of the real estate community. Some saw the loss as devastating to the city.
But Amazon just couldn't quit New York's deep talent pool — it isn’t an HQ2-level investment, but Amazon announced plans in early December for a new, 335K SF Manhattan office that used no public incentives.
JLL’s $2B acquisition of HFF, announced in March and finalized in July, was the latest in a years-long string of brokerage consolidations. These M&A deals have been frequent (and are likely to continue) as midsized companies have found it more difficult to compete in a globalizing world.
JLL didn’t really need the boost — it was already the second-largest brokerage in the world, behind CBRE — but the HFF acquisition shrank that deal volume gap and expanded JLL’s capabilities in the capital markets and debt advisory services realm. It also led to the departure of several of the Chicago-based brokerage's top capital markets brokers as the two companies experienced typical M&A growing pains.
Instead, in July the Fed cut interest rates for the first time since 2008, and cut them again in September and October.
The cuts were seen as largely proactive as uncertainty has risen in the U.S., and most in commercial real estate said the rate reduction wouldn’t have much impact on the industry, though it could help out refinancing deals or be the deciding factor for someone on the fence about developing this late in the cycle. The Fed said Tuesday that it doesn’t intend to cut rates again in the near future.
Chick-fil-A is one of the fastest-growing and most popular fast-food restaurants in the country (though Popeye’s is trying to give it a run for its money), but it hit more turbulence than usual this year over its philanthropic activities.
A trio of airports severed their ties with the chain in March after nearby residents protested its financial support of charities with anti-LGBTQ stances. Chick-fil-A’s first location in the UK was open only eight days in October before the landlord said it wouldn’t renew the pilot lease, again amid large protests by LGBTQ organizations.
In November, Chick-fil-A announced it would limit its donations to three categories — education, homelessness and hunger — and not give money to organizations with anti-LGBTQ positions in the future.
Nearly 800,000 Californians faced planned blackouts in October as electricity provider Pacific Gas & Electric shut down the grid across most of the Bay Area. The four mass shutdowns spanned a couple of weeks, with some residents being without electricity for nine days in a row in mid-October.
The impact on businesses in the area was likely in the billions of dollars, though an exact cost is still hard to pin down. The outages, which some say could be the new normal for the area, also limited security in CRE and may have some investors saying building in California isn’t worth the hassle, though overall the area’s appeal seems unharmed.
The blackouts were intended to keep wildfires from sparking, but failed to do so — on Nov. 1, only three weeks after the shutoffs were first announced, at least 13 wildfires were burning in California. The most devastating, the Kincade Fire, began on Oct. 25 in Northern California and by Nov. 6 had burned almost 78,000 acres.
Three and a half years and two prime ministers later, the uncertainty that has gripped the UK since Brexit was approved in a June 2016 referendum is finally nearing its end.
Nervousness and uncertainty stalled some real estate decisions — a potentially very bad thing, given the UK economy’s dependence on the sector — especially as the deadline to exit the European Union was pushed from March to April to October and now to January 2020.
The July departure of Prime Minister Theresa May, who had herself taken over for David Cameron after the initial Brexit vote, added to the turmoil, though her replacement, Boris Johnson, was largely welcomed by the real estate community.
London property in 2019 received its lowest level of investment since 2011. Investors have been pulling money from open-ended funds, Starwood Capital said it wouldn’t place more money into the UK until Brexit cleared up, and some tenants have been uneasy about committing to long-term deals. But Brexit didn’t halt activity altogether; London has remained a top global destination for investment, and analysts said real impact on deals and real estate fundamentals has been muted. Some companies have even seen the drama as an opportunity-maker.
The final piece of major drama — a general election Dec. 12 — crystallized a path forward with Johnson locked in as PM and his Conservative Party now the majority in Parliament and able to push his plan forward. The UK will (finally) formally leave the European Union on Jan. 31. Many expect that will free up a rush of real estate deals, but now other UK economic indicators may keep some investors’ nerves humming.
When last year hit a record in retail store closings, analysts predicted the sector had hit its trough and would rebound in 2019. They were wrong.
That record was broken by May, and new waves of closures were announced through the year, bringing the store tally above 9,300. Payless led the list, announcing in February it will close 2,300 locations. Even multimillion-dollar flagships weren’t safe.
The numbers aren’t in yet on the holiday shopping season, but even a strong one won’t save many of the sector's poorly positioned players. Brokerages are certainly trying: JLL and Gordon Brothers launched a venture in February to help ailing retailers get back into the black.
One of the biggest storm clouds on the economic horizon this year has been the trade war between the U.S. and China — even the Fed’s decision to cut interest rates was seen by some as an attempt to balance the slowing effects of the tariffs.
President Donald Trump increased tariffs from 10% to 25% on $200B worth of Chinese imports to the U.S. in May. This round hit a large number of consumer products, sparking fear by American retailers that their thin margins would evaporate or that customers may not accept increased costs. The tariffs also threatened to increase construction costs and undermine developers’ underwriting, though reaction from the commercial real estate industry was mixed and some thought real estate may be seen as a safe haven in the trade war.
In July, warehouse owners said they hadn’t seen any demonstrable effect of the tariffs on their business, but in August, Trump upped the ante, adding a 10% tariff on the $300B of Chinese goods (mostly consumer products, concerning retailers even more) that hadn’t yet been affected. Shipping has become more expensive, and ports have been hit hard by a mad rush ahead of the tariffs’ implementation and subsequent steep drop off in activity.
Amid the dispute and policies by the Chinese government aimed to keep more dollars from migrating elsewhere, Chinese investment to U.S. real estate plummeted.
On Tuesday, Trump and Chinese President Xi Jingping announced a limited trade deal that would walk back another planned round of tariffs and halve the ones that were implemented in September but leave the other tariffs in place.
As is quite typical for the investment firm, Blackstone had a giant year for acquisitions.
Its biggest was the June purchase of Singapore-based GLP's U.S. portfolio for $18.7B. That 179M SF distribution portfolio was the second-largest in the country behind Prologis’ (which also bid for GLP and which has expanded its portfolio since through other large M&A deals).
Blackstone bought Colony Capital Industrial in September for $5.9B — nearly $1B more than what Colony Capital asked for as it reoriented its portfolio toward data centers — adding 60M SF to its books. Colony itself had purchased a $1.2B, 12M SF portfolio in March.
Also in September, Blackstone bought Dream Global REIT, which owned about 200 properties in Europe, for $4.7B. Lastly, Blackstone dropped $1.2B on Space Center RE, which owns roughly 20M SF.
As fears of climate change and its impact on the built environment rose around the globe, two of the biggest U.S. metros passed laws to ensure CRE owners did something about it. New laws took effect this year mandating building owners in New York City and Washington, D.C., focus on energy efficiency, and other cities around the U.S. are looking at similar sustainability rules.
An expert in D.C. estimated 50% of its buildings would need to be retrofitted to meet that city’s legislation, which was geared toward reducing D.C.’s greenhouse gas emissions 50% by 2032.
New York City in April passed the Climate Mobilization Act, which will fine buildings that exceed a certain emissions cap and which mandates large and midsized buildings reduce their emissions 80% by 2050 (the year Mayor Bill de Blasio has set as his goal for NYC to be carbon neutral). About 60% of the city’s buildings are estimated to be affected, and a study found retrofits could cost the city’s landlords $20B over 10 years. De Blasio has also come out against glass-and-steel construction, which concerned, confused and angered developers.
The new law took effect in November, with the first deadline for emission reductions coming in 2024, but the real estate industry at large hasn't started to act, as many city agencies are still figuring out the details.
Major developers got into the M&A game in 2019, too. Cousins and Tier REIT announced their merger in March and closed it in June. The combined REIT — operating as Cousins with a $7.8B valuation — has an office portfolio of more than 21M SF across the Sun Belt and a development/redevelopment pipeline of 5M SF.
This is Cousins’ second major acquisition in recent memory: In 2016, it merged with Parkway Properties in an estimated $2B deal. It then spun off some of Parkway’s properties, which could be on the table now, too — Cousins CEO Colin Connolly said his team will assess the properties of Cousins/Tier REIT just as it did after the Parkway deal.
Nine states passed strict anti-abortion laws this year and sparked some backlash from the business community. Georgia, Alabama, Mississippi, Louisiana, Arkansas, Missouri, Utah, Kentucky and Ohio all passed legislation in the first half of 2019 to make abortions more difficult to obtain, primarily by limiting abortions after a heartbeat is detected.
The furor from businesses that oppose these bills has perhaps been loudest in Georgia. Movie and television studios, a growing part of the state’s economic output, threatened to pull production from the state.
Disney said it “would be difficult” to continue to invest in Georgia after the law took effect. Netflix said it would oppose the law, and one studio owner told Bisnow in July that businesses were already passing the state over. OpenInvest launched a tool in May for investors to make sure their investment dollars didn’t go to companies based in states with anti-abortion laws, and San Francisco officials said in October that the city won’t do business with any of the 22 states with stricter abortion laws, or with companies headquartered in those states.
Georgia’s law was set to take effect Jan. 1, but a federal judge in October blocked that while the bill’s legality is battled out in court.
The hubbub has largely died down since the summer, and it appears no studies have been undertaken in the second half of this year to see if these laws have impacted business dealings as some feared. In December, Warner Bros. leased 600K SF west of Atlanta for streaming productions.
It may seem like a decade ago in political news cycles, but the federal government was closed less than 365 days ago.
From Dec. 22 to Jan. 25, the U.S. experienced the longest government shutdown in its history. Its record-breaking length made real estate experts nervous. Office landlords worried about their balance sheets if the General Services Administration stopped paying rent.
Affordable housing was particularly cloudy as residents faced eviction if their federally funded rent wasn’t paid, and over 1,100 contracts in the Section 8 program weren’t renewed on schedule, impacting both the residents and affordable housing owners. The shutdown also delayed a public hearing on the opportunity zone program, which could wind up having the effect of investors missing a key deadline (see above).
Prologis, already a behemoth in the industrial space, went on a serious M&A tear in 2019, acquiring Industrial Property Trust for $4B in July and Liberty Property Trust for $12B in October as it battles with Blackstone for industrial dominance.
The Liberty deal brought Prologis a 107M SF logistics portfolio across 87 U.S. markets, plus a 5.1M SF construction pipeline and 1,684 acres that could support 19.7M SF. The IPT acquisition came with 37.5M SF of U.S. industrial space.
The two deals brought Prologis' portfolio to nearly 1B SF of industrial assets around the world, though it said it intends to sell off some of the projects in each new portfolio. Prologis also acquired DCT Industrial for $8.5B last year.
Eldorado Resorts purchased Caesars Entertainment Group in June for $8.6B, but don’t let the simplicity of that statement fool you.
To help fund that acquisition, Eldorado sold the real estate of three casinos (Harrah’s resorts in New Orleans, Atlantic City and the Laughlin in southern Nevada) for $1.8B to Vici Properties, a REIT spun off from Caesars that already owned Harrah’s Las Vegas and the Caesars Palace Las Vegas flagship. With modified lease agreements, Eldorado’s revenue from that deal was $3.2B, giving it the money needed to buy Caesars.
Mixed-use powerhouse developer The Howard Hughes Corp. announced a major corporate realignment and disposition plan in October. CEO David Weinreb and President Grant Herlitz left the company, and Houston-based Central Region President Paul Layne was named CEO.
It shed its holding company structure, and the corporate HQ was moved from Dallas to The Woodlands, a massive master-planned community north of Houston that Howard Hughes owns and is still building out.
The company also said it would sell $2B worth of non-core assets, but said it would keep the New York Seaport District, a slightly surprising decision since analysts said its remaining cost and time to develop, especially in the face of community opposition to the project, were weighing down Howard Hughes’ stock.
Mere days before Thanksgiving and the official start of the holiday shopping season, iconic jeweler Tiffany & Co. was purchased by LVMH Moët Hennessy Louis Vuitton for $16.2B. It was the largest deal ever in the luxury retail sector. LVMH, run by France’s richest man, Bernard Arnault, now owns about 70 luxury retail brands, including Bulgari, Dior, Givenchy, Fendi and Dom Pérignon.