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A New Year, A New CRE Narrative: Less-Than-Stellar Office Growth

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The new year is expected to bring nearly flat growth in the U.S. office sector amid political gridlock and a volatile stock market.

Empty Office

While Democrats winning a majority in the U.S. House of Representatives in November has many political analysts expecting a do-nothing Congress, Transwestern’s 2019 Broker Sentiment Survey sees a silver lining. Congressional gridlock means there shouldn’t be sweeping political or economic policy changes to hinder commercial real estate.

That doesn’t mean expectations for office should be high going into the new year. 

“I wouldn’t say the survey was very optimistic. Rather, the office market will decelerate slightly, closer to flat conditions in 2019,” Transwestern Managing Research Director Elizabeth Norton said. “The survey was taken before the recent volatility in the stock market and political events. The political turmoil of late could create economic uncertainty and slow consumer spending. “

The survey took factors like leasing velocity, development and investment activity, and asking rents into account. While most respondents didn’t expect a downturn, 76% of those surveyed expect office development levels to be flat or only slightly higher in 2019. Transwestern’s U.S. office index decreased from 112.9 for 2018 to 111.2 for 2019, indicating flat conditions. 

More than half the respondents in the survey expect investor interest in the U.S. office market to rise, but 52% of the respondents expect flat cap rates in the new year. The southeastern and southwestern U.S. are expected to have the strongest conditions in the U.S. office market while the Northeast and the central U.S. are expected to have the weakest. 

While a stalemate in Washington may not generate economic changes to drastically alter the real estate industry, Norton said it can create uncertainty that could slow down consumer spending.

“As a major economic driver, when consumerism slows, it in turn impacts the office market,” she said. 

Fishtown, Philadelphia Market-Frankford Line subway stop

The survey also reflects what amenities have become a hot commodity for office projects. While reliable WiFi, fitness centers and access to retail were important factors, access to transportation or parking is the most-desired amenity of all. Just over 86% of the respondents said transportation was of most importance to their clients.

Boston-based Perry Brokerage Director of Intelligence Brendan Carroll said more than 60% of the city’s largest office projects in the development pipeline are within a five-minute walk to transit and 90% are within a 10-minute walk. He expects that trend to continue in the years ahead.

“This is becoming THE commercial real estate topic,” Carroll said via email to Bisnow. “With the increasing ability to be truly productive on devices that can be used during car-free commutes, people are increasingly viewing time sitting in traffic as lost time.”

Warehouse

While the Transwestern survey didn’t have a rosy office outlook, it does show expectations for the industrial sector to see even higher rents, tenant activity and development levels. The overall 122.1 U.S. industrial index for 2019 is lower than the 130.9 seen in 2018, but 72% of respondents forecast higher investor interest in the sector this year. 

The Northeast and Mid-Atlantic regions are expected to have the strongest industrial conditions while the Midwest and Southeast are seen as having the weakest. 

“Industrial space in the United States is enjoying attention it hasn’t had this century,” Carroll said. “Manufacturing-type space is enjoying some success as the country is seeing a surge in high-end manufacturing, and heavy demand for quality, well-located product by the e-commerce players is driving rental rate increases that were stagnant for more than a decade.”