Three 2020 trends for commercial real estate

2020 is upon us! My wife and I joke the time between Labor Day and year’s end just flies by — aided of course by Christmas decorations festooning the stores before Halloween.

But I digress.

By all accounts, 2019 was an amazing year! As the year dawned, I was a bit concerned about the trade tiff with China, downward pressure on our economy and the upward push on interest rates. Would there be a slowdown? Well, we certainly appeared to be heading that direction until mid-year when BOOM! Interest rates took a tumble and activity skyrocketed.

There was a huge uptick in buying and many commercial offices experienced their best months ever. I know our office did. The tepid housing market even caught fire as buyers sensed now is the time to act!

So what’s in store for 2020? Well, they’re just predictions and they’re all mine.

Interest rates

The Fed has encouraged the economy with three rate cuts in 2019. But most of our loan rates are tied to the 10-year Treasury which rests at around 1.9%. This time last year they hovered closer to 3%. Mid-year they touched 1.6%.

“The Federal Reserve signaled that it wants to hold off on further interest rate cuts for a while,” wrote David Payne, staff economist for Kiplinger on Dec. 11. “At its meeting this week, the Fed kept the federal funds rate between 1.5% and 1.75%. Fed Chair Powell expects that the economy has stabilized, but again emphasized that the future path of Fed actions will depend on events.

“The bond market has also been more sanguine, as rates have changed little over the past two months,” Payne said. “The yield curve – the gap between rates on short- and long-term bonds – has maintained its historically normal upward sloping line. This indicates that investors are not worried much about a possible recession occurring next year.”

Overall buying and selling activity

In order for there to be normal transaction volume, we need available spaces coupled with a positive outlook from buyers. In the past three years, our stock of available industrial inventories has steadily declined — bolstered only slightly by a few newly constructed projects.

Currently, empty buildings are at an all-time low. At the same time, buyer sentiment remains robust. In other words, we still have plenty of demand but very little supply from which to transact. To me, this translates to higher prices for those vacancies that do hit the market.

I am, however, paying close attention to large spaces — in excess of 100,000 square feet. These have been the darlings of developers the past few years as they are cheaper to build. Overall, the vacancy on large boxes is double that of smaller offerings. This could spell some softening in big space pricing.

Election year

Yes! The prospect of a new administration or four more years of entertaining tweets is here. The biggest predictor, in recent elections dating back 40 years, on who will be elected has been the health of our economy. Remember the double-digit interest rates of the late 70s that spelled the demise of Jimmy Carter? How about the “read my lips, no new taxes” and S&L fueled recession of the early 1990s? Yep. One term for George H. W. Bush!

Historically, as we approach November, an “I’ll wait to see who’s elected” attitude persists. Uncertainty leads to inaction, which sends a wave of softness through our business. Once we know for sure who will occupy the White House – companies can plan accordingly.

This content was originally published here.