MILD SLOWDOWN IN APARTMENT DEMAND
The overall multifamily vacancy rate likely will rise by 20 bps to 4.5%, still below the long-term average of 5.1%. Rent growth will edge down to about 2.4%, just under the long-term average of 2.6%.
As a result of slower economic growth, apartment demand is projected at 240,000 units in 2020, approximately 20% less than 2019’s estimated 300,000 units. Millennials will continue to move into homeownership, albeit at a modest pace due to affordability issues. Nevertheless, multifamily demand will remain sufficient enough to absorb most of new supply and to lower concessions in oversupplied markets.
NEW SUPPLY NEAR CYCLICAL PEAK IN 2020
Multifamily developers will remain very active in 2020. Permits, starts and completions were all at or near this cycle’s highest levels in 2019. In 2020, permits and starts likely will fall, but not deliveries. CBRE Research predicts that multifamily completions will total 280,000 units, on par with 2019’s estimated 281,000 units.
Development will continue in both urban and suburban locations next year. The geographic emphasis, however, is shifting to the suburbs—both mid-rise “urbanesque” product in the densifying suburbs and garden product in more traditional greenfield locations.
FIGURE 13: MULTIFAMILY COMPLETIONS TO REMAIN ROBUST IN 2020
Source: CBRE Research (2020 forecast), CBRE Econometric Advisors (history, 2019 estimate), Q3 2019. Completions of newly-built communities are counted in the quarter in which the property reaches occupancy stabilization.
RENT CONTROL TO HAVE BIGGER IMPACT IN 2020
New rent regulations have been instituted in a few key markets and many more are being considered to alleviate rising rental housing costs. Housing economists concur that building more housing is a better response to the problem than rent control, but 2020 will bring more debate, possibly more regulation and more unease for the industry.
New rent control legislation was enacted this year in New York, California and Oregon. On the watch list for possible legislation are Illinois and Washington state, along with more restrictive legislation in California. New York Metro’s 9.2% year-over-year drop in multifamily investment in the first eight months of 2019 was partly caused by the implementation of new rent control regulations. In California, investment activity was mixed for the same period. Greater Los Angeles had a 9.8% drop in investment year-over-year, but the San Francisco Bay Area had a 7.4% increase. Investment also rose in Portland (23.5%).
SUBURBAN MULTIFAMILY WILL CONTINUE TO OUTPERFORM IN 2020
Buying or building in the suburbs will remain the best bet based on market performance and investment returns. Suburban multifamily will outperform urban, maintaining lower vacancy and achieving higher rent growth.
CBRE Research’s top four markets for multifamily performance in 2020 are Austin, Atlanta, Phoenix and Boston. The first three are very high-growth metros by population, households, employment and multifamily demand. Construction is very active in these markets. In Atlanta and Phoenix, development has not ramped up to levels that should cause any concerns. Development in Austin has tapered off. Among the gateway markets, Boston is the star performer.
Investors and developers should also consider smaller metros (e.g., less than 2 million population). While liquidity and overbuilding risks are generally higher in smaller markets, there are several metros with exceptional multifamily performance today resulting from favorable supply/demand fundamentals (steady growth over recent years and only moderate development activity). Many smaller metros are undergoing a significant upgrading of their urban cores, thereby improving quality of life and helping them retain talent.
Seven smaller metros had 4% or higher rent growth as of Q3 2019: Albuquerque, Birmingham, Colorado Springs, Greensboro, Memphis, Dayton and Tucson. They are likely candidates for outperformance in 2020.
U.S. Outlook by Sector
U.S. GDP growth will slow to between 1.5% and 2% in 2020, down from an average of 2.5% over past five years.
U.S. GDP growth will slow notably next year as various issues create higher levels of uncertainty, including the ongoing U.S.-China trade conflict, slowing global growth and a presidential election. Barring any unforeseen risks, we assess that a recession will be avoided, thanks in large part to the stimulatory effects of the Fed’s rate cuts in 2019. Slow growth will continue in 2020, broadly supporting already strong property market fundamentals.
Investment volume in 2020 should total between $478 billion and $502 billion, making it one of the strongest years on record.
Amid slower economic growth and global uncertainty, U.S. commercial real estate will remain a haven for investment in 2020. Greater investor caution and buyer-seller disconnects on pricing could moderately reduce volume from 2019 levels. Cap rates should be broadly stable, with slight compression for multifamily assets and slight increases for the other major sectors for an average spread of about 260 bps over 10-year Treasury yields next year. Investors should not count on significant appreciation returns, but income returns will remain steady.
Demand for office space will remain strong in 2020. Flexible space inventory will continue to increase, but at a slower pace.
Despite continued positive absorption of office space in 2020, rent growth will slow and vacancy will increase. Leasing activity will remain driven by tech tenants, benefiting markets like San Jose, Austin and Salt Lake City. Flexible office providers will strategically expand their footprint but a drawback by WeWork will significantly slow expansion from previous years. CBRE’s forecast is for 51.1 million sq. ft. in completions, a 70-bps increase in vacancy and 1.6% rent growth.
Absorption gains will be limited in 2020, with available supply outpacing demand. Nevertheless, rents will rise by 5%.
Despite some softening in the industrial & logistics (I&L) market, overall fundamentals will remain strong due to continued e-commerce penetration and demand for logistics space. Rent growth will be driven by newly constructed facilities and infill properties. Although there are potential trade-related risks, resilient consumer spending will buoy the I&L market and mitigate any tariff effects on major hubs relying on port activity.
Total U.S. retail sales increased by 3.5% year-over-year in Q3 2019 to $1.57 trillion, however more modest growth is expected in 2020 to $1.55 trillion.
Total U.S. retail sales growth is expected to slow in 2020, as consumers become more cautious. Positive net absorption and rent growth in most U.S. markets will be spurred by a lack of new supply and thousands of retail store openings. Malls are benefiting from the refreshing influence of Generation Zers, who prefer to shop in stores and are driving traffic back to brick-and-mortar retail. Many retail assets will convert to mixed uses, creating communities and thriving town centers.
The multifamily vacancy rate will edge up by 20 basis points to 4.5% in 2020, remaining under its long-term average of 5.1%.
Multifamily is positioned for continued favorable performance in 2020 but will experience some cooling due to new supply outpacing demand. Completions will match peak levels of recent years. New and potential rent control legislation will remain an industry concern. The best opportunities are in suburban markets, smaller metros and metro leaders, including Austin, Atlanta, Phoenix and Boston.
Interest in specialty sectors will continue, with alternatives accounting for more than 12% of all commercial real estate investment in 2019.
Investment in alternative or specialty sectors has risen steadily in recent years and will continue to attract high levels of investor interest and capital in 2020. Total investment in 2020 will come close to the annual average of $59 billion since 2014 and represent 12% of all commercial real estate investment, up from only 6% at the peak of the last cycle. Alternatives acquisition volume in 2020 likely will match this level.
New deliveries will increase the primary data center markets’ total inventory by 17.3% in 2019, increasing the competition between certain markets in 2020.
The wholesale data center sector continues to evolve as flexibility and agility within IT and real estate strategies drive decisions. Transaction volume remains driven by the adoption of Hybrid IT/multi-cloud access strategies by users. Adding momentum headed into 2020, network connectivity should remain a critical component of overall IT and real estate decisions. Demand will continue as users right-size and adapt their portfolios to handle current and future technologies, such as high-performance computing (HPC) and 5G.