After years of booming growth in the commercial real estate market, there are signs that the prices have finally peaked and are beginning a downturn. Real estate decisions that were made quickly and efficiently in the past are now taking longer and requiring deeper consideration, an early indicator that a change is coming.
While some may blame that shift on the current political climate and decisions by President Trump, it is much more likely that the pendulum is simply set to swing in the other direction after an exceptionally long upturn. Some lenders are spooked by the recent glut of apartment homes, condos and hotels that have been built in urban areas and are holding back on decisions until clearer signs regarding expected changes to tax codes are forthcoming.
However, in this time of transition, there are still investments to be made in services such as healthcare and technology — specifically semiconductors and products used in flash memory for devices.
Focused Booms
Millennials and younger Generation Xers drove a significant boom in urban real estate over the past few years as they migrated into the cities to be closer to work and cultural activities.
Commuting long distances is not something that’s appealed to younger generations, who would prefer to have a smaller energy footprint and more modest-sized housing in an urban area than face the daily grind of driving.
However, this boom was relatively focused on urban housing centers, and as the market reaches saturation the growth potential has begun to dim. For the most part, this growth has been limited to the largest U.S. cities and urban areas, while the vast majority of the commercial real estate market has begun to struggle.
Data-driven Decisions
Commercial real estate is only one of the many sectors of the economy where Big Data is utilized by investors to make a decision whether or not to move forward with specific projects. The information could be based on everything from demographics of the area to highly-detailed financial models that help drive decision making processes.
Additionally, virtual reality is an exceptional selling tool, as investors are able to virtually walk through an upcoming project and make recommendations before the first shovel of dirt has been moved.
The benefits of data-driven analysis can be seen not only in the real estate industry, but throughout the business sector as well.
Year-end Slowdowns
Late 2017 is expected to bring even more softening of the construction market, with commercial real estate being the hardest hit. In many markets, housing is still hot but the large budgets associated with commercial projects are being affected by tightened lending standards, growing labor and material costs and overall government uncertainty.
These factors continue to drive increased competition, with organizations who have invested in technology generally beating out their low-tech counterparts. While current projects are continuing apace, new project starts are down significantly from earlier in the year and the high 2016 levels.
With the tightening seen around traditional financing routes, builders are still finding money to continue projects, but this often comes at a higher rate from private equity funds or other non-traditional lenders.
Production Potential
With the strong moves towards American expansion, production may be the ideal market to focus on while the commercial real estate market attempts to find its legs again. The emphasis on technological innovations and how they’re able to drive expanded manufacturing capabilities without massive upfront investments makes this market more attractive than any time in the recent future.
Computers are more powerful than ever, and the Internet of Things (IoT) provides functionality for business leaders that brings more efficiency to the plant floor and boosts overall output. A renewed government focus on passing an updated tax law will have an even greater positive impact on manufacturing business in general as well as the plan being put in place to continue investing in infrastructure projects such as bridges, airports and roads.
Ultimately, commercial real estate continues to grow in many parts of the country, but a slowdown is inevitable. The shift towards urban living is strong but limited to larger cities, ultimately impacting the growth of housing structures and other commercial buildings in a downtown setting.
Spending on consumer goods — especially those that are manufactured domestically — has the positive byproduct of an overall increase in production, with technology driving innovation, lowered prices and bottom line increases.
Regards,
Ethan Warrick
Editor
Wealth Authority
