The past year has been an interesting year for real estate as the US Federal Reserve radically raised interest rates to battle inflation. The burning question on any investor’s mind right now is whether commercial real estate is still a safe asset class to invest in.
This past March, I was fortunate to hear real estate investment firm Marcus and Millichap’s lead economist Johnny Chang address this topic head-on. Let us dive into the five macroeconomic trends to pay attention to that will continue to positively impact the commercial real estate market.
On-shoring and Reshoring of Jobs to the US
Marcus and Millichap expect that the onshoring and reshoring of jobs to the US will positively impact commercial real estate investment activity in 2023, particularly in the office, industrial, and retail sectors. This trend is being driven by several factors, including the increasing cost of labor in China, government policies on trade and immigration, and the overall strength of the US economy despite rising interest rates.
Additionally, office space demand will increase as businesses expand their operations to accommodate new employees. Industrial space demand will increase as businesses move their manufacturing operations closer to their customer base. Retail space demand will increase as businesses open new stores to serve increased consumer demand.
Behavior Trends of Millennials and Boomers
Another macroeconomic trend to pay attention to is understanding the behavior trends of two of the most important groups in the commercial real estate market—millennials and baby boomers.
Millennials, also known as Generation Y, are those born between 1980 and 2000. They are the largest generation in history, and they are entering their prime working years. Millennials are more likely to start their own businesses than any other generation. This means that they are more likely to need office space, retail space, and warehouse space for their businesses. Millennials are also more tech-savvy than any other generation. This means they will be looking for office space with good internet connectivity and modern amenities.
Boomers are the generation born between 1946 and 1964. They are nearing retirement age, but many are still active in the workforce. Boomers are more likely to downsize as they enter retirement. This means that they will be selling their homes and moving into smaller apartments or condominiums. They may also be looking for storage space for their belongings.
Furthermore, as the millennial and boomer generations continue to age, their impact on housing and retail will only become more pronounced. For one, both groups are increasingly likely to rent rather than own their homes. This shift could lead to more demand for rental units and higher prices for those units. Additionally, as boomers age, they will require more medical care and assistance with daily tasks. This could lead to increased demand for senior housing and assisted living facilities. And finally, as both groups age, they will have more disposable income and free time, which could lead to increased demand for leisure activities and retail establishments.
Suburbanization Trends of Millennials for the Next Ten Years
Another trend that will continue to increase is, as the millennial generation enters its prime working and child-bearing years, many are making the move to the suburbs. This contrasts with previous generations, which tended to stay in urban areas throughout their lives.
Several factors are driving this trend of suburbanization among millennials. First, as young adults, many millennials are starting families and are therefore looking for more space and greater affordability than what is available in most urban areas. Second, suburban areas are often seen as safer and more family-friendly than city neighborhoods. Finally, many millennials grew up in the suburbs and therefore prefer this type of environment.
According to Marcus and Millichap, this trend of suburbanization among millennials will continue over the next ten years. This will have several implications for commercial real estate markets across the country beyond housing. For one, there will be an increased demand for suburban office space as more businesses look to cater to this growing demographic. Additionally, retail establishments will need to adapt their offerings to meet the needs of suburban shoppers, who tend to be more focused on convenience and value than their urban counterparts.
Massive Wealth Transfer from Boomers to Millennials
As baby boomers approach retirement, they are expected to transfer $84 trillion in wealth to their millennial children. This transfer of wealth is expected to have a positive impact on the commercial real estate market, as millennials are likely to invest some of this money in property.
As a result, Marcus and Millichap’s forecast predicts that the commercial real estate market will see increased activity from millennials in the coming years. This increase in demand is expected to lead to higher prices and more competition for properties.
Increasing Transaction Rates Due to Increase in Capital
As we head into 2023, Marcus and Millichap is also forecasting an increase in transaction rates for commercial real estate. This is due to the increase in capital that has been flowing into the sector.
Several factors are driving this influx of capital. First, the stock market has been volatile recently and many investors are looking for a safe haven for their money. Commercial real estate is seen as a stable investment that can provide good returns.
Second, interest rates, up until last year, were historically low. However, the cost of capital is still relatively inexpensive and accessible to investors.
Third, there is a growing demand for commercial space (a byproduct of the previously noted trends) as the economy continues to expand. This is resulting in higher rents and values for properties.
All these factors are expected to lead to increased transaction activity in 2023 and beyond.
Near the end of his presentation, Mr. Chang reminded us of the importance of paying attention to current market conditions and upcoming regulations that could affect rental rates or occupancy levels. However, the above macroeconomic trends could be a combined force that could give commercial real estate investors a nice investing advantage. With this knowledge at hand and Marcus and Millichap’s predictions in mind, investors can be sure to maximize their success in 2023!