There's a tremendous amount of uncertainty going into the new year, which makes it difficult to predict how the CRE climate will evolve, said John Chang, national director of research and advisory services for Marcus & Millichap.
National policy, tariffs, immigration policy, budget proposals and tax laws all could impact economic growth, international trade, job creation, inflation and interest rates in the near term. However, looking out over the next five years, three CRE trends are apparent, he said.
The first is demographics. The United States has one of the most favorable demographic outlooks of any country, said Chang. Seventy-five million baby boomers aging into retirement are followed by 73 million millennials and 70 million Gen Z.
“Each of these age cohorts continue to drive demand for different types of commercial real estate,” said Chang. “Baby boomers are bolstering the need for medical office space and seniors housing, while millennials and Gen Z will continue to drive demand for both owner-occupied and rental housing, and all age groups will support the demand for retail and industrial space. So the long-term space demand drivers for virtually every type of commercial real estate are on a positive track and will be supported by positive demographics.”
The second trend is an anticipated slowdown of construction. The elevated cost of construction will inhibit substantial supply additions over the next few years or longer, said Chang. The construction slowdown is being driven by the high cost of debt and capital, rising materials, labor and land costs, and fees and expenses associated with zoning, permitting and entitlement.
“While the demand drivers for commercial real estate should remain robust over the next five years, the new supply will likely fall behind,” said Chang. “That implies tightening vacancy rates and rising rents that bolster the financial performance of real estate assets.”
The third trend is increased capital flowing into the sector. There have been twice as many transactions in 2021 as there were in 2007, when dollar volume reached record highs that many thought would never be eclipsed. On an inflation-adjusted basis, the combination of increased commercial real estate data availability, professional management, lending, liquidity and sophistication and the emergence of broad-based syndication have all combined to make commercial real estate a more mainstream investment option, a trend that is likely to continue, said Chang.
In addition, as an estimated $84 trillion in wealth begins to transfer from aging baby boomers and the silent generation to younger generations, including money and real estate, additional capital is likely to flow into CRE investment, he said.
“While I may not have detailed insights into how the policies of the newly elected administration will impact the commercial real estate market in 2025, I can say that the underlying drivers supporting commercial real estate performance and the flow of capital into the sector over the next five years should be quite strong,” said Chang.