2017: A dream year for the commercial real estate industry
In many respects, 2017 was a dream year for the real estate industry. Whether the game was new development or redevelopment, new markets and opportunities presented themselves to those willing to plunge headfirst into the fray. Unquestionably, the pain brought on by the global financial crisis is a distant memory. The ready availability of debt aand equity, has helped real estate transaction volume to rebound, but with a mix of caution and restraint. Overall, there is a sense that real estate has learned painful but valuable lessons and therefore a real estate-driven recession seems unlikely. The Federal Reserve has helped, by remaining cautious about raising interest rates too high and too soon. In addition, while bank regulators and new risk rules have affected the volume of real estate loans from national lenders, some of the void is being filled by regional and community banks. These are the institutions that smaller developers have long depended upon, banks that are experienced in local market conditions and that have the capacity to underwrite smaller deals skillfully. From a land use perspective, developers have focused on infill opportunities with a more modest project size, both in the cities and in older mixed-use suburbs. Suburbs continue to grapple with their own problems. Maintaining or increasing tax revenue requires a certain degree of governmental zoning flexibility. In many areas, industrial users have shuttered existing plants and manufacturing facilities, made obsolete by technology or the export of such facilities overseas. The result has been a renewed focus on adaptive reuse. A transformation from industrial zoning to multi-family or transit-oriented development has been popular, principally because of the demand driven by millennials’ and empty nesters’ preferences for residences that are walkable and transit accessible. The two groups are looking for similar amenity packages but will differ on unit size and price. However, to create these amenities and keep neighborhoods affordable often requires changes to traditional suburban zoning. Yet opposition to change remains in some communities seeking to preserve the status quo. Thanks to social media, the opposition is often well-organized and well-funded. Local governments have been and will continue to be aggressively pushing the private sector to meet worsening housing affordability needs. Inclusionary zoning ordinances and impact fees are making a comeback. Many retail stores will need to adapt or die. More retail stores are being transformed into places that sell experiences, rather than goods, and more development will combine housing and retail to satisfy consumer demand for places that offer convenient, car-free shopping. Suburban office demand has been slowly returning but continues to face competition from cities and small towns which have enacted economic development and tax-incentive zones, to lure tenants out of the suburbs. Another dampening effect on office growth generally, will be the continuing march of technology-drive remote commuting. For 2018, I see retail and office developers challenged by continued growth in telecommuting and online shopping, but on the flip side, industrial developers will benefit as online shopping creates demand for distribution and logistics hubs. Multi-family rental demand will continue to grow, and millennials and baby boomers will continue to create demand for mixed-use properties combining residential, retail and offices. Building complete neighborhoods will continue to be the wave of the future. Neil A. Stein, Esquire is a principle at Kaplin Stewart Meloff Reiter & Stein, P.C. and a member of the Land Use, Zoning & Development and Real Estate, Business & Finance Transactions Department.