As we move through 2018, the global economy is in good form and the real estate market is buzzing with innovation. How will it play out over the next 12 months?
Global economic growth will continue and with it demand from occupiers. Unemployment is falling across the world, boosting consumer confidence and spending. Business investment is also improving. President Trump's tax package has substantially improved business confidence in the U.S. As a result of solid economic progress, Central Banks are beginning to sense that the time is right to ease back on monetary stimulus. The Fed will likely hike rates four times this year and the ECB and Bank of Japan will signal the early end to Quantitive Easing. This is not negative, it's a sign that the global economy is finally shrugging off the impact of the financial crisis, but it does mean the era of yield compression in real estate is coming to an end. We see real estate value as broadly stable over 2018.
The level of investor interest in real estate was strong in 2017, with investment transactions totaling $953bn, about the same as in 2016 ($941bn). Transactions were down slightly in the U.S. (8%), but up sharply in EMEA (11%) and APAC (20%). Cross border investment activity is stable at about 14% of the total, as investors seek to build out their globally diversified portfolios of offices, retail, industrial, and residential real estate. Asian (6.2%) and U.S. (5%) capital dominates cross border real estate investment flows at the moment. Asian outbound investment focused on the EME region and Australia, whilst U.S capital targeted EMEA. EMEA, western Europe in particular, was a hot investment market in 2017. We see the market as stable in 2018, with investors' desire for income yielding investments offsetting their worries about rising interest rates.
If we were writing a school report, in which the market was graded in three subjects, it would be as follows: economic fundamentals B++, investor activity B+, occupier innovation A++. Across the board we see change in the way real estate is thought of and utilised. In offices, a new wave of operators is creating new ways of working or co-working as it has become known. Traditional offices are being leased on a short-term basis, with high standards of amenity, social and sporting opportunities and high levels of IT support. Place making and networking are part of the office management agenda, suiting small companies operating in the gig economy and larger enterprises with mobile workers.
The retail sector continues to trifurcate. Large dominant centres with choice, accessibility and a leisure offer forge ahead. Medium centres are adjusting to the challenge of e-commerce, by broadening their range and focusing on innovative food and beverage. Weak centres, such as C grade malls in the U.S. and small and medium sized towns in the UK, have largely lost the battle to dominant centres and the internet and are looking at change of use.
Industrial and logistics (I&L) real estate is as hot as can be. Operators are seeking to build out distribution chains that simultaneously meet the needs of large scale shipments to hub locations, same day fulfillment and returns. Smart buildings combine with global supply chain management to meet the needs of ever more demanding consumers. Investors, seeing a major structural shift taking place, are investing heavily in the sector. In 15 years I&L has moved from the ugly duckling of real estate to full grown swan.
The urban renaissance has seen major growth of investor interest in multi-family or apartment real estate. From millennials to empty nesters, there is sustained interest in urban living. In some cities apartment demand, with high levels of sharing, reflects the lack of affordability of housing, but positive motivations dominate, as people seek to enjoy the exciting opportunities of successful cities alongside the flexibility of renting. The trend for city living has developed alongside a strong uptick in hotel demand for leisure. Increasingly people live, work and take their holidays in cities. Sharing technologies such as Uber and Airbnb have facilitated this trend. Rents in all sectors are trending up, but have moved most sharply in industrial and multifamily.
The next two years is very positive for global real estate, but also very nuanced. Investors will have to deal with slowly rising interest rates and, in some cases, declining rates of rental growth as the market absorbs a wave of new development that has built up in the last few years. APAC has the highest levels of new supply, but it is also creeping up in the U.S. EMEA, apart from office development in certain cities, is facing a relatively weak development pipeline. However, successful real estate investing is not only about the old-style dynamics of demand and supply, it's about figuring out what a rapidly changing market place wants: community and amenity in the work place; smaller homes with easy access to a great live-work-play environment across a range of price points, including for those on low wages; and same day fulfillment centres, particularly for the delivery of high quality food produce. Society is changing and along with it, the way we use real estate: real estate investors can access good returns by successfully meeting its changing needs.
Professor Richard Barkham PhD, MRICS, CRE
Global Chief Economist, CBRE
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