Trends Real Estate Investors Should Really Look Into This Year 2019 (Gold Nuggets for Investors!)

Historically, real estate has outperformed the stock market, acting as a stabilizer for investors when volatility takes hold. These eight real estate trends are the ones to watch in 2019.

 

1. Homebuyers are getting younger

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Photo: Realtybiznews.com

Nick Giovacchini, director of client services at AlphaFlow in San Francisco, says:

“Many millennials have recovered from the 2009 crash and have managed to find jobs that will allow them to afford homes.” As baby boomers age, they may be looking to trade down from larger homes to more affordable options, such as smaller rentals or senior living facilities. High-end home sellers may have to reduce prices as millennials increase demand for more affordable housing.

What does this mean for an investor?

Giovacchini says opportunities for investors lie in senior living housing, entry-level homes and condos.

 

2. Opportunity Zones

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Photo: National Real Estate Investor
What’s an Opportunity Zone?

It’s a measure that was included in the Republican tax law signed by the President as a way to support existing businesses, seed new ones or finance real estate projects in underinvested areas, many of which were hit hard by the Great Recession. The provision in the tax law instructs governors to designate Opportunity Zones from a pool of low-income, high-poverty census tracts that are subject to certification by the Department of Treasury.

The neighborhood choices are key to the overall impact of the program. If states pick areas already undergoing a transformation, investors will be able to ride the wave and ultimately win because of the tax savings, but there will be no benefit to residents in impoverished communities starving for investment.

Peter Muoio, executive vice president and chief economist at Ten-X Commercial, an online transaction platform for commercial real estate, says that opportunity zones are on track to be the hottest trend in commercial real estate for 2019:

“With valuations at cycle highs and fundamentals waning, the tax incentives offered by these programs are massively attractive, especially as not all of these zones are created equal,” Muoio says, acknowledging numerous cities may prove to be diamonds in the rough.

What does this mean for an investor?

Image result for opportunity zones in commercial real estate

Image courtesy of Data Points

Opportunity Zones are designed to reward long-term investment by deferring or abating capital gains taxes. Initially, investors defer their unrealized capital gains by reinvesting into an Opportunity Fund. They’re taxed on just 85 percent of that original investment, as well as proceeds, if they stay in the fund for seven years. If an investment is held beyond 10 years, investors are only responsible for paying taxes on the original investment, making it the more cost-effective option.

Corporations or financiers interested in investing in an Opportunity Fund should consider that if the program’s new developments and investments in existing businesses spark revitalization in the low-income community, investors may reap a windfall—but caveat emptor. A single investor will likely not have enough capital gains to make an Opportunity Zone project work. Pooled funds may be needed, which creates issues of governance and possible headaches among investors.

Muoio says that “as capital flows in, certain submarkets could see increased volume, and “increased liquidity is a positive for the commercial real estate environment.”

 

3. E-commerce continue to close down brick and mortar shops

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Photo: Adweek

Jonathan Lewis, founder and CEO of JLJ Capital, says:

“Many consumers find it easier to purchase goods online,” potentially threatening traditional retail’s survival. “E-commerce is forcing many retailers to close store locations because they money they take in isn’t enough to cover the cost of their rents.”

What does this mean for an investor?

Lewis says real estate investors who want to maintain a position in traditional retail should consider hair and nail salons, restaurants, yoga studios and gyms – services not accessible via e-commerce and may be better positioned to survive market downturns.

 

4. Rising Interest Rates

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Photo: Credit Cards

Dianne Crocker, principal analyst with EDR Insight, says:

“One of the biggest headwinds facing the commercial real estate market in 2019 is the combination of rising interest rates and slowing appreciation…This means borrowers face a higher cost of capital at the same time that assets may not necessarily be showing higher yields to accommodate those costs.”

What does this mean for an investor?

“Rigorous due diligence is critical at this late stage to ensure investors aren’t overreaching at exactly the wrong time,” Crocker says. Investors ought to be looking for value-add opportunities but the high interest rates will definitely have more impact on one’s investment decisions.

 

5. New Construction Gets More Expensive

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Photo: Common Construction Problems & Solutions

Lee Roberts, managing partner of SharpVue Capital in Raleigh, North Carolina, says:

“In addition to supply-demand factors, there is a large policy component to [the construction prices]…Not only are interest rates being driven higher by the Federal Reserve, but materials costs are being affected in part by trade policy, while labor costs are moving higher in part due to immigration policy.”

What does this mean for an investor?

Investors should tread carefully this year, and keep a close eye on the statistics and reports. According to the Bureau of Labor Statistics Producer Price Index, construction prices had inched up 0.5 percent in October 2018, reflecting a 7.9 percent increase year-over-year.

 

6. Be in the Know on the Latest Tech

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Photo: Global Real Estate Experts

Dianne Crocker, principal analyst with EDR Insight, says:

“Thanks to growing traction of technologies like machine learning, data analytics and platforms, the entire commercial real estate ecosystem will soon have better tools for decision-making…Commercial real estate is on the cusp of moving from a potentially inefficient industry to one that is notably more efficient, largely due to the growing volume of data that isn’t yet being tapped”

What does this mean for an investor?

The tech train continues to glide along in 2019, with some unique implications for commercial property investors. Crocker says that one of the most exciting possibilities that lies ahead for commercial real estate investors is the application of tech to support property risk management.

 

7. Build-to-Rent

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Photo: The Architects’ Journal

 

Build to Rent (BTR) is used to describe a purpose built development of residential property designed for rent instead of sale. BTR is commonly known as ‘multifamily housing’ in the U.S.

While BTR is unlikely to solve the housing crisis, but it may help to alleviate it, as it creates high quality housing stock for the rental market. The cost of renting such properties is still beyond the reach of many, but the good news for tenants is that BTR will lead to improved conditions. BTR offers a higher-quality of management than they may receive from an individual landlord, which in turn means that individual landlords will need to up their game.

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Photo: Bisnow

George Maravilla, vice president at Tower Capital in Phoenix, says:

“It’s a relatively new trend…These newly built and to-be-built rental communities have a lot of the conveniences and amenities of an apartment but feel more like a home.”

“As more developers move into this space, it’s likely to join the mainstream of CRE asset classes…Build-to-rent communities are designed to fit the privacy and affordability needs of younger buyers shopping for a mortgage loan and boomers looking to downsize.”

What does this mean for an investor?

Maravilla says that build-to-rent represents a new frontier for investors with a pioneer mindset looking to diversify into non-traditional housing.

 

8. Offices with Smart Technology

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Photo: Cisco Newsroom

Smart technology is increasingly becoming standard for new homes, and it is gaining ground in the office space sector as well as companies now move toward digital tools and remote work.

 

Franco Castaldini, chief commercial officer at Toronto-based ThoughtWire, says:

“Owners and operators [of office spaces] will learn from tech companies and adapt what works to a variety of tenants to facilitate smoother operations.”

“Property owners will leverage use cases for preventing equipment failures and costly system replacements, responding to emergency events and automating routine workflows to mitigate initial technology investment costs.”

What does this mean for an investor?

Looking beyond 2019, Castaldini says that smart tech may have an even wider impact not just in office spaces but in other real estate sectors as well.

Sources: U.S. News, Lexology.com, National Real Estate Investor

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