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CRE Sector at Crossroads as Investors Navigate Headwinds, Report Finds

CRE Sector at Crossroads as Investors Navigate Headwinds, Report Finds

An abundance of capital, solid economic fundamentals, and favorable demographics will continue to buoy commercial real estate, though each sector is facing some headwinds. Companies can gain competitive advantage by focusing on mixed-use properties where the synergies among multifamily, office, and retail converge, either along suburban transit nodes or in urban areas. This is among the key takeaways from Commercial Real Estate at the Crossroads, a new report that Capital One commissioned from MIT’s Center for Real Estate.

“Our MIT partners have pinpointed a number of important trends that real estate professionals should note as they look to the future,” said Glenn Gallagher, Senior Vice President and National Market Manager for Commercial Real Estate at Capital One. “There is reason for continued optimism across all asset types, but mixed-use developments have significant potential for maximizing upside while insulating investors from the challenges affecting any one sector.”

The authors of the report note that a variety of factors—real economic growth, record-low unemployment, low inflation, rising government spending, and tax reform—have combined to produce one of the longest periods of sustained growth ever in commercial real estate, but the market is not without its areas of weakness. The combination of rising valuations and trailing absorption is discouraging traditional investors in some multifamily markets. Flexible spaces, open floorplans, and telecommuting have lessened the demand for office space. And the upsurge in online sales has led retailers to focus on smaller, more strategically located stores and in-store experiences that draw and engage shoppers.

The rise of mixed-use development, according to the report, is a response to these factors. These projects mitigate some of the risk of single-use developments and can generate higher rents and provide higher rates of return. Because availability of sufficient real estate within major cities is limited, many mixed-used developments are now being built outside of the urban core. Lower costs, desired walkability, access to public transit, shifting demographics, and a live-work-play dynamic comparable to central business districts have made some suburban markets appealing to young professionals and employers alike.

“Our researchers have captured the commercial real estate industry at a moment of transition,” said Steve Weikal, Head of Industry Relations at the MIT Center for Real Estate and the co-founder of MIT’s Real Disruption real estate technology conferences. “Borne out of necessity during the downturn, new business models and technologies are maturing, and real estate uses are converging to form new and exciting product types. This presents tremendous opportunity for developers, owners and investors going forward.”

Taken as a whole, Commercial Real Estate at the Crossroads suggests that it is time for real estate professionals to assess the data, to rethink their assumptions, and explore new kinds of projects and properties. Click here for a copy of the full report and additional information about this study.

ABL Advisor