The new year is already underway, and several economic trends have begun to shape how investor and advisors alike are gauging their commercial real estate opportunities in 2019. A few narratives stand out as the key make-or-break issues influencing the CRE industry over the next 12 months, and this quick overview provides a succinct breakdown of these developing stories.
1. Market Performance Remains Unpredictable
The stock market is expected to continue its pattern of high volatility heading into 2019. Just 3 days into the new year, both the Dow Jones and the S&P 500 index recorded their worst start in nearly two decades. The next day, a surprisingly optimistic jobs report led to the Dow to surging 800 points over the matter of a few hours. In addition to reports on progress made in ongoing U.S.-China trade disputes, this was enough positive news to pull the market out of the tailspin it had found itself in the day before.
Limited stability in the stock market may serve to further soften housing sales as homeowners recognize that the value of their property is in an indefinite state of flux. Unexpected downturns in the stock market may also serve as an extra barrier to investment, encouraging advisors to understand which properties stand to be impacted the most as volatility in the stock market becomes the new normal.
2. Job Growth May Exceed Expectations
As mentioned, the December jobs report recently released by the Bureau of Labor Statistics was a welcome bit of positive news in the face of economic uncertainty. Total nonfarm employment expanded by 312,000 jobs in December 2018, driven primarily by gains in the health care, food services, and manufacturing industries. More importantly, wages experienced a gain of 3.6% in December.
Economic developments like these reflect positive forces driving the economy that are not necessarily reflected in the mercurial stock market. Construction of new multifamily is likely to continue unimpeded if employment and wage growth continue to show signs of improvement or at least continue to keep pace with the previous year.
3. Construction Will Surge for Another Year
While economic uncertainty may impact multifamily construction further down the road, nationwide construction is expected to continue accelerating as we head into 2019. Annual apartment completions totaled close to 320,000 units in 2018, a number that is expected to climb to 337,000 units by the end of 2019. Construction is likely to be scaled back in 2020, allowing demand to catch up with the bevy of new, high-end apartments coming online at a historic rate.
If affordability problems are enough to significantly deter absorption, developers may scale back projects in 2019 to limit vacancies. The same scenario may occur if renters begin to seek out atypical multifamily units as an affordable alternative to traditional apartments.
4. Options for Home Buyers Still Limited
With home prices already hitting record highs across the nation and mortgage rates ending the year at 4.61%, many analysts expect the housing market to hit a cooling period in 2019. Home values continued to increase in 2018, but did so at a slower rate, a trend that is likely to continue through the rest of the year.
The same affordability barriers that deterred a significant portion of the population, especially millennials and recent graduates, from becoming home owners in 2018 are expected to still be in play this year.
5. Waning Consumer Confidence Could Rebound
The Conference Board released its latest Consumer Confidence Index in the final days of 2018, reporting a drop in consumer confidence from 136.5 in November to 128.1 in December. This loss of 8 points reflected that more consumers hold serious doubts about job prospects and the economy’s overall performance.
“Expectations regarding job prospects and business conditions weakened, but still suggest that the economy will continue expanding at a solid pace in the short-term,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “While consumers are ending 2018 on a strong note, back-to-back declines in expectations are reflective of an increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”
Those increasing concerns aren’t necessarily misplaced, and it will be interesting to see how unexpected gains, such as last December’s positive jobs report, will impact consumer confidence throughout 2019. A major breakthrough in foreign policy, for example, would do much to assure consumers that the economy is back on the right track.
6. Politics Will Be at Play in 2019
Many of today’s biggest political news stories will have a direct impact on commercial real estate in 2019. The current government shutdown, for example, will create more barriers for the commercial real estate industry the longer it continues without resolution. The partial closure of the Department of Housing and Urban Development and the Federal Housing Administration threatens to significantly delay approval for multifamily projects.
Another major political story for is ongoing trade disputes with China, which has been a major contributor to market volatility. Thankfully, the next round of trade talks is scheduled between Beijing and the United States for second week of January. Signs of progress in these upcoming negotiations will go a long way toward curbing extreme fluctuations in the stock market.