The commercial real estate (CRE) industry has shown relative stability in 2020 even though the overall economy experienced unpredictable ups and downs. Investor confidence in CRE assets has remained solid because of several factors, not the least of which is that interest rates remain low.
But what’s store in 2021? We’ve compiled what experts say will be the emerging commercial real estate investment market trends in the coming year. Do note that the following data is not investment advice.
1. Micro-units in Multi-family Buildings
Micro-units refer to small and efficiently designed “suites” that give tenants the bare essentials for living comfortable day-to-day lives. They often range from 200 to 400 square feet and are much more affordable for the lessee monthly. What attracts many CRE investors to this type of housing is that they can charge higher per square foot.
Micro-units are not just becoming more prevalent in multi-family buildings—you can also see them nowadays in offices, retail, and restaurants. Renting a smaller unit is less risky for tenants than sinking money into a big space right away. And for landlords, having more (albeit smaller) units can help spread out risk.
2. Last-mile Distribution Centers
The last-mile distribution sector was already growing even before the pandemic because of the increased demand for quick online shopping fulfillment. Last-mile distribution centers referred to the final stops for packages or deliveries before they head off to their destinations—such as the homes or offices of the people who ordered them.
They are located strategically in high-density areas and urban cores. Wal-Mart, another big-name retailer, is starting to retrofit their existing stores to become Last-Mile distribution hubs. This trend is expected to persist in the coming years.
3. Ghost Kitchens
COVID-19 has caused the popularity of ghost kitchens to take off as more people prefer takeout and delivery to dine in. Ghost kitchens are designed to serve exactly that—no dine-ins, just food to go. They can be shared by multiple users, allowing smaller restaurateurs to test new concepts without making a huge investment or signing a long-term lease.
4. Multi-family Conversions
Factories, office buildings, hotels, and malls that are already located in desirable areas can be converted into multi-family apartment complexes, often for a fraction of what a new construction might cost on a per-door basis. Such buildings have a distinctly unique character because of their history, and this is something that younger renters find attractive.
5. Technology in Commercial Real Estate
“Property tech” or proptech is likely to grow even more as investors find ways to make their building and asset management processes more efficient. Technological adaptation can mean as simple as eliminating (or at least reducing) the need for physical signatures or implementing smart building software to monitor significant data points to increase a building’s operational efficiency.
Technology will design and construction materials are made. Pre-fab constructions and modular constructions, for example, don’t just shorten timelines but also significantly drive down costs.
6. Focus on 18-hour Cities
Many CRE Investors are expected to reevaluate their investment markets and look for greener pastures. So-called 18-hour cities are becoming more popular because they offer attractive lifestyles, a magnetic culture, and employment opportunities at more affordable rates.
What exactly is an 18-hour city? This term refers to midsized cities with good amenities and lowers costs of living/costs of doing business compared to 24-hour cities. These places are increasingly considered viable investment alternatives to the traditional big six markets of New York, Chicago, Boston, Los Angeles, Washington, DC, and San Francisco.
For commercial real estate investors, 18-hour cities are attractive opportunities because property values here tend to be more stable, never spiking up or down dramatically. Some of the 18-hour cities that are expected to receive more CRE investment include:
- Nashville, TN
- Austin, TX
- Portland, OR
- Raleigh / Durham, NC
- Charlotte, NC
- Salt Lake City, UT
- Seattle, WA
- Denver, CO
The top three markets for commercial real estate investing in 2021 based on data from the Urban Land Institute are the following:
- Nashville, Tennessee
- Austin, Texas
- Raleigh / Durham, NC
These cities are successfully attracting the millennial workforce. Two of the—Austin and Nashville—are located in no-income-tax states, making them popular with those who want to leave high-tax urban cores such as Los Angeles, Chicago, New York, and San Francisco.
7. A more conservative approach to the Class A Office Space, Hospitality, and Big-Box Retail sectors
These three sectors have taken a hit because of the pandemic, so commercial real estate investors are expected to be more careful when making investments in these markets in the next 2 to 3 years.
Some hotels, motels, and tourist rental companies default on their loans, but it’s not all bleak. Well-positioned investment groups see this as an opportunity to buy such assets for less, with the expectation that hospitality should come roaring back to life once COVID-19 is under control.
Big-box retail—which has been showing a decline for over ten years now—is also expected to continue on its downward trend as consumers avoid shopping in person and turn to shop online. However, retailers are starting to pivot by using their existing stores as distribution hubs for pickups and online deliveries. Creative investors are also taking this opportunity to buy large vacant big-box spaces to convert them into warehousing facilities and other such assets.
Class A office spaces that are primarily leased out to larger corporations may remain risky in the short term as these corporations move to work-from-home arrangements to protect themselves from legal liabilities that may result from their workforce getting sick.
That said, class B and C office spaces are expected to perform exceptionally well. Micro-office units and coworking spaces should continue to grow as more small business owners and entrepreneurs seek locations where their teams can collaborate and work without distractions.
Office space will remain a status symbol, too. Companies will still want a physical location to establish credibility. While this sentiment may change, such a transformation will likely be gradual. Having a basecamp should continue to be important for companies of all sizes in the foreseeable future.