The commercial real estate market is diverse, with different sectors running strong while others are weak. While space is heavily concentrated in larger office buildings and industrial facilities, the majority of buildings in commercial real estate markets are relatively small. Smaller properties, particularly in a midsized market, appreciated more than large ones in 2018. This makes for some interesting projections concerning 2019.

What Does This Mean For Commercial Real Estate Investors?

Investors must choose strong real estate sectors with clear upside potential in the coming years. Commercial real estate provides incredible results to investors when leverage magnifies strong returns.

Choosing the right sector and market makes tens of thousands of dollars difference for small investors. For large investors, the difference is in the millions. Understanding commercial real estate trends makes the big returns possible.

The year 2019 promises a banner year for industrial and multi-family homes. As the strongest real estate sectors, they offer both upside potential and downside protection, but it’s important to consider the local market conditions.

Most commercial spaces are small properties, allowing people who are starting out in commercial real estate access to hot markets. Here is what you need to know about commercial real estate investment trends in 2019.

Smaller And Multi-Function Properties Are A Great Place To Be

Smaller- and multi-function properties offer better potential than large properties in 2019. Most commercial real estate consists of small properties, though large properties encompass more square footage. Big properties, especially in the central business districts (CBDs) of large metro areas, are at risk of price declines. The reason: these properties surged ahead at the start of this real estate cycle, but now prices have risen too high, causing investors to pull back. The CPD office sector price average has suffered a year-over-year price drop of 2.2 percent. The CPD sector’s sales suffered a staggering 17 percent decline. Smaller properties, such as suburban offices, continue to rise in value. Suburban offices gained 6 percent in the past year, but a 10 percent decline in sales makes them vulnerable. Smart investors are turning to the where the demand is strongest. Industrial and multifamily residential properties in secondary and tertiary markets are in short supply.

Smaller Markets Reap The Most Gains

Property in secondary and tertiary markets saw 2018 gains in value at 6.9 percent. Primary markets returned 5.6 percent. Macroeconomic fundamentals are responsible for the secondary- and tertiary markets superior returns, and that trend will continue in 2019. Population growth, domestic migration patterns and strong employment support the rise of secondary metros.

Andrew Nelson, the chief U.S. economist for Colliers International, said in a Bisnow article that he sees secondary markets outpacing primary markets in 2019. He notes that primary markets surged at the start of the recovery and are now reaching the top, while secondary markets are catching up.

Industrial And Multifamily Promise To Be 2019’s Stars

Nelson predicts the top commercial real estate market in 2019 will be industrial real estate. The sector has a great 2018 and a strong start to 2019. Industrial real estate transactions jumped 26 percent. E-commerce companies needing warehouse space generate much of the demand. Demand that once went to retail space has shifted to warehouses, and it’s not just the big players like Amazon. The inadequate supply of warehouse space led to a 4.3 percent vacancy rate in 2018, a historic low. Multi-story warehouses are the hot new real estate investment trend because of limited metropolitan-area space. Warehouses are being built upward instead of outward in the United States for the first time, though multi-story warehouses are already the norm in Europe. Rents for multi-story warehouses are two to three times their one-story counterparts.

Nelson sees multifamily residential being second to industrial real estate in 2019. Multi-family residential, in 2018, came in first for volume but a distant second for sales increases. Demand for workforce housing in large metros continues to keep supply tight. Sales volume in 2018 rose to 8 percent, while Industrial took the crown with a 26 percent.

The strongest types of commercial RE investments are industrial real estate in secondary markets, followed by multifamily housing in secondary metros. The structural change from brick-and-mortar stores to e-commerce has led to a weak market for retail space but a giant opportunity in warehouses.

Overall, Colliers Chief Economist Andrew Nelson remains bullish about 2019 and 2020, with warehouses and apartment buildings in the starring roles.

What does this mean for you? 2019 might just be the perfect year to renegotiate your lease, find a new property or open that second location you have been thinking about. Let the team at LCI Realty help you make your plans into a reality. We can help you find the perfect property for your business. Contact our team today by calling 480-565-8981.

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