2016 has been rolling out quite well for commercial real estate development. Of course, there have been some speed bumps, as we saw in December, 2015–January, 2016. The year began with a decline in oil prices, and this left many concerned with what direction the overall economy would take. Luckily, these concerns have abated, and commercial real estate development continues to roll on through the year.
Rent and Occupancy
What’s happening at the property level with rent and occupancy? There’s more good news here as rent and occupancy both trend upward. The climb is a little slower than many in the industry expected, compared to the trends in 2014. But occupancy is on the rise, and this is very good for real estate development overall.
Much of this is likely due to the trend in recent years of people moving into the city from suburbs. As we mentioned in our July blog post, many are seeking to live closer to downtown areas of cities. These tend to be hubs of culture and entertainment, ranging from theaters and museums, to restaurants and nightlife hot spots.
Will an Increase in Interest Rates Hurt the Industry?
An increase in interest rates was almost expected, so it doesn’t come as much of a surprise. We can likely expect to see a few modest increases in interest rates through the end of 2016. Even with these increases, 2016 should remain a relatively low-interest environment for developers.
How Should Developers Prepare for the Rest of 2016?
Developers are doing quite well today, which should come as no surprise given the trends of the past few years. Developers should look forward to continued growth, but recognize that now is a good time to slow down a little. It’s important not to be overly aggressive and to remember to double check any underwriting.
Prudent developers are more likely to outshine the ones taking big risks. In the past, developers could have taken on pretty much any project and made it successful, but it’s hard to say whether that rings true today. Caution and planning go a long way in our increasingly complex industry.
Which Sectors Look Promising?
Over the past few years, there has been less emphasis on home and land ownership. People tend to move more often and are more likely to rent. This, coupled with the aforementioned migration from the suburbs, makes apartments a great project and a solid investment. In particular, the trend toward mixed-use communities shows great promise.
Likewise, healthcare developments are showing promise. These projects range from medical offices to assisted living facilities. This is a growth sector in the overall economy. Over the next 5 years, the demographics will become powerful enough for this segment to do well. Many developers are already preparing.
What Trends Will Impact the Industry?
People often think of development as brick-and-mortar, but it’s actually quite a dynamic field. People look at companies like Airbnb and question its impact on the industry, particularly hotels, but research has shown that where people decide to stay isn’t as simple as it seems. Many people still prefer the locations and amenities of hotels for certain types of travel, while others prefer the community that shared living provides.
How millennials prefer to work, with open and playful offices, is shifting how office buildings are developed. Some developments are more transit-oriented to make cities more accessible to residents.
2016 has shown that these are dynamic times for real estate development, and things are likely going to get even more interesting.