The outlook for commercial real estate is expected to moderate over the next three years, according to the latest forecast from the Urban Land Institute's Center for Capital Markets and Real Estate. Growth will continue, it found—but at a slower pace than previous years.

In just about every category or asset class, some level of slippage is expected.

For example, growth forecasts for CRE prices are projected to slow with 5% price appreciation expected this year, 3.7% next year, and 2.8% in 2021. The latter two years are below the long-term average growth rate of 4.4% for the first time since 2011.

To name another example, transaction volume is projected to fall from $562 billion in 2018, the second highest post-recession annual volume, to $535 billion in 2019 and $500 billion in 2020.

Even total returns—the traditional lure for investors in a low rate environment—are expected to fall. The study finds that institutional real estate assets are expected to deliver total returns of 6% this year, then slip to 5% in both 2020 and 2021. By property type, 2019 returns are forecast to range from industrial's 10.3% to retail's 2.9%. In 2021, returns are forecast to range from industrial's 7% to retail's 3.8%.

The individual asset classes are also expected to make slower traction. Growth in single family housing starts is expected to reach 900,000 in 2019 before falling to 888,500 in 2020 and 850,000 in 2021. Price growth is expected to fall from 5.6% in 2018 to 2.8% in 2021.

Vacancy rates for apartments are expected to increase slightly to 4.6% in 2019, 4.8% in 2020 and 4.9 % in 2021. Granted, they are still below the long-term average of 5.2% but this uptick is also accompanied by a moderating rental rate growth, which was 2.8% in 2018 and is projected to be 2.2% by the end of the forecast period, below the long-term average of 2.4%.

Office vacancy rates are forecast to edge down to 12.5% this year and then reverse direction and increase to 12.8% in 2020 and 13% in 2021. Rental rate growth is expected to drop over the next three years.

Finally, while retail availability rates were at 9% in 2018—which is the lowest post-recession rate, tied with 2016—survey respondents anticipate they will inch up from 9.1% in 2019 to 9.2% in 2020 and 9.4% in 2021. Rental rate growth is expected to drop from its 2018 level of 2.4% to 1% by the end of the forecast period.—Erika Morphy

SECTOR VIEW: NMHC Ranks Top Apartment Players In Annual List

For 30 years the National Multifamily Housing Council has released an annual ranking of the nation's largest apartment owners, managers, developers, builders and syndicators. This year's list, the 2019 NMHC 50, highlighted issues and performance that were very similar to that of 2017, according to Caitlin Walter, vice president of Research. “For years, the increase in demand for apartments outstripped the growth in supply,” she said. “The recent pickup in the annual pace of apartment production has brought new supply roughly in line with demand, at least nationally.”

According to the survey:

MAA remained the country's largest apartment owner, breaking the 100,000-unit mark, with 100,864 apartment homes owned.

Greystar Real Estate Partners also retained its place as the largest apartment manager, with 451,180 apartments under management.

Alliance Residential rose three spots to become the top developer this year with 6,935 apartments started in 2018—that's over 1,000 more units started than the next developer on the list.

Summit Contracting Group stayed on top as the nation's highest-producing apartment builder, starting 8,828 apartments in 2018, up more than 2,000 units from last year.

PNC Real Estate became the country's largest apartment tax credit syndicator with 136,447 apartments syndicated.—Erika Morphy

BRICKS AND STICKS: The Rising Cost of Office Fit Outs

The cost of office fit outs has been outpacing tenant improvement allowances, according to a recent study by JLL. It reports that the average cost of an office fit out increased by 12% last year, fueled by a combination of strong demand for new space and increased prices for labor and materials. Tenant improvement allowances also jumped in 2018 by 13%—but not by enough to fully offset cost growth, JLL said, resulting in an increase of net out-of-pocket costs to tenants. Of the total construction cost increase in 2018, 60% was offset by increases in tenant improvement allowances, and the remaining 40% was passed on to tenants.

TI allowances will keep pushing higher in 2019, JLL predicts, while concessions will continue to increase in most markets as new supply will remain high.

These numbers are hitting up against another recent trend in office fit outs: many tenants want to update their space every year or two. JLL writes that “trends common in other industries like consumer electronics and fashion, where consumers consider products expendable and want new versions rapidly, are starting to seep into construction and fit outs.” Of course, with fit out costs continuing to rise, this trend becomes more of a challenge for occupiers because expensive capital outlays are being spread across fewer years of use.

A Breakdown of the Numbers

To give the industry a sense of the hard numbers, JLL compiled the following costs for three different types of floor plans and their respective costs:

Progressive Open-office floor plan with 100% bench-style seating and no enclosed offices. Design also includes numerous varieties of both collaboration and conference spaces.

The base cost (the space is designed on a low cost and simple budget, with finishes focused on function. Space contains basic technology and aesthetic design) is $147 per square foot.

The medium cost (there is an increased project complexity, such as upgraded lighting, cabling and design features. Average quality materials and details) is $170 per square foot.

The high cost (the project design is complex with top-quality finishes and space improvements as well as increased effort spent on aesthetics and detail design) is $193 per square foot.

Moderate Agile floor plan with 10% enclosed offices and 90% open floor plan with 6-by-6-foot workspaces and minimal benching for visitors. Design also includes a mix of conference rooms and two to four dedicated collaboration spaces.

Base is $156 per square foot

Medium is $182 per square foot

High is $207 per square foot.

Traditional Private office heavy floor plan with 30% enclosed offices and 70% open floor plan with large 8-by-8-foot workspaces and no bench space. Design also includes several conference rooms and one dedicated collaboration space.

Base is $167 per square foot

Medium is $196 per square foot

High is $224 per square foot

CAPITAL VIEW: REITs Find Liquidity in At-The-Market Offerings

Many life science firms, technology companies and other businesses are facing liquidity and capital resource constraints. The reason? Ongoing market turmoil has resulted in increased volatility that has subsequently shut down traditional methods of raising capital. In comes “at the market” or ATMs providing a somewhat efficient means of raising measured amounts of equity capital over time by allowing a company to tap into the existing secondary market for its shares as needed. Increasingly REITs are also turning to this channel for liquidity.

In an ATM offering program, an exchange-listed company systematically sells newly issued shares into the trading market through a preferred broker-dealer at current market prices instead of through a traditional underwritten offering of a fixed number of shares at a fixed price all at once. Their use and allure have significantly risen over the last few years because of the Securities Act Reform regulations adopted by the SEC in December 2005, which streamlined the procedural hurdles for conducting an ATM offering program, according to Daniel P. Adams, partner and co-chair of Capital Markets at Goodwin.

“At the beginning of 2019, Goodwin observed that at least 115 public REITs had ATM programs in place, covering the sale of nearly $40 billion,” he says.

There are many benefits to ATMs, according to Adams. The company has the flexibility to control the amount of sales, the timing of sales, and a minimum acceptable price is one. Another is that the company can raise equity as and when needed and can precisely match the sources and uses of funds. Also, the incremental nature of sales means that the company stands to benefit from a rising stock price and that the overall cost of issuance is generally significantly less than that of a traditional underwritten offering. Other benefits include the fact that sales are usually anonymous/discreet over an electronic communications network, the program can be put in place within a few weeks with little to no road-show or other sales efforts required and no lock-up is required from officers, directors or significant shareholders.

“I see ATMs staying around for a long time,” says Adams. “Issuers have really embraced ATMs and the benefits they offer for the foreseeable future.”—Tanya Sterling

MARKET VIEW: Has the Phoenix Market Already Matured?

Phoenix was on the last metros in the country to recover from the recession, and because of that, many investors have the expectation of an extended runway. However, with the flood of capital into the market, has Phoenix already moved past “emerging” status and into maturity?

“In terms of whether Phoenix is still emerging or is a mature market, I think it is both. Since the region has abundant land with limited barriers to entry, it will likely always have emerging submarkets on the outskirts of town,” according to Bob O'Neill, SVP of acquisitions at CapRock Partners. CapRock is expanding its industrial development activity in the market in response to the growth, and it does see an extended runway.

However, Phoenix has certainly capture capital attention—from both private and institutional players—and that has put pressure on pricing and cap rates. “Phoenix was one of the last MSAs to recover from the financial crisis, so investing in the market wasn't high on most institutions' priority lists until a couple of years ago. As absorption has increased and industrial vacancies have dropped to around 7%, we are seeing a lot of interest in Phoenix from investors who weren't active in the market four or five years ago,” says O'Neill. “Now, many of the major industrial REITs and institutional investors have an increased appetite for acquiring more industrial real estate in Phoenix.”

In addition to strong fundamentals and continued population growth, leasing activity, lease rate growth and absorption of new product has justified the bullishness. “As Phoenix's population continues to grow and the Loop Freeways are developed, those outlying areas will be more desirable for owners and tenants,” adds O'Neill. “In terms of the mature markets, the industrial areas around Sky Harbor Airport and Tempe are very desirable and we have started to see a few cases of developers tearing down older industrial buildings and manufacturing plants for the development of new state-of-the-art industrial distribution buildings.”

Whether or not Phoenix is reaching maturity or still evolving and growing, it remains a strong investment market.—Kelsi Maree Borland

Exec Watch

Pacific Partners Investment team has joined Colliers International. The team, which includes first VP Edward Pan, VPs David Lin and Jeff Lin, associate VP Jason Lin and senior associate Richard Wang, focuses on trans-Pacific investment in Los Angeles with a specialization in multifamily and retail asset classes.

THE NEW ECONOMY: Why Experience is the Next Big Office Amenity

Imagine walking into your office building in the morning and instead of using a badge to head in, you breeze through security thanks to facial recognition technology. You zip up the elevator to the amenities floor where you can take a yoga class and grab a shower in a marble bathroom before heading to the office for the day.

During lunch you head down to the health foods expo in the lobby and after work you grab a drink during an all-employee building event on the terrace.

Sound too good to be true? It's not. This is fast becoming the reality of what a day-in-the-life can and does look like for many office occupants across the country.

What were once considered quirky perks reserved for Silicon Valley startups are now routinely making their way into large office buildings in central business districts where cubicles and wood-paneled corner offices once reigned. Not only are access to amenities proliferating, employees now have an experience that goes along with it.

The ability to manage that experience is the next evolution of the property management business: experience management.

What could possibly be the return on investment for offering an experience management service? Asset managers are paid to monitor costs of their buildings down to the penny, and this could seem like just an extra cost.

The answer is that just like the amenity wars that have put those gyms and terraces into office buildings, the ability to manage the experience of those amenities wins talent and tenants.

Winning talent with moments of delight

As demographics continue to shift, companies are realizing the value of fully-amenitized office space as another attractor to top talent as they compete in the battle for talent in a tight labor market.

An organization's physical workplace tells employees and candidates a lot about how it values openness, collaboration, well-being and sustainability, among other things. In fact, a growing ﬁeld of research indicates that the physical workplace is a critical asset in a company's ability to attract and retain top talent.

Millennials, now the largest cohort in the workforce, and their predecessors in Generation Z, value experience. Providing those experiences in the workplace can determine where they want to work.

Dr. Marie Puybaraud, Global Head of Research for JLL Corporate Solutions, describes this phenomenon best:

“A workplace that is powered by the human experience goes beyond a work-life balance. It drives how people feel about their place of work. How empowered, engaged and fulfilled they are, it's the purposeful fusion of life and work based on authentic human experiences.”

These experiences can be as small as a flawless entry system or as large as an organized employee engagement event, but they all inspire moments of delight that keep current or potential employees engaged.

Showing tenants love leads to leasing

Just like the workforce, corporate tenants have more choices today than at nearly any time in the past. According to the latest JLL U.S. Office Outlook, there is more than 110.4 million square feet of office space under construction, which could help tip the scales to a more tenant-friendly market.

Owners are courting those tenants in the same way those tenants are recruiting talent – with product that differentiates itself in every way possible, including by offering experiences. One real world example of how experience management is drawing tenants is the new Cloud Level on the 70th floor of Chicago's Aon Center.

What was once office space is now a fully staffed 34,000-square-foot amenity floor that includes a 16,000-square-foot fitness center with spacious, luxury locker rooms, a club-like tenant lounge and a plethora of conference spaces for tenants to choose from. Designed by Gary Lee Partners, the Cloud Level opened as Chicago's highest office amenity space with unbelievable views of the city, lake and park, and compliments the building's newly renovated lobbies.

“The Aon Center is an iconic building in Chicago's skyline, and we're ensuring it keeps that status with high-end improvements throughout the building, including a renovated lobby and the new Cloud Level,” said Mark Karasick, Managing Partner at Aon Center owner 601W Cos. “It's about giving tenants the peace of mind that they will have everything they need right there in their building.”

The Aon Center is nearly fully-leased to credit tenants, in no small part thanks to the building's beautiful amenities.

Experience will be table stakes

Basic functions of property management aren't going away anytime soon. Keeping the lights on, the HVAC running efficiently and ensuring your building is up to code will always be critical.

But the ability to be able to provide an amenities and programming that appeals to an experience-driven workforce and the companies that are recruiting them will become just as important as those basic functions.

Mark Zettl is the president of JLL Property Management. The views expressed here are the author's own and not that of ALM's Real Estate Media Group.

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UP Front: CRE's Numbers are Slipping

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