John Chang, SVP, national director of research services at Marcus & Millichap.

The following is a thought leadership column from John Chang, SVP, national director of research services at Marcus & Millichap. The views expressed are the author’s own.

Underlying demand drivers for all real estate sectors will remain strong in 2020 as the ultra-tight labor market supports steady wage growth and household formation. Decisive Federal Reserve action in 2019, together with its stated commitment to sustaining the growth cycle, has moderated recession fears and boosted sentiment that will empower business leader decisions. Real estate and the economy will also benefit from favorable demographic drivers as baby boomers and millennials lever sturdy household balance sheets into active spending and investments.

Exceptionally low unemployment has unlocked accelerated household formation, driving increased apartment demand. Vacancy rates stand at or near 20-year lows in most markets despite record construction levels, delivering steady rent gains in the 4 percent range. Workforce housing, particularly Class C properties, is poised to outperform in 2020 as much of the new housing demand will be concentrated in the most affordable segment of the market. In addition, the stock of Class C apartments has been shrinking as remodeling and upgrading these “value-add” properties has been a core focus of investors for the last few years. Vacancy rates for these assets will likely remain about 50 basis points below the national average for all property classes and deliver a rent growth premium in the 100-basis-point range.

Driven by the tight labor market, wages will sustain their current 3 percent growth trajectory in 2020, supporting rising disposable income levels, which are already at a record high. With baby boomers continuing to delay retirement and millennials — more than half of whom are now in their 30s — rapidly developing careers and earning potential, retail sales should maintain annual growth in the 4 percent range. Increased consumption has bolstered retail space demand, particularly for service-based retailers such as restaurants and fitness-related businesses, and this will sustain momentum for well-located community retail centers. Vacancy rates of multi-tenant retail properties have stabilized below pre-recession levels near 6 percent and development will likely remain muted.

Hotels delivered exceptional performance in 2019, with occupancy levels pegged in record territory above 66 percent despite higher room deliveries. The sector has been supported by strong business and leisure travel, which will likely continue in 2020, but the segment with the greatest upside potential in the coming year will be properties that deliver access to unique experiences. Millennials, in particular, have demonstrated an intense interest in unique, “Instagrammable” travel experiences and heightened discretionary spending will support this trend. Leisure travel should remain elevated, supporting properties that offer something beyond the norm, barring a substantive economic slump.

 

Although there are certainly risks to the 2020 outlook, most notably trade relations with China, the upcoming U.S. election and other geopolitical variables, the baseline forecast points to continued growth that will remain supportive of all commercial real estate. Local supply and demand factors could overshadow national trends, but the broad-based trends will likely deliver positive traction.