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Utah Business

CBRE shares whats new and upcoming for commercial markets in 2020. Here's what you can expect.

An Outlook Of Commercial Markets in 2020

At the end of each year, CBRE releases an annual real estate outlook providing in-depth forecasts for the economy and each major commercial sector. A desire to understand where the economy is headed next year is perhaps of greater interest than usual, due to ongoing geopolitical issues, an upcoming presidential election and a very mature cycle (the longest in US history). There is constant questioning of when the expansion will end and how geopolitics will affect markets, particularly as it relates to trade tensions between the US and China. Though there is much to consider, CBRE’s 2020 US Outlook’ predicts a good year for commercial real estate, and we expect the same in the local market. 

Indicators suggest continued confidence in the local office sector. Operational agility has become a priority, giving rise to an increased number of coworking and flexible space options. In addition, the ever-strengthening tech market will continue to favorably contribute to both supply and demand, which 

should keep the Wasatch Front’s office sector healthy in 2020. 

INDUSTRIAL & LOGISTICS 

ECONOMY 

US GDP growth will slow to between 1.5 percent and 2 percent in 2020, down from an average of 2.5 percent over the past five years. 

US GDP growth will slow notably next year as various issues create higher levels of uncertainly, including the ongoing US-China trade conflict, slowing global growth and a presidential election. Barring any unforeseen risks, CBRE believes a recession will be avoided, thanks in large part to the stimulatory effects of the Fed’s rate cuts in 2019. Slow growth will continue in 2020, broadly supporting already strong property market fundamentals. 

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From a local standpoint we expect things to mirror the national outlook; continued growth is expected in the state, albeit at a more moderate pace than recent years. Utah remains well-positioned going into 2020 with dynamics that will support consumption. Unemployment in the Salt Lake metro fell below 2 percent in October, which will support continued wage growth. Combined with favorable demographics, these factors should bode well for the state of Utah’s economy next year. 

Absorption gains will be limited in 2020, with available supply outpacing demand by 20 million to 30 million square feet. Nevertheless, rents will rise by 5 percent. 

Despite some softening in the industrial and logistics (I&L) market, overall fundamentals will remain strong due to continued ecommerce penetration and demand for logistics space. Rent growth will be driven by newly constructed facilities and infill properties. Although there are potential trade-related risks, resilient consumer spending will buoy the l&L market and mitigate any tariff effects on major hubs relying on port activity. 

Salt Lake’s industrial sector has recently experienced a surge in demand from large e-commerce and logistics providers. The area’s ability to attract and service heightened levels of commerce has greatly increased and should moderately increase in 2020, leading to another year of solid I&L performance. 

RETAIL 

Total US retail sales increased by 3.5 percent year-over-year in Q3 2019 to $1.57 trillion, however more modest growth is expected in 2020 to $1.55 trillion. 

Total US retail sales growth is expected to slow in 2020, as consumers become more cautious. Positive net absorption and rent growth in most US markets will be spurred by a lack of new supply and thousands of retail store openings. Malls are benefiting from the refreshing influence of Generation Z, which prefers to shop in stores and is driving traffic back to brick-and-mortal retail. 

CAPITAL MARKETS 

Investment volume in 2020 should total between $478 billion and $502 billion, on par with the prior two years and one of the strongest years on record

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Amid slower economic growth, global uncertainty, and low interest rates, US commercial real estate will remain a haven for investment in 2020. Greater investor caution and buyer-seller disconnects on pricing could moderately reduce volume from 2019 levels. Cap rates should be broadly stable, with slight compression for multifamily assets and slight increases for the other major sectors. Significant appreciation returns are not expected, but income returns will remain steady. 

Within the state of Utah, sources of capital flowing into the state continue to grow and evolve, as the Salt Lake City metro is viewed as a market with low-risk and good-return compared to many larger markets. Investor interest in the state is expected to continue at elevated levels in 2020, though the low availability of institutional-grade assets available for sale may be a constraint on volumes. 

Aside from the robust growth in southwest Salt Lake County and northern Utah County, Utah’s retail market has experienced some challenges during the current expansion. However, as of YTD 2019 retail lease activity has reached near-record levels. Tenant activity has been steady and diverse-particularly among recreation, fitness and entertainment services, and we expect this positive momentum to carry over into 2020. 

MULTIFAMILY 

OFFICE/OCCUPIER 

The multifamily vacancy rate will edge up by 20 basis points to 4.5 percent in 2020, remaining under its long-term average of 5.1 percent. 

Multifamily is well positioned for continued favorable performance in 2020 but will experience some cooling due to new supply outpacing demand. Completions will match peak levels of recent years. New and potential rent control legislation will remain an industry concern. 

For the past several years, multifamily has been the strongest-performing investment asset in the state of Utah, reaching a record $1.4 billion in 2018 and showing good momentum to come close or match that number in 2019. Locally, we expect the market to follow the national pattern, with multifamily development continuing its momentum, though potentially at a slightly more moderate pace than the recent past. 

Demand for office space will remain strong in 2020, with absorption forecast to total 20 million square feet. Flexible space will continue to increase its share of total office inventory, albeit at a slower pace. Despite continued positive absorption of office space in 2020, rent growth will slow and vacancy will increase. Leasing activity will remain driven by tech tenants, benefiting markets like Salt Lake City, Austin and San Jose. Flexible office providers will strategically expand their footprint but at a more moderate pace than in recent years. CBRE’s forecast is for 51.1 million square feet in completions, a 70-bps increase in vacancy and 1.6 percent rent growth.

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