Industrial properties, particularly those serving online shopping businesses, top the list of best real estate prospects in 2017, according to a survey of brokers, developers and other building-industry leaders.
The recently released “Emerging Trends in Real Estate” from the Urban Land Institute ranked other sectors, with retail as the least desirable category.
Based on interviews with more than 500 leaders and survey responses from 1,500 participants, PwC (PriceWaterhouseCooper), the study’s four authors — Hugh Kelly, Alan Billingsley, Andrew Warren and Anita Kramer — also identified several niche opportunities, from mixed-use projects down to manufactured housing.
“Most institutional investors interviewed feel that 2017 could be near the peak of the economic cycle,” the authors said.
A geographical breakdown was not provided for each category, but the national trends seem to apply to conditions in San Diego.
Here’s the rundown from best to least favorable categories, with quotes from the report:
- Industrial: “Rates well as a defensive sector, typically performing well during economic downturns.” A growing industrial type scored the highest in the survey — the “last mile” distribution center for e-commerce companies that promise same-day and next-day delivery. “These necessarily are in expensive locations in a broad range of sizes, and may be newly built or adaptations of older buildings.” Also recommended are conversions of warehouses into creative space, a specialty the San Diego-based Cruzan firm is pushing.
- Apartments: “Most investors continue to favor apartments as a relatively safe investment in a possible downturn.” Urban locations, studios, luxury units for empty nesters and adaptive reuse for housing are standout elements. But the authors caution that affordability is posing a problem for renters since construction is not outpacing demand. They also say institutional investors are not too interested in auto-dependent suburbs in “supply-unconstrained markets.” San Diego’s many development constraints would suggest that investor interest will remain strong here.
- Single-family homes: “Remain generally in favor, but investors view them less positively than they did last year.” Investors believe for-sale homes are undersupplied but are hampered by lack of debt financing for lot development. Facing high fees and costs, high-end projects attract the most interest. On the other hand, they see a promising future, assuming millennials will turn from renter to homebuyer in the suburbs. “Quite frankly the failure of urban public education in the U.S. means that they actually have to move.”
- Hotels: “Are the most volatile properties through market cycles, and concern exists that they have hit a peak already.” Rising wages and labor shortages are prompting developers to opt for limited-service properties. Economy and luxury hotels have lagged. The industry has brushed off the impact of short-term vacation rentals, despite evidence in some markets that they are eating into market share and restraining rate increases. The San Diego City Council recently asked for new regulations to control short-term rentals.
- Office: “U.S. institutions see it performing badly in economic contractions and highly sensitive to job numbers.” With foreign buyers active in prime central business districts, some institutional investors eye so-called “Class B” properties, the older, less well-located buildings in certain submarket locations attractive. But others say suburban office parks offer no interest. Life-science buildings serving the biotech industry — a strong market in San Diego — are popular, while high-tech markets, such as in the San Francisco Bay area, are showing signs of a “tech crash” in light of escalating housing prices employees can’t afford. One emerging opportunity is “plug and play” office space that can be leased for short as well as long periods and does not require elaborate tenant improvements.
- Retail: “On the investment side, retail came in dead last, even lower than last year. As for new development, its rating was rock-bottom.” Investors expect “a record level of store closings as the Internet continues to cannibalize retail.” But chains are increasingly marketing online; e-commerce “will not come anywhere close to supplanting” physical stores. Food and beverage is a growing portion of mall sales; grocery-store-anchored centers retain their popularity; power centers and big boxes cannot compete with online websites; and outlet malls receive low ratings for investment and development opportunity.
The niche real estate sectors to watch include:
- Mixed use of retail with apartments or offices
- Private infrastructure, although not as popular as abroad
- Medical office buildings
- Data storage
- Self-storage, particularly aimed at downsizing baby boomers needing somewhere to put their stuff
- Student housing, though it may be “largely played out” as a growing opportunity
- Senior housing — “the baby boom generation that led to the apartment boom in the ‘70s is going to lead to a senior housing boom”
- Residential condominiums “particularly in gateway markets” (San Diego is not considered one of those)
- Manufactured housing in good locations where the underlying land value is “quite valuable”