By Sean Jasie, Senior Vice President, Business Banking, Webster Bank
Greg Manning, Senior Vice President, Commercial Real Estate, Webster Bank
Dick Vaughan, Senior Vice President, Webster Bank
Commercial real estate values are peaking, driven by overseas investors paying above-market, driving up prices. As a result, we’ve seen many U.S. investors have been stockpiling capital, waiting for the moment to make their move. Is that moment imminent?
Some worry that capital markets are headed for a serious correction. We foresee growth continuing at its current pace: no aggressive movement, but steady motion forward. As PwC and the Urban Land Institute report:
The key word for real estate’s future performance is transformation—in technology, in generational choices, in a reconfiguration of preferences by geography and by property type, and in the potential for new investors in the asset class.
E-Commerce vs Bricks-and-Mortar
The e-commerce boom shows no signs of abating. One facet causing investors and developers rethink the ways they use space. Consumer demand for faster delivery requires new approaches to logistics, and even the tried-and-true Just-In-Time supply model needs ever-faster definitions of “Just-In-Time.” Warehouse properties have to be “smarter” and more efficient to accommodate the growing need to fulfill e-commerce orders. Multi-story warehouses are changing the equation, offering higher rent potential than the conventional facilities.
Retailers are reinvesting in their physical properties, and that includes the brick-and-mortar stores of businesses involved in e-commerce, groceries for example. Online purchasing has not yet diminished the need for customer service, likely requiring an investment in tune-ups for all the channels a business uses.
Demographic changes realign opportunities
Our own experience corresponds with a national trend: movement to the suburbs. We’ve seen growth among industrial/manufacturing clients, especially for medical/life science properties and warehouse space, choosing suburban locations that enable them to enrich their sites with amenities that attract and keep the emerging generations of talent.
Millennials seem to be following their parents’ paths to the suburbs, but they’re looking for more than just pool tables and a fitness center. From daycare facilities to green space, consumers today and tomorrow are demanding amenity-rich settings for work/life balance. They are fueling the success of “18-Hour Cities” with suburban perks.
These secondary markets can provide compelling risk-adjusted returns. Multi-family and retail assets continue to be attractive investments, especially for redevelopment of older properties.
Demand/supply challenges ahead
Even as demand for industrial real estate continues to rise, supply lags behind, driving up prices for land and construction, and tempering growth. As asset values peak, investors may gravitate to riskier construction lending.
Those conditions may pose a challenge for investment, especially in affordable housing, one of the key priorities for many institutional investors. The 2017 Tax Cuts and Jobs Act created Opportunity Zones, offering tax benefits to private investors who helped fund rehabilitation projects in economically depressed areas. A concern remains that investment will flow into areas already experiencing vigorous development and might price out lower-income residents in service to investor returns.
The Webster perspective
Ever-expanding data capability—including artificial intelligence and machine learning—has made the real estate financial markets more efficient, and therefore much more competitive. Groundbreaking fintech tools, such as blockchain technology, have enabled faster decision-making with the potential to lower costs. PropTech capabilities increase speed and transparency across every facet of a real estate transaction.
However, finding opportunity in the evolving nature of commercial/industrial development still demands a fine-tuned sensitivity to the local turf—something that technology can only deliver to a point.
Webster offers an advantage here: Our willingness to offer interest rate swaps, part and parcel of our appetite for lending. Our CRE endeavors are backed by Webster’s $27 billion in assets—the strength and experience investors need to move deals forward, faster.
The opinions and views in this blog post are those of the authors, and are not intended to provide specific advice or recommendations for any individual. All loans are subject to the normal credit approval process.
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