As the country prepares to endure more political and financial volatility, commercial real estate executives cite rising interest rates and the end of the current growth cycle as their lead concerns for the industry this year, according to Seyfarth Shaw's 4th annual Real Estate Market Sentiment Survey. This focus on real estate fundamentals is best understood in the context of legislative gridlock and serious business threats, on the one hand, and new investment opportunities in opportunity zones, the cannabis business, and coworking spaces, on the other.
From a divided congress to cannabis investment to new coworking spaces, Seyfarth Shaw's 2019 Survey examines the industry's current market sentiment:
Fed Chief Takes Charge: To little surprise, given Fed Chairman Jerome Powell's announcement to raise interest rates in December 2018, only 6 percent of respondents surveyed in January 2019 expect three rate increases in 2019, down from 37 percent last year. President Trump's public distaste for interest rate hikes may also play a part in respondents' sentiment. However, as in every previous year of the survey, respondents are tremendously hawkish — as 91 percent expect at least one increase this year.
Cannabis Caution: The great majority of respondents (85 percent) do not plan on investing in the cannabis industry in 2019. Of substantial legal concern to companies pondering investment, marijuana is still considered a Schedule I drug by the Federal Government. With a patchwork of existing state cannabis laws and no legislative movement federally, banks continue to place limits on credit, thus complicating investment opportunities.
Coworking Confusion: 70 percent of commercial real estate executives report no increased investment in coworking spaces in 2019, notwithstanding the explosive growth of this product over the last few years. This survey response raises more questions than answers about the future of coworking: Is the industry facing a saturated market or are most businesses already in the coworking game?
Cyberattack Awareness: Concern for cyberattacks grew by over 20 percent in the last year. As news outlets continue to publish stories about large cyberattacks on notable brand companies, the real estate industry has taken notice of its vulnerability.
House Divided: The political landscape dramatically changed as of 2019, and President Trump faces a new power dynamic in Washington for the remainder of his first term. However, this shift doesn't seem to bother half the industry who report it will have no impact on the market. Only 37 percent believe the blue wave in the House will have a negative impact. In 2017, over two-thirds of respondents believed that the Trump Administration would have a positive impact on the market and one-third named Donald Trump the best presidential candidate for the industry in the firm's inaugural survey back in 2016.
End in Sight: Survey respondents are clearly indicating the industry's general sentiment that all good things must come to an end. The end of the current growth cycle, a new concern for a potential recession, and a continued fear of rising interest rates round out the top three concerns of 2019. The commercial real estate industry appears insusceptible to the turbulent political and financial news of the day as political risk, increased investigations and possible impeachment, and stock market volatility finish near the bottom of this year's list of concerns.
Tax Opportunities: Nearly one-third of survey respondents (32 percent) indicate that they will be taking advantage of the federal opportunity zone program as either an investor or sponsor in 2019. Of that group, almost one-third of real estate executives (32 percent) are investing in opportunity zones as a new source of investment capital, while another 25 percent plan to utilize the program as a way to defer current taxable gains.
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