What Is Going to Happen to Commercial Real Estate in 2019?

Dec 13, 2021

After being in the commercial real estate business in San Francisco for over 34 years, I feel confident to say that in entering another new year, I have a good idea of what to expect. However, this year is different. There are so many uncertainties in the market right now that it’s hard to gauge how this year will end. In the course of compiling its annual Emerging Trends report, the Urban Land Institute found that the only certainty in its outlook for 2019 was uncertainty.

There are a number of factors to suggest that the market will turn soft and could take a nose dive if certain factors prevail at once. On the other hand, if the stock market rebounds, and tax reform works– then who knows?

If the Market Dives…

On the side of a soft or even a nose dive coming this year, you first have to look at the tech sector. During the previous Dotcom Boom and Bust of 1997 to 2001, that market saw rental rates in line with today’s market. When the stock market crashed on tech stocks in March of 2001, by October the office market along with industrial and retail completely collapsed. Rental rates went from an average of $92.00 for Class A to $32.00 in less than 18 months. If the stock market collapses once again on tech stocks, it could be as bad or even worse.

Tech Ties to Commercial Real Estate

The big difference today is the growth of coworking office spaces and shared office facilities. Coworking spaces thus far have relied solely on income from tech companies– if tech growth fades, then that will impact coworking spaces directly. In addition, coworking spaces have increased rental rates in all classes– A, B and C class buildings– therefore, if coworking facilities take a dive and start defaulting on leases, then this by itself could mean we’re in serious trouble, not only in San Francisco but across the country.

A Downward Domino Effect

We are already seeing a major slowdown in San Francisco for office and residential construction.  Due to long delays in securing permits, the high cost of construction costs, and the new affordable housing laws – projects in the pipeline won’t make progress and future projects will have to go through the entitlement process.  All this spells trouble for the brokers, attorneys, architects, construction workers, and development companies. This will mean less jobs and less chance for economic growth.

We also have the overall high costs of living in San Francisco. Many residents are now seeking relocation or new jobs. If this continues, then it will be harder for tech firms to hire talent and will force them to look elsewhere for office space and talent to grow their business.

If the Market Holds Up…

On the side that the market will continue to be strong and grow, then the stock market will determine our economy this year. If the market stabilizes and continues to grow, we should expect things to remain good for brokers. But another unknown is the real impacts of the Tax Reform Measurethat will now take full effect. The promise is that a new corporate tax rate will bring over $3 trillion dollars back to the U.S. and create more jobs through manufacturing. If this happens, we will be in good shape.

Many years ago, when I was working for another commercial real estate firm, I attended their economic forecast breakfast with one of the well-known economists in the Bay Area. For four years in a row, the economist was absolutely wrong in his projections. I am not an economist, but I am an optimist. So far, January has been extremely busy… just hoping it continues.

Written by: Hans Hansson

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