FIVE MARKET PREDICTIONS FOR 2018

Part II of II

Last week, I published Part I in a two-part series on five market predictions for 2018 based on my opening track at the Environmental Bankers Association’s winter conference. In it, I predicted:

  1. Continued economic growth;
  2. More property deals in smaller metros with a focus on repurposing retail and industrial sites; and
  3. Pervasive cycle-awareness guiding lender risk management.

Here are predictions #4 and #5 to round out the list.

The pace of commercial real estate transactions is slowing, partly because there is a dearth of good properties on the selling block, and partly because of the bid-ask gap between buyers and sellers. That translates into investors turning an eye toward existing properties or outdated properties and thinking about ways to make improvements that will pay off. One area where the needle is moving is on green buildings and energy retrofits.

A few developments are lending serious momentum to this trend:

  • Operating a building with old systems is expensive.
  • There’s more data than ever to demonstrate that energy improvements pay off.
  • Pension funds and investors are turning up the pressure for sustainable property portfolios.
  • Tenants, especially millennials, are attracted to space with the latest-and-greatest energy-efficient features.
  • Regulators are shining the glaring light of scrutiny on energy efficiency ratings. NYC is just the latest example.
  • Ground-breakers, like JP Morgan Chase, are undertaking widespread corporate initiatives to reduce energy consumption–and others are sure to follow its lead.
  • Fannie Mae’s and Freddie Mac’s successful “green” lending programs now account for roughly 42 percent of Fannie’s overall purchases and 27 percent of Freddie’s.

Down this new path where efficiency is king, commercial properties with energy-efficient features will have a financial edge. That office building that conforms to LEED certification standards will be more desirable to tenants and would-be purchasers than one that doesn’t.

Prediction #4: We will see much more business activity revolving around making commercial real estate properties and portfolios as efficient as possible.

You can’t think about the future for our industry—or any industry—without a nod to technology.

A few years ago, I spoke at BB&T Bank’s environmental roundtable. As prep, I asked veteran environmental due diligence consultants to tell me the types of things they did on early Phase I environmental site assessments that would shock their much younger colleagues. I got answers like: waiting for snail mail to deliver government records, sorting through dot-matrix printouts of property records, taping Polaroids into a report, sending film away to be developed and even, typing a report on a typewriter.

 

To a newbie, the idea of assessing commercial properties without electronic photos is unfathomable. Or accessing government records in paper files rather than with the click of a mouse.

Technology has made huge leaps and bounds in a very short time, and the pace of change is accelerating in a big way.

Just think about how much more your smart phone can do since your very first mobile phone. Think about all the things you can do now without human interaction, or that you can control remotely. Buy groceries, check in for a flight, manage home appliances, feed the dog and on and on. These are advances not over the past decade…but just over the past two to three years.

Real estate is an industry that relies on long-standing practices….paper files and spreadsheets, in some cases. Anyone who bought a house recently likely still had to sign a stack of paper documents in their attorney’s office. In contrast, technology moves at lightning speed.

At last year’s PRISM conference, Dev Strischek, a veteran in environmental risk management, observed that the sheer volume of unique variables that they need to track for just one loan origination has absolutely exploded from a handful of data points to literally dozens of metrics. This ramps up pressure on banks considerably to double down on how they manage and analyze data.

Because of that pressure, the brave new world we’ve been hearing about for decades is here. Innovations that were revolutionary just a few years ago, like new report-writing platforms, are now standard operating procedure.

The need for speed, accuracy and efficiency marches on—and a succession of new technologies that started back with the Internet, cloud storage, big data, machine learning, and artificial intelligence—marches on, too. In every industry, we are moving—or being pulled into—new solutions that will dramatically change how we perform our day-to-day tasks.

So the professionals you are hiring today as the next generation of leaders in our industry will see incredible technological changes in their careers…the processes we use now will seem as archaic as a typewriter or Polaroid camera a decade down the road.

This year, more new technologies will take shape to centralize data, blur the lines between once-distinct functions, facilitate decision making, and allow the timely movement of information through the lending channels in a more efficient way. And you can bet change management will be a critical as we all adjust to the next phase of advances.

The bottom line for 2018 is that the good times are likely to roll a bit longer. An economic slowdown is not likely until the latter half of 2019. Rising interest rates and the aging of our long-running bull market are driving a more risk-averse lending and investment culture. Efficiency is the name of the game, and technology is stepping up to meet demand for faster, more accurate business operations.

As KC Conway told me recently, “We’ve been waiting for these times for more than a decade. Enjoy them, keep your eye on the horizon, and let’s just hope we don’t overbuild and over-leverage.”

Many of us would be happy to have a 2018 just like 2017 or 2016 and that might not be far off the mark. If you don’t believe me, check out the Chinese horoscope. It’s all about real estate, environment and territory integrity.

Much growth and success to all of you in the new year!

FOR MORE INFORMATION

Access my slide deck from the Environmental Bankers Association’s opening track, titled The 2018 Commercial Real Estate Forecast: Here’s What You Can Expect .

FIVE MARKET PREDICTIONS FOR 2018, Part I of II