New opportunities have emerged during the pandemic that promise to drive robust development activity and deliver healthy returns this year. Here are the asset classes and markets that leading developers are targeting in 2021.
Doubling Down on Industrial
The strong performance in industrial last year has put the asset class squarely at the top of the food chain for new development. Build-to-core developers will certainly target industrial development in 2021, but developers in secondary markets and smaller metros are also finding ample opportunities.
The 2021 market outlook report from CBRE estimates that industrial development will increase by 29% this year. E-commerce is driving the majority of new construction activity, thanks to growing online retail sales, which are expected to hit nearly 25% of total retail spending this year. CBRE says the activity will result in 250 million square feet of warehouse absorption, significantly higher than the five-year average of 211 million square feet and a good motivator for increased warehouse and logistics construction. Both speculative and built-to-suit industrial development will hit record or near-record levels of construction.
Uncovering New Possibilities in Residential
Multifamily has long been the darling of commercial real estate, but in 2021, new residential properties are proving just as profitable. During the pandemic, renters developed a taste for single-family homes in sprawling, low-density suburban neighborhoods. The trend has catalyzed growth in the build-to-rent single-family home market, where developers are creating highly amenitized single-family rental communities that offer residents the same professional management they would find in luxury apartment buildings.
Traditional multifamily development won’t go away, but an outlook report from J.P. Morgan highlights the severe need for more affordable housing stock nationally. It calls on developers to think creatively about ways to manage construction costs and increase the viability of affordable development. Strong fundamentals also create a compelling case for increased construction activity. Affordable housing vacancy rates were lower than they were in the previous recession and the market segment saw modest rent growth.
Driving Value in Mall Makeovers
Deteriorating retail fundamentals will continue to create challenges for retailers in 2021. CBRE research and ICSC predict a 20% reduction in total retail inventory by 2025. While this will likely stall new retail development, it will also create significant opportunity for developers to repurpose obsolete retail properties—and indoor malls are the prime target. Class-B and class-C malls have been impacted by widespread store closures, particularly among large-box department stores, giving developers an opportunity to purchase these distressed assets at a significant discount. Conversion to industrial will be the most common alternative use of retail, but multifamily, office and hotel uses are all fair game.
Soaking Up the Sunbelt and Beyond
New geographic markets are shining with opportunity for new development across asset classes. Secondary markets took flight during the pandemic, attracting renters from major metros with affordability, better quality of life and low density environments that offered some reprieve from the pandemic. Smaller metros in the sunbelt region were the top destinations for migrant renters, with Phoenix, Austin, Atlanta, Tampa, Raleigh and Charlotte among the favorites. However, the pandemic also catalyzed growth in new parts of the country, like Bend, Oregon; St. Louis; and Salt Lake City, which have been nicknamed Zoom Towns, a nod to the way that remote work policies have contributed to growth. While renters moved to these cities in 2020, developers are following in 2021. With new demand for everything from housing to retail, expect a development boom in these markets this year.
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