5 trends for commercial real estate in 2019 and beyond

Learn about the biggest trends for commercial real estate heading into the next few years.

Tags: Best practices, Commercial real estate
Published: October 31, 2018

What factors drive the commercial real estate (CRE) industry? What keeps commercial property owners, developers and investors up at night, and can help provide reassurances of better days ahead?

For the past six years, we’ve hosted hundreds of commercial real estate professionals at our annual CRE conference, aiming to inform them of the trends affecting their organizations. What we’ve found is that, despite ever-evolving challenges, the industry is poised for many opportunities.

Harnessing the benefits of those trends requires complete understanding of economic, financial, tax, regulatory, sustainability, security and innovation changes. We covered each of these at the 2018 CRE Conference, to help provide a complete picture of the CRE industry to attendees.

The conference was opened by Jim Kelligrew, vice chairman at U.S. Bank, and included breakout sessions where attendees collaborated with their peers on common industry issues. A payment automation panel, where our conference sponsors, Nexus and Visa participated, closed the conference on the second day.

For those who couldn’t attend, here’s a recap of the event, as well as five key takeaways that can help guide your CRE business into the next year.

 

Regulatory environment slowly evolving

Even with the changes in federal administration, professionals shouldn’t expect major regulatory changes in the near future. John Stern, executive vice president and corporate treasurer at U.S. Bank, outlined that changes appear more evolutionary than revolutionary.

“Even now, the current regulatory environment is complex, with multiple new rules in the past decade creating new constraints,” Stern said. “Although many new leaders have taken over at the Federal Reserve and the Office of the Comptroller of the Currency, they’re more looking to ‘optimize’ current regulatory practices instead of overhaul them.”

One of the largest areas of change in the short term involves the transition from LIBOR for pricing loans and other financial instruments. Stern urges CRE professionals to stay current on news of this transition, as many loans will likely be based on SOFR as soon as next year.

 

Environmental sustainability becomes vital

As newer, younger workforces enter commercial industries, the need for a holistic sustainability program increases. Sustainability policies offer more than a business incentive or tax cut; they also increased brand awareness for an audience that increasingly seeks environmentally friendly organizations.

A sustainability panel, hosted by three prominent professionals in corporate design and client care, outlined why CRE organizations may want to have a complete sustainability plan in place. Here are some of the key points taken from the panel:

  • Tenants and occupants care about this. Almost all of a building’s carbon resides within the building itself, which can affect air quality for inhabitants.
  • Younger professionals want to work for organizations that shared their environmentally friendly values. To gain those new employees, it’s essential to speak to them through actions.
  • Sustainability was initially thought of as an expense generator. However, as more buildings become energy-efficient, it’s becoming more common and affordable to have a sustainable design.
  • Many companies are already using sustainable practices, but they just may not be consistent. Modern practices should be holistic and connected across the enterprise.
     

The cyber landscape is more connected than ever

Organizations face a new army of security vulnerabilities every day, each with the potential to cause lasting economic and reputational damage. However, while the cybercrime landscape has grown more sophisticated, prevention efforts have also advanced.

Spending forecasts for cybersecurity prevention practices have increased among real estate clients. This coincides with an increased demand for internet connected devices, creating what research firm Gartner calls a fourth industrial revolution.

Increasing connectivity has resulted in increasing cyber threats. As a wakeup call for the real estate sector, the FBI issued a Public Service Announcement in June 2018 that pointed to the rise in business email compromise / email account compromise scams for the industry. CRE firms experienced a 1,100% increase in number of victims, and about a 2,200% rise in reported monetary loses between 2015 and 2017.

The largest threats in the near future might involve physical safety, driven by advancements in 3D printing and weapons development.

What can CRE professionals do to prepare for this future? A recent Gartner study on security project recommendations noted the following:

  • Deploy privileged account management
  • Prioritize risk management efforts
  • Cultivate active anti-phishing measures
  • Automate security scanning
     

Driving value with emerging technology

The future of commercial real estate technology is closer than you think. Dominic Venturo, chief innovation officer at U.S. Bank, shared some recent advancements in innovative technology, driven by the belief that innovation enables the bank’s key priorities

“Innovation helps to assess emerging technologies and trends, understand the implications of our customers’ evolving behaviors, develop and test ideas and inform our business line product and feature roadmaps,” Venturo said.

For CRE professionals, Venturo referenced three key innovation trends:

  • Ambient computing: Developing services with the assumption that devices will fade into the background, or become irrelevant altogether.
  • Smart contracts: A legal agreement reduced to software code, where systems can monitor the status of events and/or conditions and take action within these rules.
  • Application Programming Interfaces (APIs): Software intermediaries that allow software applications to talk to each other.
     

Tax reform brings new variables in 2019

Under the recently passed Tax Cut and Jobs Act of 2017, CRE professionals have seen changes in their tax and regulatory practices. Laurie Murphy, senior director of tax planning at U.S. Bank, highlighted some of the major changes for real estate professionals in the new law.

 

General business provision

  • The centerpiece of the new law is the permanent reduction in the corporate tax rate from 35 percent to 21 percent.


Tax increases

  • Limit interest deduction
    • Disallow a deduction for net business interest expense of any tax payer in excess of 30 percent of a business’s adjusted taxable income
  • Net operating loss (NOL) deductions
    • NOL deduction limited to 80 percent of taxable income with no carryback


Tax decreases

  • Opportunity zones
    • Deferral of capital gains income if reinvested in certain qualified opportunity zone funds that invest in active businesses located in low-income areas designated as opportunity zones.


Pass-through deduction

  • Generally allows an individual taxpayer (and estate or trust) a deduction for 20 percent of the individual’s domestic qualified business income from a partnership, corporation or sole proprietorship.

These changes, just a few highlighted from the massive tax reform law, carry major implications for organizations. However, some have already taken advantage of the law’s reduced rates.