As we prepare our Thanksgiving table this year, commercial real estate (CRE) lenders have a lot to be thankful for. Since the financial crisis, the CRE market has enjoyed a record run. FDIC-insured bank commercial real estate loan portfolios reached nearly $2.4 trillion as of the first quarter of 2019, reflecting 26 consecutive quarters of growth. Although that growth has begun to slow in the latter stages of a decade-plus economic expansion, the tidings bode well for another solid CRE lending year in 2020.

A Cornucopia of Favorable Conditions

2019 has been a good year for CRE lending. Consider:

• Strong fundamentals: Continuing the trend of recent years, vacancy and capitalization rates have remained low across all property types. Rental prices have increased steadily, and property values have continued to grow.
• Stable, diverse growth: The CRE market has been strong and steady across the four primary property types— multifamily, office, retail, and industrial properties. Each has enjoyed balanced conditions and solid fundamentals, and none are experiencing distress in the short term.
• Risk is declining: Although growth in commercial is starting to slow, much of the expansion over the past few years has come from loans on existing properties, with less of a focus on riskier new construction lending. In addition, more institutions have jumped into CRE lending, spreading the risk and reducing the national median ratio of CRE loans to total capital from a high of 216% in 2008 to 186% in 2019.

Some Turkeys in the Wings?

Despite these positive current conditions, the forward outlook is less certain. The CRE market faces some challenges as we look out over the next year or two:

• In the most recent quarter, CUNA adjusted its U.S. economic forecasts for 2019 and 2020, now predicting 2.1% GDP growth in 2019, and just 1.5% growth in 2020. For context, consider that the long-term “normal” GDP growth rate is around 2.0%.
• CUNA has also dropped its loan growth forecasts for credit unions to 6.5% in 2019 (down from its earlier forecast of 7.5%) and 5.5% in 2020 (down from 7.0%). The main drivers are continued softening in residential mortgage origination and auto lending.
• FDIC sees emerging concerns with oversupply in the multifamily and industrial property segments. In addition, continuing disruption in consumer shopping habits will heighten pressure in the retail property sector.

Demographic shifts to drive geographic growth

Longer-term, significant changes in the country’s demographic makeup will inspire shifts in real estate markets. The massive Baby Boomer and millennial generations will impact markets significantly over the next decade and beyond.

As millennials mature and start families, they are moving out of large cities to smaller urban and suburban areas. However, this generation’s vision of suburban nirvana differs from their predecessors’, as they seek all the conveniences and active vibe of modern city life. Mid-sized metros like Hoboken and Summit, NJ are prime examples, featuring robust transportation networks and vibrant, walkable city centers filled with trendy restaurants and boutiques.

Boomers, meanwhile, are rapidly retiring from the workforce and entering their golden years. This generation maintains an active lifestyle, and its understanding of retirement and “taking it easy” diverges from previous generations’. The needs of this generation are still being determined, and boomers’ ultimate impact on housing and commercial real estate will be nothing if not significant.

With these trends in mind, the hottest real estate markets include mid-sized cities in the southern U.S., including Austin, Raleigh/Durham, Nashville, and Charlotte, which share in common excellent weather, a plethora of educational and cultural institutions, and thriving, hip communities.