The 2016 edition is hot off the press, so Mitch Roschelle, CRE Practice Leader at PwC and his colleague Andrew Warren came by the studio on what was coincidently the CRE Show’s 5th anniversary.
“Congratulations,” Roschelle began, “on five years of great radio.”
Then he went on: “For this study we ask participants what they think about the market, and compare this to previous results. What we ask about is ‘prospects for profitability.’”
“This year 84% of respondents feel that prospects for their firm are good-to-excellent for profitability.”
This number is up steadily for the past number of years, and is in fact the same number seen 10 years ago, just before the market collapse. But are we really at the cusp of another bubble?
The charts do look almost identical, but ten years on, market fundamentals are quite different. Concerns have risen in the press that we’re approaching top of the market. While it’s true that the gateway cities have intense cap rate compression, I don’t think that’s true in most of the country.
“As far as a bubble goes,” offered Warren, “pockets of property types and certain markets that might be a little over-warm. We don’t see a bubble per se. You might call them ‘bubble-ettes.’ The fundamentals are really strong.”
One question in the study ‘What inning are we in?’ received no responses beyond ‘7th.’
What about the concern that this market is long-in-the-tooth? What’s different today?
“Looking back as far as the Lincoln administration, markets cycled with greater frequency and shorter duration. Longer cycles are the new normal,” explained Roschelle. “The pervasive response in this year’s report is we’re in the middle and there’s still a lot of runway.”
The biggest distinction between today’s real estate market and ten years ago is the supply situation. Since the housing crash, building has not come back to previous levels. And that lack of supply keeps demand high.
“Slow growth has been the greatest thing to happen the real estate economy.” Roschelle said he’s been flamed on social media for this statement, but he stands by it. “Slow growth means we can absorb what we build, which is ideal for real estate.”
High demand and short supply keeps NOI growing for investors. As far as concern about interest rates, Warren concluded that the impact would be insignificant.
“Although interest rates are expected to go up, the question is when and how fast,” noted Warren. “We’ve created more jobs in this recovery than we did from 2001-2008. NOIs should continue to rise, even as interest rates rise. And we’ve built far more homes during times of high interest rates.”
Here is a sampling of the dominant trends identified by the 2016 report, available for download HERE.
18-hour cities 2.0
Second cities that have embraced live-play-work urban cores are achieving a vitality that is attracting more commerce and population. Charlotte, Nashville and Raleigh, for instance, provide urban lifestyle at a much lower price point than coastal cities. Where to settle, retire, or locate a company? Consider Atlanta, Dallas, or Portland.
Next Stop the Suburbs
Urban Land Institute (ULI) monitors where Millennials & Boomers decide to live and they report that the younger cohort are beginning to buy in the burbs. Closer-in urban burbs with walkability and transportation are receiving most of this migration, but increasingly growing young families need services that aren’t readily available in the city. Urban locations that want to keep Millennial families over time will need to address school and safety issues.
Offices: Barometer of Change
Aging American office stock is over used, cramming more people into less space. With square feet per employee shrinking, issues like elevator wait times and retrofitting for mobile devices are straining the resources of older buildings.
For office investors this is good news/bad news: demand for office isn’t shrinking. But the costs of retrofit or replacing aging stock to fit contemporary needs are significant.
Housing Options for Everyone
Once upon an American dream two-thirds of us expected to own our home. Post housing crash this is no longer viable. Home ownership rate is falling across all generations. Multifamily is absorbing the Millennial households.
We have a growing population of seniors and working class who need decent homes. Housing Affordability (as opposed to Affordable Housing) will become an increasingly urgent concern: do we have housing for people near their work? Who will provide this housing?
Rising rents are beginning to make renting unaffordable. Residential builders are expanding cautiously now that existing home sales are up. Interest rates should not deter home buying - even 200 basis points increase is only 30 a month on a payment.
Tied to the urbanization trend, transit is hot. From the burbs to the city, city to rural, you need functional infrastructure for a city to thrive. And not just transit, but healthcare and public education. Education always plays a vital role in where people decide to live.
Denver is a great example. It essentially created its urban center with transit, at tremendous cost but great benefit to the city. Nashville has become more vibrant, more populous by investing heavily in essential city services.
Food is Bigger and Closer
Vertical farming in here - the urban farm to table movement is now growing organic food in old warehouses, schools and office buildings, bring agriculture closer to the people.
Consolidation Breeds Specialization
Consolidation is essential to this economy. A firm can’t get ahead without buying up competitors or niches they aren’t strong in yet. Consider banking: you’ll see acquisition of private equity by public banks, bigger banks getting even bigger, and financial service providers consolidating. It’s a trend across many industries, including commercial real estate, particularly retail.
We Raised Capital Now What?
Uncertainty in the world has capital flowing into the US with no sign of stopping. It’s made some markets really strong, but it means there can be more cash than good deals. Foreign investors who have traditionally been on the coasts now have to venture further into the heartland.
Return of the Human Touch
With expanding ubiquity of tech there is so much available data. But it doesn’t matter how much if we don’t have the people who understand what to do with it.
As the Boomers retire, Gen X are stepping up. A lot of experience is leaving the industry with them. This generation of management turned away from the phone and brought texting and social media into the business world. The first time we meet now may be digital, but the face-to-face business meeting hasn’t gone away.
Emerging Trends’ Best Bets:
Get into secondary markets – Pittsburg, Columbus, Knoxville, Louisville, and more.
Dive deep into the data – Work with all available intelligence in your business.
Middle income multi-family – Tap the demand for housing affordable to the middle.
Go long on REITs – There’s a great opportunity to capitalize on mispricing when the market is down.
Water is the new oil – This is, and will continue to be, a big deal.
Small companies are king – Companies with 50 employees or less create more jobs. Get used to embracing the smaller firm.
Download 2016 Emerging Trends in Real Estate, United States and CanadaHERE
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