Top Ten Countdown – The Issues Affecting Real Estate
To make the most prudent real estate decisions, it’s important to consider the business and social trends which may impact results. Good thing The Counselors of Real Estate get together their respected brain trust each year to produce their annual Top Ten Report. I had the opportunity to sit down with Peter Burley, CRE Counselors Chair of the External Affairs Committee to bring you an insider’s perspective.
10. The rise of experiential retail: Property owners and retailers are moving towards a more experiential destination for the consumer. Showrooms, gathering spaces and restaurants are drawing people to locations. A recent survey by KPMG indicatedthat online sales made up 21% of all retail sales – meaning 1/5 of all retail sales are online. And retailers are responding by shrinking the space of stores and inventory but adding an online component. This concept is what is known as “clicks and bricks.” The opportunity in secondary and tertiary markets because of this experiential retail gives impetus to help stimulate the economy in the smaller markets where they might not otherwise have those kinds of economic development opportunities, according to Burley.
· Downsizing of retail stores
· “Destination” concept
· Transitioning to showrooms, internet shopping and returns
· Reimagined anchor store concept
· New mix of retail, food entertainment, housing,
· Sourcing local/regional entrepreneurs=unique
· Opportunity in secondary & tertiary markets
9. The sharing/virtual economy: Airbnb and Uber are the most ubiquitous examples. Burley also mentioned Divvy, a bicycle sharing companies. All three of these companies “offer alternatives to traditional lodging and transportation offerings.”
· Hotels under pressure from short-term rental businesses (like AirBNB)
· Ride-sharing=reduced need for commercial garages
· Office sharing/virtual office (Regus model) = office space reductions
· Crowdfunding capital
8. Energy: The actual rig count in the U.S. for extracting oil was at its lowest level in 50 years which has a huge impact on the regional economies. “When a key commodity like this becomes unstable and volatile, it threatens political, economic and global stability,” said Burley.
· Investors are reassessing investment in regional markets (i.e. Houston & North Dakota)
· U.S. oil production is down = lowest rig count in 50 years
7. The disappearing middle class: The middle class wage has become stagnant and people are falling down the ladder instead of climbing up it. A recent Pew Research study indicates the median income for middle-class households fell by nearly five percent between 2000 and 2014. Their median wealth (assets minus debt) declined by 28 percent after the housing market crisis and the subsequent recession. Part of the disappearance has to do with the concept of one income vs. two income family. Two parent homes with kids under 18 fell from 72% single income to 37% single income over period of 40 years and now 60% of households have two incomes. That means less opportunity in the middle market, which specifically impacts certain retailers.
· Middle market contraction (Sears, Macy’s)
· Less opportunity in middle market development
· Opportunities in high density multi-family housing
· Opportunity in the Luxe area- malls, hotels, housing
· Opportunities at low-end (Walmart, Dollar stores)
6. Housing affordability: “There are such low inventories of available housing for sale that it’s pushed pricing way up and it’s been outstripping wage growth to the point where people cannot afford to buy homes in many markets,” said Burley. A perfect example is San Francisco. In metro Atlanta, home prices were up 6.5 percent in April, according to the latest S&P/Case-Shiller Home Price Indices.Prices were also up 1.3 percent from March to April, reported The Atlanta Business Chronicle.
As far as credit constraints go, there has also been a swing back to tight credit so that people aren’t qualifying and credit scores are damaged. These two strong forces are making it difficult for people to get into new homes. And in some markets, the income to rent ratio to is over 50% or more and that's not sustainable over time. This is what presents the opportunity for micro housing.
· Opportunities in development alternatives: micro apartments –and micros within mixed-use
· Still strong demand in multifamily
· Opportunities in mid-range multifamily
· But – some slowing in rent growth
· Builders targeting starter home market
5. The political environment: “Politics is local and so is real estate,” said Burley. There are communities that are having difficulty making decisions and also paying for those decisions. The tax environment can either attract or repel a business or consumer looking to live in that area. Whether or not the infrastructure in a community can support new businesses and people moving in to those communities has a big impact on where people live and do business.
· Tax environments attract – or repel business
· Tax revenues determine economic viability
· Lack of capital expenditure to support continued urban growth & infrastructure
· While some locales deflect or repel business, others may present opportunity
4. Densification urbanization: “The 24-hour city is really the dynamic place where businesses and people want to be,” said Burley. People are moving into the cities in huge numbers – globally roughly 80%. And we are also seeing suburbs urbanizing themselves. There are opportunities related to this in terms of the densification, but infill in and around the urban core has become a very hot commodity, so if you can find an infill space and make the place, you can be very successful.
· Urban centers attracting more business
· Live/work/play preferences offer many opportunities for development, reuse
· Luxury multifamily proliferates in urban centers
· Emergence of innovation centers, education centers
· Office & malls adversely affected – but also opportunities in both sectors
3. Demographic shifts: Millennials have now have overtaken the boomers in terms of population growth. Combined, millennials and the boomers make up more than half the population (more than 150 million people). In addition, the boomers are retiring at a rate of about 10,000 per day and at the same time the number of people over 90 is growing so fast that it has tripled since 1980. By 2040, people over 90 is expected to represent 15% of the population. According to Senior Housing News, 117 million Americans are expected to need assistance by 2020. “These large demographic cohorts have needs. They need housing, places to work, places to shop, and places to play and that's where real estate comes in,” said Burley.
· Multifamily development still strong with evolving amenities
· Opportunities in housing options for Millennials and Boomers
2. Debt Capital Market Retrenchment: With the risk retention rules going into effect, Burley said they expect that the pace of lending is probably going to slow for the remainder of this year. “Concerns over the potential impact of risk retention on credit markets has prompted the real estate industry to lobby Congress on legislation seeking to clarify the risk retention rules to minimize negative impacts on commercial property markets,” reported CoStar.
· Much greater risk management among lenders
· Tightening credit regulations and requirements
· Construction lending tightens as result of BASEL III
· May present the opportunity for other, less regulated lenders to gain market share
1. The changing global economy: In 2016, we will probably see about 1.8% GDP growth. Next year, maybe about 2.3%, which is a downshift from what we were expecting but the U.S. remains the most attractive place in the world to invest.
· Global deceleration
· U.S. still attracts global capital for real estate investment
· Broader investment demand in higher-yield markets
· But seeing a general softening of investment
· Weaker exports, potential
Burley summed up the show by saying, “It’s really fascinating how intertwined all of these trends and themes are. You can't talk about retail without talking about the urban models, you can’t talk about that without talking about the generations, (the millennials and the boomers). And you can’t talk about investing in secondary and tertiary markets without talking about global capital entering the U.S. If they're all intertwined, then they all have an impact so it's worthwhile to keep an eye on everything that is going on in the world.”
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