I recently had the pleasure of hosting editor and project chair Mitch Roschelleand his colleague Byron Carlock, both partners with PwC, in Studio One to discuss the highlights of this much-anticipated report.
In this, the project’s 36th year, the survey derives from a record number of 1,400 participants, including 400 face-to face interviews, with people recruited from all walks of commercial real estate life. Owners, private and institutional investors, service firms, commercial developers, lenders, REIT professionals and residential homebuilders share their opinions and experience. That, plus the latest significant and relevant market and demographic data are the foundation of the report.
What about profitability?
Heading right for the bottom line, I had to ask Mitch how optimistic we could be about 2015. “For 2015 we see 74% positive expectation for the market. To put that in
perspective, in 2009 when we asked about profitability, only 17% were positive. Over 21% of our respondents expected poor performance. The remaining 60% were pessimistically neutral. Contrast that to last year, when over 67% expressed a positive expectation.”
Does that mean we’re moving up too fast? Are we at risk for another bubble? Will the good times last? In order to answer those questions, we looked at the top 10 findings from Emerging Trends in Real Estate 2015®
Top Ten Emerging Trends for 2015
1. THE 18 HOUR CITY COMES OF AGE
Coastal gateway metros like New York and San Francisco have been called the “24-Hour Cities,” whose live/work/walk urbanity is one reason for their desirability. But most Americans and many companies can’t afford these cities, and thus emerges the “18-Hour City:” a smaller, more affordable metro that is successfully attracting employers and population with similar amenities.
The Megatrend here is urbanization. As smaller cities revitalize, demand is increasingly for live/work/walk neighborhoods. That lifestyle is no longer just a youth trend, but becoming much more mainstream, including retirees and families. Development funds are following, as investors will allocate capital where the population is flocking.
Charlotte, Raleigh-Durham, Denver, Brooklyn, Portland and Atlanta are the standouts in this years’ report, where we studied the 3-year population trends of over seventy cities.
2. THE CHANGING AGE GAME
The lifestyle decisions of Boomers are expected to have the greatest impact in 2015, especially on the housing, office and retail markets, and to a lesser degree, lodging and tourism.
Since by definition population ages 16-64 define the workforce, you can say that the 64-year-olds are exiting the workforce as the 16-year-olds are entering. But it’s not that simple.
It’s as yet unclear how much Boomers will want, or need, to work in retirement. And, what choices Millennials will make about renting or owning as they move into their middle years are unknown as well. Will they embrace the suburbs? So far, that generations has made different decisions than their predecessors.
3. LABOR MARKETS TRENDING TOWARD TIPPING POINT
A significant gap is developing between talent needed and available in larger markets.
Millennial entrance to the labor force has already peaked, and Boomer retirements are accelerating. For professional jobs in major markets, Millennials and the long-term unemployed often don’t have the skills. Long-term trends indicate labor shortages ahead, and greater opportunity for highly skilled and older workers in major markets.
4. LOVE-HATE RELATIONSHIP WITH TECHNOLOGY
Real estate is still a very analog business in a digital world. Many of our participants resist embracing technology, which is, by nature disruptive. This is understandable. The CRE business is traditionally conservative, in that ‘if it ain't broke, don’t fix it’ way.
But change is unavoidable.
The increase of telecommuting is already having a significant impact on how office space is used. You’ve heard of those companies that help people rent their homes for lodging? Several firms are developing this tool for the office market, as we speak. You can bet this will be disruptive.
Crowd funding is coming to real estate, and you will see capitol aggregated in brand new ways. New legislation is only beginning to impact how investors raise funds. Speaking of which….
5. 900-POUND GORILLA SWINGS INTO VIEW
Clever investors are already beginning to tap the enormous six trillion dollar defined contribution plan funds (such as IRAs and 401ks) into commercial real estate investing, via the self-directed IRA instrument and other devices.
It’s estimated that if a modest 5% of this pool were allocated to such ‘alternatives’, you’d see a tremendous well of capital unleashed. Potentially $300 billion or more could certainly make an impact.
6. EVENT RISK IS HERE TO STAY
Natural or human-made crisis will always affect commercial real estate, and that result is predictable: globally, investors turn to tangible, U.S. dollar-backed assets, which in turn drives international money into U.S. real estate.
International investment in U.S. real estate, over $50 billion last year, is spread across dozens of markets and all income-producing property types.
Historically, the biggest risk of major events is a disruption of markets, but for the biggest events in the last 6 months, there was almost no measurable impact in the economy. However, a concern for capital conservation and an eye out for potential economic troubles are certainly on respondents’ minds.
7. DARWINIAN MARKET KEEPS THE SQUEEZE ON
Competition in all business, including all the CRE services, is unrelenting. Asset managers and service providers are consolidating, and that’s squeezing ever more productivity from the workforce. There is no room for complacency, since your competitor is waiting for an opportunity to adopt your customer. That looks to continue for the year to come.
8. GET SERIOUS ABOUT INFRASTRUCTURE
The U.S. has almost 3.6 trillion dollars in postponed infrastructure spending that needs to be completed by 2020. These projects create not only jobs but also spur development in retail, residential, office and more.
Post-WW2 boom, infrastructure development was about interstate highways and suburbs. Today, with the trend toward urbanization, we are reversing that tide and rebuilding for densification.
The cities that invest in infrastructure will be the ones that succeed in drawing the investment, jobs, and the amenities that attract a vibrant workforce.
9. HOUSING STEPS OFF THE ROLLER COASTER
The recent rocky ride for residential real estate had an impact on CRE. A great percentage of office tenants are tied to the residential business – lenders, brokers, agents and more.
Now that the residential market is rebounding, we see a kind of optimistic equilibrium. There’s excitement, with maybe a little frothy action in some of the hottest markets, but mostly it’s unfolding at a reasonable pace.
Millennials are not forming households, and homebuilders aren’t building on spec. Financing is still tight, and down payments are required. The housing supply will continue to tighten, which will push construction to pick up later in 2015.
10. KEEP AN EYE ON THE BUBBLE
We’re always concerned about a return of the bubble. Historically, the intervals between downturns have increased, with an average period of 105 months per cycle. We’re at 63 months now. There is much more discipline in the markets today. Lending standards and underwriting are more rational, and that’s prolonging the recovery. A slow recovery is good for us – it keeps the window open longer for more buyers to make an informed move.
Despite respondents’ caution and concern, they are, as noted above, optimistic. The data really doesn’t indicate any bubble activity. The gateway markets look pricey, but they aren’t symptomatic of every market across the country, and there are still good values to be had within them.
Two and three years ago all the value creation was cap rate compression. But now we see real NOI growth because the fundamentals are legitimately improving. We really do expect rent growth, as much as 3-5% or more, up to 15% in multifamily, in the year ahead.
Sounds like plenty of good news for buyers, sellers, owners, and investors. Business is active, and moving well without over inflating, a healthy balance. What’s particularly heartening is the activity spreading to more cities around the country, away from the coasts, and bringing more opportunity to smaller markets.
Like the Emerging Trends respondents, we all eye the horizon, concerned about any shadow of recession or bubble, but all signs for the year ahead indicate that business is good, and it’s time to get back to work making the commercial real estate world go ‘round.
You’re invited to check out the full show with charts on YouTube.