What are the trends that will drive investment and development in 2016?
PWC’s forecast gives a heads-up on where to invest, which sectors and markets offer the best prospects, and trends in the capital markets that will affect real estate. Now in its 37th year, Emerging Trends in Real Estate® is one of the oldest, most highly regarded annual industry outlook for the real estate and land use industry.
It includes interviews and survey responses from hundreds of leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants.
1. 18-hour cities 2.0
Last year, Emerging Trends identified the rise of the 18-hour city. This year, the real estate industry is expressing growing confidence in the potential investment returns in these markets.
We are finding a tangible desire to place a rising share of investment capital in attractive markets outside the 24-hour gateway cities.
2. Next Stop: The suburbs…What is a suburb?
“The suburbs are a long way from dead,” said one interviewee emphatically. Another industry veteran counseled, “There are only about ten dynamic downtowns in the county; the rest of the areas, people are in the suburbs.”
As prices have risen in the core gateway markets, it is apparent that a fresh look at suburban opportunities is gaining favor.
3. Offices: Barometer of change
On the subject of jobs, the office sector has been benefiting from the strengthening employment numbers in this maturing recovery. Employment is up by more than 2.9 million year-overyear, as it has been since late 2014, and the July growth rate for jobs was a solid 2.1 percent.
Job gains have now spread to the vast majority of metro areas, with New York/Northern New Jersey (168,900), Los Angeles (152,000), and Dallas/Fort Worth (117,800) leading in absolute change, and only a few metro areas registering moderate decreases.
4. A housing option for everyone
If the “work” component of “live/work/play” is evolving, so is the “live” element—housing. We normally think of change in terms of trends or cycles. Sometimes, we acknowledge patterns of maturation.
But the global financial crisis began with disruptive change in the bursting of the housing bubble, which, in turn, has been sorting itself out in a “change of state” whereby homeownership is pulling back from the nearly 70 percent of households seen at the extreme of the bubble to 63.4 percent in the second quarter of 2015.
5. Parking for change
Should we be phasing out parking lots and parking structures even before the widespread adoption of the autonomous vehicle (a.k.a., the driverless car)? Miles traveled by car for those people 34 years old or younger are down 23 percent.
The American Automobile Association reports that the percentage of high school seniors with driver’s licenses declined from 85 percent to 73 percent between 1996 and 2010, with federal data suggesting that the decline has continued since 2010.
The new Yankee Stadium, built in 2008, provided 9,000 parking slots for its 50,000 seating capacity. But that has turned out to be too many, since most fans come by mass transit, and the parking structure is left at just 43 percent occupancy.
6. Infrastructure: Network it! Brand it!
“The U.S. is losing the battle globally,” when it comes to infrastructure, complained one investment manager interviewed this year. “What is our problem?” The conventional approach to infrastructure improvement is utterly disheartening.
The most recent (2013) American Society of Civil Engineers (ASCE) Infrastructure Report Card give the United States a grade of D+. At present, state-by-state updating is going on, and the results are not showing much improvement.
Arizona rates a C, as does Georgia. ASCE scores Utah a bit better at C+, but Illinois, Iowa, and Virginia get only a C–. And none of these states is in the oldest region of the nation— the New England/Mid-Atlantic corridor—or the heart of the factory belt in Ohio and Michigan. The ASCE estimate of $3.6 trillion in infrastructure.
7. Food is getting bigger and closer
This may be the ultimate in niche property types: adaptive use with a vengeance (or at least with veggies).
The classic theory of urban places relegates agriculture to the hinterlands, as virtually every kind of vertical construction has superior “highest-and-best-use” characteristics, bringing greater investment returns to land value than growing food.
This is absolutely true in most cases. But there are places in more cities than we might imagine where neighborhood land is cheap or older buildings sit idle, and where median incomes are low and the need for fresh food is high. Some are the “hollowed out” areas of Detroit as well as Camden and Newark, New Jersey.
But there is a surprisingly significant level of activity in places like Brooklyn, Chicago, Philadelphia, and Washington, D.C., where “foodies” of all generations abound.
8. Consolidation breeds specialization
If “size matters,” that is not the same as “bigger is better.” The playing field itself is changing.
While size and scale have brought advantage over the years, the evolutionary trends in development, equity investment, and lending are showing that “small can be powerful” as well.
This works on many levels. Developers find it hard to access the best capital unless they have scale; but this means fitting the quality demands of conservative lenders.
9. We raised the capital, now what do we do with it?
The flow of capital into U.S. real estate continues to increase. Total acquisition volume for the 12 months ending June 30, 2015, was $497.4 billion, up 24.6 percent year-over-year.
While this pace of growth is probably not sustainable, investors across the board (with the exception of the government-sponsored enterprises [GSEs]) are anticipated to have capital availability in 2016 that is equal to or greater than 2015 levels.
With pricing already near record levels in a number of markets and property types, where will this new capital be invested?
10. Return of the human touch
We are passing from the “dazzle” era of technology and big data, to the more difficult tasks of wise application. The idea that expertise in slicing and dicing numbers is the skill most needed in real estate financial analysis has been exposed as inadequate.
The global financial crisis did not get triggered because of a lack of mathematical aptitude. The folks who got us all into trouble knew math just fine.
What they lacked was the good judgment to foresee consequences and the conscientious determination to prudently manage to standards other than short-run profits.
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