The 36th annual “Emerging Trends in Real Estate,” co-published by PwC U.S. and the Urban Land Institute provided some insights on trends that are expected to impact commercial real estate investing in 2015.
“Unlike previous reports and previous cycles, we are seeing sustained growth,” said Mitch Roschelle, PwC U.S. real estate advisory practice leader. “In the past several years, we reported that real estate market participants’ main fears revolved around uncertainty with the economy. Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of megatrends impacting society and the global economy.”
Following are the top ten trends that surfaced as a result of the “Emerging Trends in Real Estate” survey:
1) The 18-hour city comes of age.
The number of cities that thrive around the clock and on the weekends is greatly increasing. Many downtowns are walk-able communities that have combined housing, retail, dining and office space. This design has spurred investment, development, and improved quality-of-life.
2) The changing age game.
Over the last several years, we have watched Millennials postpone homeownership and rent longer, but this could change in the 2020s. The commercial real estate industry should also expect to see changes as a result of a smaller population of rising Generation Z, and Baby Boomers that will continue to influence real estate development and investment for at least two more decades.
3) Labor markets are heading for a tipping point.
Economists believe that while the “jobless recovery” is a concern, long-term labor market trends are heading in the opposite direction. In a few years, the major concern will be about labor shortages, not surpluses. Based on responses from survey participants, the most important issue for real estate is job growth.
4) Real estate’s love-hate relationship with technology.
Survey respondents viewed e-commerce and crowdfunding as a challenge they will need to adapt to in the coming years. Sites such as FullCapitalStack and Crowd With Ease are changing the way owners raise capital for their property investments. Technology is also changing the way people utilize commercial real estate and has pushed demand levels to an accelerated pace.
5) Event risk is here to stay.
Geopolitical risks, global unrest and natural disasters are event risks that are particularly troubling to U.S. commercial real estate investors. Consequently, many of the survey respondents identified international investors as their best prospects for increasing volume in 2015.
6) A Darwinian market keeps the squeeze on companies.
Competition is unrelenting, and the need to have a clear “brand identity” is important as firms navigate the swift stream of capital. It will be important for companies to specialize and sharpen their focus. According to some survey respondents, this is a sign of maturity in the industry and greater stability ahead.
7) A new 900-pound gorilla.
The Defined Contribution Real Estate Council was established in 2014 to “promote the inclusion of direct investments in commercial real estate and real estate securities within defined contribution plans in order to improve participant outcomes.” In 2014, U.S. retirement assets hit $23 trillion, and more than half of that was in defined contribution or individual retirement account funds. It’s likely that new products will be specifically directed toward this capital source in the coming years.
8) Infrastructure: Time for the U.S. to get serious?
The American Society of Civil Engineers gave U.S. infrastructure a grade D+ on its most recent report card. Since 2009, spending on educational buildings and health care facilities by both public and private sectors is down by one-third – facilities needed to compete in the future. This trend is not good, and it will be particularly painful for real estate if problems are left to worsen.
9) Housing steps off the roller coaster.
Many economists believed that the residential real estate market was “too big to fail,” but collapse it did. Fortunately, residential real estate appears to be returning to the classic principles of supply and demand. As a result, residential real estate should be a positive trend for the economy as a whole.
10) Keep an eye on the bubble.
While respondents of the survey generally had a positive outlook, many cautioned that up-cycles breed optimism. Unfortunately, excessive optimism can promote recklessness, which is why some survey respondents questioned if equity underwriting will be less rigorous in 2015 than in 2014.
There are many factors that may contribute to the success of commercial real estate in 2015. Unfortunately, how everything will ultimately shake-out is unknown.