Tremendous opportunities lie ahead for real estate professionals — but also risks, slowdowns, and potentially difficult transitions.
That’s according to the 2019 Emerging Trends in Real Estate report released this month by the Urban Land Institute. The report, a joint effort with PwC, is based on interviews and survey responses from thousands of respondents from the real estate industry. It’s a wide-ranging look at the state of the industry, but below are some of the most significant trends to watch out for in 2019 and beyond.
The market may reach a “plateau,” but it won’t collapse
Probably the most significant trend the report identifies is the likely cooling of the market — a trend that has been explored by other sources as well. Though most of the people interviewed for the report didn’t think a correction was automatically on the horizon, the prevailing sentiment was that the real estate market is “coming off a peak” and expectations are reaching a “plateau.”
This trend is tied to an expected general slowing of economic growth in the US, which “presents a challenge to real estate markets.” The result may be increased risk around new projects, and an interest among those in the industry to “seek the most productive use” of existing assets.
Whatever happens, surviving will mean getting creative. The report concludes that “success will elude those markets remaining passive or stubbornly applying 20th-century approaches” to modern problems.
“Success will emerge from those markets that tackle their problems innovatively,” it adds.
Affordability is straining the market
Unsurprisingly to anyone living in a major city, affordability issues will shape real estate in the near future. The report notes that, nationwide, “rising levels of unaffordability are largely a function of underproduction at all price levels except for luxury housing, both ownership and rental.”
The high cost of housing has far-reaching effects. It is driving homelessness across the US. Half of all renters are paying more than 30 percent of their income on housing. And 12 million people are spending more than 50 percent of their income to keep a roof over their heads.
To solve this problem the US needs to build 4.6 million additional rental housing units by 2030. That adds up to 325,000 units per year. That’s doable, according to the report, though so far “deliveries are skewed toward upper-end product.”
Millennials are interested in the suburbs
Headlines have long touted millennials’ tendency to live in urban centers, and that has indeed happened. But today, at least some of the more than 80 million people who are now in their 20s and 30s “could be turning their attention to the suburbs.”
This is a particularly important trend right now because millennials are currently starting families and settling down — meaning they could have a huge impact on the housing market and everyone who works in it.
“The traditional attractions of the suburbs — larger homes, good schools and lots of green space — have not changed,” the report adds.
This trend is related to widespread affordability issues (see above). It’s also driving people to second-tier cities outside of the country’s biggest coastal metros. And within those cities, 55 percent of new residents decided to live in the suburbs.
The report describes these as “18-hour cities” (in contrast to “24-hour cities” such as New York and Los Angeles) and reveals that such metro areas are expected to see more economic and population growth than the national average in the near future. These 18-hour cities have also diversified their economies and cultivated “desirable urban neighborhoods.”
The impact of the trend to the suburbs and 18-hour cities isn’t limited to residential real estate.
“Retail follows rooftops, so retail development to meet the new residents’ requirements will follow,” the report states. “Finally, you may begin to see more emphasis on employment centers as residents decide they want to work closer to where they live.”
Speaking of retail, it isn’t actually dead
Everyone has heard that Amazon is killing brick-and-mortar stores, but somewhat provocatively the report suggests that the “so-called retail Armageddon” may be overblown. Instead, the report cites an unnamed executive who said that “retail is doing fine; bad retail and bad retail development are not!”
Overall, there is a trend toward less retail space, and leases are getting shorter.
However, some online retailers — again, Amazon — are now beefing up their physical presence. And what exactly constitutes “retail” is evolving, with property owners potentially looking for fewer but more relevant tenants and mixed-use development playing a bigger role.
“In order to survive,” the report continues, “even the strongest retail projects may need broad reasons for customers to visit, and will include uses ranging from medical and educational services to distribution activity, with dense or mixed-use settings adding further support.”
Co-working is only getting bigger
The report points to co-working behemoth WeWork and states that investors are warming to the idea of companies that lease large office spaces then sublet them back to smaller businesses.
But WeWork is also trying to “create a community,” the report continues, which translates into rising costs in the form of things like higher quality finishes. The report quotes one survey respondent who complained about how that eats “into landlord economics.”
Overall, the report’s authors expect office space to deliver less favorable returns than other types of properties. To prosper, city office space, in particular, needs to offer amenities.
“These buildings need to have good Walk Scores, access to transit, and urban-like amenities (even in the suburbs) as well as larger floor plates with more light, a food and beverage option, and customization in design,” the report explains.
Texas and the two coasts have the “markets to watch”
The report ranks 79 major cities according to their overall real estate prospects. The Dallas/Fort Worth metro area took the top spot, with Austin in sixth place and San Antonio in 20th. Brooklyn took the second spot and all but four of the top twenty cities were in coastal states or Texas.
The report also points to Seattle, which fell from the first spot last year to 16th in 2018, as evidence that “we may need to get used to more volatility in our market list.”
Uncertainty lingers with technology, but it will be crucial
Technology is going to impact employment, but it’s not clear yet exactly how.
The report specifically points to artificial intelligence and states that “predictions range from optimistic to devastating, differing by tens of millions of jobs even when considering similar time frames.” However, in the near future AI may at least increase efficiency and improve customer service.
The report suggests that real estate professionals look for ways to use AI as a tool that can assist them.
Other technologies, such as blockchain, are reshaping the financial side of real estate, which is helping the industry “cope with speed requirements and competitive exposure.”
The report further points to crowdfunding and crowdsourcing — which typically use the web to raise money, sometimes from non-traditional investors — as another growing trend. However, the report notes that crowdfunding is still new and “has not proved its mettle in a downturn.”
Climate change is reshaping the industry
The report devotes considerable space to the impacts of climate change, pointing out that “the evidence of floods, wildfires, and violent storms in 2018 indicates that the risk has been intensifying.”
These disasters and the broader trend of a changing climate will have wide-ranging impacts on the real estate industry.
For one, climate change-fueled disasters are leading to the reshuffling of property values. The report singles out flooding as one factor that has dragged property values down, which is exactly what has happened in Houston following Hurricane Harvey last year.
Massive insurance payouts thanks to natural disasters will also affect premiums going forward, the report argues, meaning homeowners could face increased costs in the future.
Though climate change poses significant challenges, it is also creating opportunity. The report describes, for example, “resilient design” that can weather disasters as a “burgeoning field”
“Approaches can include the elevation of buildings or mechanical elements, incorporation of backup or passive power sources, building hardening and enhanced wind preparedness in hurricane-prone areas, and the incorporation of green infrastructure and landscape design to absorb water during routine and peak events,” the report notes.
Growing concern about the environment is also driving an interest in “high-performance sustainable real estate.”
“Sustainability and health factors are likely to be standard for tech and more urban tenants and investors,” the report says of the office space market.
Those who can handle change will see greatest opportunity
The recurring theme of the report is change. The market is changing. Technology is changing. The climate is changing. Even millennials are changing. Though these changes “may seem daunting,” the report notes, and do create risk, they also represent an opening.
“There also are opportunities,” the report states, “for those who are prepared to move forward in the transformed real estate market.”