By Roland Murphy for Arizona Builder’s Exchange
In an extensive, 3,700-word report, The Counselors of Real Estate, recently published their views on the major issues facing both the industry and the world at large.
While we certainly encourage you to read and digest the full information and detail the group worked so diligently to assemble, keep reading below for the general gist and summary.
The CRE 2017-18 Top Ten Issues Affecting Real Estate:
- Political Polarization and Global Uncertainty
- The Technology Boom
- Generational Disruption
- Retail Disruption
- Infrastructure Investment
- Housing: The Big Mismatch
- Lost Decades of the Middle Class
- Real Estate’s Emerging Role in Healthcare
- Climate Change
1. Political Polarization and Global Uncertainty
Domestically, the U.S. is more divided than at any point in recent memory. Globally, tensions in perpetual hot spots like the Middle East and Asia are on the rise. Europe is beset with internal strife, rising nationalism and a burgeoning immigration problem.
As a result, alliances and policies once taken for granted are now tested regularly and in ever-changing ways.
This is impacting trade, monetary policy, foreign investment, hospitality, retail and manufacturing, and increases in national self-interest combined with local and regional infighting make long-term, stable compromise, agreement and even negotiation challenging.
2. The Technology Boom
Little can be said about how technological innovation has changed individual lives and global markets that isn’t cliché, but it needs to be addressed. While personal tech has long gotten most of the fanfare, there’s no denying the impact of technology on commercial real estate. In 2011, according to the report, CRE tech startups had an investment of $186M. In 2016 it was $2.7B.
Industry-impacting developments include the geometric growth of automation across markets. The report cites a study of automation by McKinsey & Company that estimates 47 of jobs existing today, not just in manufacturing but across the board, could be replaced by automation.
Retail has been so impacted by tech advances, up to and including the ever-shrinking mid-range of the space, that speculation of its impending death has become almost a pastime for pundits.
In terms of RE and space planning, “big data” has become a fully-integrated component.
Technology’s current golden aspiration, the mainstreaming of autonomous cars, will, if achieved, impact everything from urban infrastructure planning to building design, zoning requirements, public transportation and everything else that’s currently influenced by the “car culture”.
3. Generational Disruption
The impact of Millennials in shifting real estate and business in general is another over-reported but still key trend.
Workspaces are now more collaborative and open and feature amenities few workers could have even imagined just a decade ago. Work hours, while often longer, are now more flexible. Live/work/play-focused mixed-use development is booming, impacting everything from space allocation to walkability in design.
On the other end of the equation, Baby Boomers and Generation X are also shifting. They’re staying in the workforce longer, in part to recoup some of the impacts of the Recession.
One thing both are doing is shifting from traditional homeownership into multifamily and condominium-based residences, driving up demand and reducing affordability across the country. Supply is lagging, and in many markets, there still aren’t nearly enough units in the pipeline to satisfy it any time soon.
4. Retail Disruption
Contrary to all the speculation on retail’s impending demise, the reality does not match the hype. While the middle range – department stores and general purpose retailers – will certainly continue to take hits, the industry has already begun adapting. Big box spaces are being reconfigured to house multiple tenants, and retail centers are going more pad-based to include fast-casual dining and other retail/service focused providers.
The report states, “As retailers refine their inventories, distribution methods, and fulfillment models, the retail market will survive and even prosper – but will do so in fresh, new ways.”
5. Infrastructure Investment
Despite the fact that both sides of the aisle and most of the middle (Yes, there still is one.) agree on the need for significant investment in the nation’s infrastructure, the polarization mentioned above makes advancing any sort of actual plan difficult-to-impossible at present.
In anticipation with the Trump Administration’s approach, placing heavy reliance on private investment and public-private partnerships, several capital suppliers are setting aside billions of dollars for infrastructure investment. The report sites alternative assets monitoring firm Prequin as estimating roughly $376B in U.S. infrastructure funds being overseen by investors.
Since housing market over-exuberance was the single greatest contributor to the Great Recession, it’s only natural the market over-corrected. Today, however, we are faced with a lack of inventory in both single- and multifamily, which has spiked prices and reduced affordability, particularly in regions that have largely recovered in other areas and regained major job growth.
The lack of current inventory – combined with generational shifts and ongoing tightness in development capital and consumer credit markets – will continue to impact all sides in residential for some time to come.
7. Lost Decades of the Middle Class
Wage growth in the U.S. after the Recession has remained tepid. The middle class, and the businesses that serve them, have borne the brunt, impacting everything from retail development to home buying.
While household incomes are finally increasing, when adjusted for inflation they are still less than they were 20 years ago, which has been a significant contributor to social disenchantment and political polarization. Combine that with rising living expenses and the highest student debt levels in history, and the middle will continue to tighten.
8. Real Estate’s Emerging Role in Health Care
Healthcare in the U.S. is a $3T annual industry, and outcomes generally lag behind other developed nations. The need for cost containment has led to a major increase in the number of clinics, urgent care centers and other non-traditional outlets to take the pressure off of hospitalization.
As a result, tailored design for healthcare facilities has become paramount to maximize both staff efficiency and patient outcomes.
In another health and healthcare-related trend, companies have begun to focus on “healthy buildings” as part of their real estate considerations. Technological advances in building design and features intended to reduce environmental concerns, combined with design standards intended to minimize occupational hazards and have combined to make healthy design an investment consideration.
Changes in long-standing U.S. immigration policies and demographics will also impact real estate. A reduction in the number of immigrants to the U.S. will likely affect labor pools and potentially slow development projects.
Immigration also has traditionally been a contributor to new household formation. That, combined with the fact that newly arrived immigrants tend to rent and drive up multifamily demand, could have significant ramifications.
In addition to the construction labor market, high-tech industries also rely heavily on immigrant workers. With potential reductions in available foreign-born workers, innovation companies may face significant increases in labor costs to attract the necessary talent.
10. Climate Change
Recent estimates on the predicted sea level rise were more than double their 2013 forecasts. If the predictions prove true, the effects on real estate in coastal and near-coastal areas could be incalculable. Even for properties not directly affected by floods, damage to the infrastructure necessary to access them could harm them just as badly.