Thechanging globaleconomy, debt capital market retrenchment and widespreaddemographic shifts areexpected to have the most significant impact on real estate in Arizona and inthe U.S. in the near-andlong-term.
This is accordingto the CRE 2016-17 Top Ten Issues Affecting Real Estate, an annual list producedand released by TheCounselors of Real Estate. This year’s list was revealed atthe National Association of Real Estate Editors conference in NewOrleans.
The 10 issuesnamed by The Counselors could be especially at play here in Arizona, which issignificantly reliant on realestate as a major pillar of its economy.
“Thislist is a useful resource in assessing both Arizona and national real estatetrends,” said Sharon Harper, President & CEOof Plaza Companies and amember of The Counselors of Real Estate. “The list shows that the real estateindustry is facingsome challenges and at the same time is presented withopportunities. It should serve as a big picture guide to anyone inthe realestate business, or any business.”
The Counselors ofReal Estate is an invitation-only professional association for the industry’sleading real estate advisors.
The Counselors’1,100 members around the world undertake a collaborative dialogue on currentissues and trends toidentify the final list.This year’slist shows that many of the issues are interconnected. Uncertainty within theglobaleconomy, tightening commercial and residential real estate credit andthe vast numbers of both aging Baby Boomers andyoung Millennials simultaneouslyin the marketplace are current and trending issues that affect real estateexecutives andconsumers alike across a variety of property sectors.
The Counselors ofReal Estate organization is known for thought leadership, extraordinary professionalreach (more than 50real estate specialties are represented by its memberexperts) and objective identification of the issues and trends mostlikely toimpact real estate now and in the future. The issues in the annual Top TenIssues Affecting Real Estate are anunbiased assessment of the most criticalfactors impacting real property.
The CRE 2016-17Top Ten issues Affecting Real Estate
1. The ChangingGlobal Economy
The IMF hasrevised GDP growth downward for much of the globe in 2016-17, as economic uncertaintiescontinue andintensify. Currency issues, declining exports, and soft energyprices add to volatility (as reflected in the stock markets in early2016 andMoody’s recent downgrade of Saudi Arabia). Political issues and conflictundermine stability as well.
Implications:There is potential for globaleconomic deceleration. Weakened exports could lead to slower/smaller port andinfrastructure investment, in particular, and broader softening of investmentin real estate and other asset classes. The U.S.remains attractive to globalcapital and inflows are still strong, although they may be under pressure attheir origin (China,Middle East, and Europe). A surge in Chinese buying ofboth residential and commercial real estate last year took their five-year investmenttotal to more than $110 billion, according to a study from the Asia Society andRosen Consulting Group.
2. Debt CapitalMarket Retrenchment
Debt markets forcommercial real estate are slowing sharply. Regulators are telling bank lendersto curtail CRE lending (that’s50% of the debt market), and the CMBS marketsare slowing down, with no legislative fixes to retention rules that are due togo into effect in the summer of 2016. Many insurance companies thattraditionally invest in real estate are approaching theirreal estateallocation limits.
Implications:The search for permanent CREdebt capital will become more intense and competition for capital will becomean issue in 2016 and 2017. The lending environment is likely to become morerestrictive. This could present opportunitiesfor some other, less regulated,lenders to enter the market.
3. DemographicShifts
Millennials(generally considered to be people ages 18-35) have overtaken the Baby Boomers(people of ages 51-69) insheer numbers, but both groups remain substantialreal estate consumers. While the Boomers are retiring at a rate ofapproximately 10,000 per day, America’s population of persons aged 90-and-olderhas almost tripled since 1980, and isexpected to increase to more than 7.6 millionover the next 40 years, according to the U.S. Census Bureau. Older householdsand younger households are competing for housing in many of the same places. Interms of income, younger (Millennial)households are falling behind with manysons and daughters living at home with parents.
Implications:Multi-family development is stillstrong, with evolving amenities. There are opportunities in housing optionsforboth groups. In the retail sector, more “experiential” shopping/dining/entertainmentdestinations will emerge, butbuying power is lower due to income stagnation.Although Baby Boomers continue to prefer to age in place, there will beopportunities in services including medical, assisted living and memory carefacilities. Look for a rise in renting over homeownership.
4.Densification/Urbanization
Transportationoptions, walkability, extensive work/live/play options continue to draw peopleof all ages into the urban coreand to close-in “urbanized” areas. The move tohigher density areas continues, as job growth and dynamic urban centersattractnew residents and businesses.
Implications:There is a growing trend towardthe development of high density mixed-use centers such as The Domain inAustinand the West Loop in Chicago that offer luxury living spaces, retail, work andentertainment spaces, parks, andgathering spaces. The emergence of “innovationcenters” and “education centers,” which represent dynamic economies andcultural environments continues. There is pressure on suburbs to become more“urban.”
5. The PoliticalEnvironment
The politicalenvironment has become acrimonious at all levels – global, national, state,local – and affects investmentdecisions (including business and householdlocation decisions) with issues ranging from the perceived ability ofgovernments to function to taxation to social issues. Social media makes itvery easy to track the political and economicclimate of any locale – anddebate any political issue publicly.
Implications:The political and tax environmentof every locale is now visible and information is immediate, creatingheightened awareness that can influence where people choose to live, wherebusinesses locate or expand and wheretourists visit and spend. Locales thatdemonstrate political stability and investment in infrastructure, transit,schools, etc.,may attract residents, visitors and businesses; thosecommunities that project a negative environment will likely loseeconomicvitality over time.
6. HousingAffordability and Credit Constraints
New issues arebeginning to emerge in the housing market, as affordability and credit constraintsare challenging both therental and home ownership markets. Stringent creditrequirements prevent many households from entering the homeownership market,increasing demand for rental property. Limited available for-sale inventory andincome stagnation areaffecting affordability. Multifamily developmentcontinues but rents are outstripping incomes in many communities. Withdeclining affordability, questions arise about where newly formed householdswill live, where the workforce will reside andwhether affordable services willbe available for aging Baby Boomers.
Implications:There will be continued strong demandfor rental housing, but with a likely slowdown in rent growth. Microapartmentsare helping to provide affordable alternatives for Millennials. Single familyowner markets have room toimprove, and builders are beginning to target“starter homes.” Competition for land in some areas is a supply constraint.
7. TheDisappearing Middle Class
The wealth andincome gap continues, with a number of measures showing stagnant or decliningwages and wealth. Arecent Pew Research study shows that the median income formiddle-class households fell by nearly five percent between2000 and 2014.Their median wealth (assets minus debt) declined by 28 percent after thehousing market crisis and thesubsequent recession. Costs have risendramatically for many large-dollar items that affect middle class families,includingcollege tuition and out-of-pocket costs under employer healthcareplans. Confidence in a comfortable retirement is wobbly,with concerns overrising costs and declining benefits in corporate retirement plans. To coverincreasing costs and erodingasset wealth, an increasing percentage ofhouseholds has moved from one-income to two-incomes. In 1960, 72 percent oftwo-parent families with children under 18 had a single earner (typically thefather). That figure fell to 37 percent by 2010,while the number of two-earnerfamilies rose to 60 percent. At the same time, the Millennial generation isfalling behind inassets and income (and many young people are coping withstudent loan debt).
Implications:Middle-market retailers (ie.g.,Sears, Macy’s) have weakened and closed some retail outlets. The purchasingpower divide drives new opportunities to serve diverse markets (i.e., Wal-Martand Dollar General at the low end of thespectrum and luxury retailers such asNeiman Marcus and Tiffany at the other end). Stagnant or declining purchasingpoweraffects where people can live as their housing choices diminish. Thereare opportunities in high-density multi-family andaffordable housing. Luxurydevelopment continues to do well (malls, office, hotels, retail). But there isless opportunity inthe middle. There will be a shift from home ownership torenting over time. A lack of home and business ownership–andsuch investment incommunities–can easily lead to or contribute to growing social unrest.
8. Energy
Whenever a keycommodity encounters instability, it can threaten global economic security.Energy markets are currentlyunstable. This year’s crash in oil prices hasthreatened the global economy–capital markets have responded–Saudi Arabiandebthas been downgraded by Moody’s and, in some markets (such as Houston and NorthDakota) lenders are restrictingcommercial real estate debt.
Implications:There has been a drastic changein U.S. oil production–rig counts in the U.S. are at their lowest level in 50years. This affects regional employment and economies. Investors arereassessing plans. Alternative energy may becomemore attractive over time.High energy demand in China could change dynamics, but energy remains a highlyvolatilemarket.
9. The Sharing/VirtualEconomy
As the effects ofthe recession only slowly fade, we are seeing the emergence of a “shadoweconomy” or “sharing economy.”New enterprises spring from economicuncertainties, such as Airbnb, Uber and bicycle sharing companies (e.g., Divvy).These have become alternatives to traditional lodging and transportationofferings – often operating outside of traditionalregulations. They offeralternatives for employment as well. Crowdfunding has become an addition totraditional sources ofcapital for new enterprises and investment, includingreal estate.
Implications:Efforts to regulate some ofthese operators have seen mixed results, and the enterprises will likelycontinue tochange the economic landscape while challenging the viability of someof their more traditional counterparts. Newcompetitors and shifting demandwill likely push weaker players out of the market (consider the falling pricesof taximedallions). Shared office spaces are rapidly becoming more widespread;“virtual” offices offer office amenities(receptionists, mailboxes, short termdesk space) to small businesses. As is often the case in periods of dynamicchange,many will become more widely accepted elements in the general economy.
10. The Rise of“Experiential” Retail
Traditionalretail is reacting to change by adapting, with major retailers shutteringstores and downsizing their footprints,moving more to online options. Asretailers retrench and rethink their retail models, large online retailersthrive. Amazonhas replaced Wal-Mart as the biggest retailer in terms ofdollars. This creates not only challenges but also opportunities.
Implications:“Destination” retaildevelopment is emerging. Malls are being reimagined as “experiential”–providing serviceoptions, “showroom” spaces (e.g., Tesla) while many actual purchasesare being made online. Malls are redefining theconcept of “anchor” stores,with high-end food courts replacing department stores. “Mixed-useexperiences”—such as ahotel/restaurant/sports (bowling) combination inaddition to traditional stores—are growing. Watch for new retail ideas toattract consumers, including offering more local and regional shops and fewerlarge chains, in an effort to create moreunique shopping experiences. As webegin to see signs that we have reached the peak of one of the hottest retailinvestment markets in history, many owners are re-evaluating their portfoliosto decide which properties they want to keepversus which to sell. Coreproperties located within major MSAs and/or high demographic areas have alwaysbeen desirable,however, over the course of the real estate cycle, investorshave moved to secondary or tertiary markets in search ofsignificantly betteryields, choosing credit tenancy over location.
