2020 Trends and Beyond.
This column reports the prognostications of real estate and economic experts going into 2020. In the Emerging Trends in Real Estate survey discussed here, the economic experts ranked "epidemics" dead last in importance of issues for 2020. They were wrong. As we go to press, the COVID-19 virus has spread around the world and been declared a pandemic. This Black Swan event has shaken economies as well as life in general. It is too soon to tell the full extent of its effects or how long they will last. We hope the discussion in this edition of Resource Center will provide an interesting perspective on where we were and how dramatically events can change markets. A future Resource Center column will discuss Black Swan events.
A new year and a new decade are underway, and you may be seeing media stories related to the future of real estate. This edition of Resource Center discusses all manner of resources that summarize the state of real estate markets and offer forecasts on the anticipated future of markets.
Even though real estate market supply, demand, and influences are primarily local, analysts and valuers are wise to be familiar with national and regional changes and trends, as well as market cultural changes that impact the realms of economics and finance.
Emerging Trends in Real Estate 2020 (1)
One of the standard resources for a real estate market outlook is Emerging Trends in Real Estate. This report is published annually by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI). The 2020 edition is available online with a free download at http://bit.ly /PWCTrends2020. The Emerging Trends outlook report is now in its forty-first year of publication. Its goal is to "provide an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States and Canada." (Page 1)
This widely respected publication reflects the views of 750 experts in their specialties, who were personally interviewed by ULI and PwC researchers, and over 1,500 survey responses. There is no black box or marketing slant involved in this report. The names of the members of the Editorial Leadership Team, authors, contributors, advisers, and contributing researchers are shown on Page ii; the names of interviewees are listed near the end of the report (Page 96). The affiliations of those interviewed and surveyed are characterized as follows:
* Private property owner or commercial real estate developer, 27.6%
* Real estate advisory or service firm, 23.6%
* Homebuilder or residential land developer, 12%
* Private equity real estate investor, 11%
* Bank lenders, 6.5%
* Investment manager/adviser, 6.5%
* Equity REIT or publicly listed real estate property company, 4%
* Private REITs, institutional lenders, mortgage REIT, debt investor, securitized lender, and others, 12.6%
The content of Emerging Trends in Real Estate 2020 is divided into four chapters: "Shifting Focus to the Decade Ahead," "Markets to Watch," "Property Type Outlook," and "Emerging Trends in Canadian Real Estate." In all sections, the narrative offers cogent facts, analysis, and conclusions.
Chapter 1, "Shifting Focus to the Decade Ahead," in essence presents cautious optimism. Even in a long, relatively good economic recovery cycle, there are reasons for concern and carefulness--the very fact that the economy has been expanding, and real estate investment healthy for years may be disquieting to some.
The report confirms that technology will continue to present disruption--rendering both risk and opportunity. The disruption by technology has and will influence demand for various property types, uses, design, and features. Change is ever present, of course, and accelerates, with change occurring faster and increasing in terms of both size and scope. One REIT executive respondent was quoted, "Don't ask me what inning we are in. We are playing cricket!" There is a satisfaction with current real estate performance, which "reinforces the optimism about real estate's ability to withstand a recession."
The experts point out, however, that there are several areas of relative softness in the economy. They suggest,
A defensive strategy might not be such a bad idea right now. For a few years now, commercial property has been "priced to perfection," meaning that there is little in the way of a safety margin for negative surprises ... The "emerging trend" for real estate demand in the decade ahead is ... for dramatically softer demand ... confidence is one thing, complacency is another.... some serious attention should be given to the prospects for an extended downshifting in the economy and its implication for commercial property demand in the decade ahead. (Page 6)
Also noted is the environment where capital continues to chase real estate, despite the need for some caution.
The conundrum is real. Investment managers are not paid to sit on cash. And yet there is serious risk in an approach that deploys the capital just because it is there. The mantra encapsulating a reasoning that one or another investment area must be chosen so that money can be put to work goes by the acronym "TINA"--"There Is No Alternative.... There is no doubt about the pressure of capital. The volume of private-equity dry powder is now estimated to exceed $2 trillion, with 5 percent or more allocated to real estate. So much money is looking to be deployed in safe fixed-income investments that $12 trillion is now parked in negative-interest-rate debt instruments in Europe and Asia." (Page 7)
This chapter draws attention to the risk of analysis relying solely on measures of central tendency in data:
One underlying lesson is this: most economic reporting and most discussion of real estate markets focus on one statistical feature: central tendency, as measured by averages and medians. That makes for overreliance on a blunt instrument--as well as encouraging herd behavior. Much more important is the distribution of the data--the shape of the data curve, its tails, and where a market falls on that distribution. And, for analytical purposes, it is helpful to take an unconventional look at the way markets that are apparently dissimilar may have surprisingly similar characteristics. (Page 11)
The "Shifting Focus" chapter offers a number of other take-aways related to areas of anticipated change.
* Building features. Climate change is causing change in features expected in rental properties to deal with increasing temperatures. (Page 9)
* Capital sources. Capital is widely available, evolving to include an assortment of sources. In the future, expect more variety in the types of debt funding suppliers.
* Demographic changes. One trend already underway and expected to continue is the state-to-state population shift. Losses generally are affecting northern states, such as New York and Illinois, while southern states, such as Florida, Georgia, Texas, and North Carolina, are seeing gains. The top-ten growth markets mentioned in this section are Austin, Raleigh/Durham, Nashville, Charlotte, Boston, Dallas/Ft. Worth, Orlando, Atlanta, Los Angeles, and Seattle. (Pages 10-11)
A second demographic change is the aging population. Exhibit 1-12, "Growth in Number of Older Americans," illustrates the expected growth in the population over age 75. The report's experts acknowledge that there are many unknowns to this change:
An increase in the population of older Americans does not necessarily signal a higher "dependency ratio" and a presumed "generational burden." ... scientific advances in medicine and in healthy lifestyles may have positive implications for seniors' income potential, yielding a boost in gross domestic product (GDP) from this population's productivity. What does it mean for real estate? "None of us really know," said our aforementioned prominent interviewee. "We need to put our minds to fresh thinking and need imagination to consider the real estate, social, and economic implications as succeeding generations have not only more years, but better years in which to live, work, and play. (Pages 15-17)
* Housing problems. Affordability is expected to impact housing. The trend is toward a reduction in the share of housing made up of detached single-unit residences. The report observes that "price recovery [following the Great Recession] has outstripped household income.... Rental apartments are also feeling the squeeze.... universally [housing affordability conditions] are 'challenging...' with "construction costs accelerating well beyond the level of inflation and the increase in nominal incomes." (Pages 12-13)
* Community design. We can expect more housing and office properties designed with an increased emphasis on community feel, common areas, and live/work/play in planned mixed-use environments. (Pages 13-15)
* Technology. The march of technology will continue to influence real estate, affecting location preferences and desirability of various property types, uses, design, and features. Technology's impact on the retail sector is well known. Dispersion of technologies such as artificial intelligence (AI) will similarly transform the nature of work and replace millions of jobs. Exhibit 1-17, "Internet of Things Applications Dependent on the Adoption of 5G," shows the variety of commercial enterprises that will be impacted by 5G services, including manufacturing, health care, media and utilities. While the specific impacts of new technologies remain unknown, what can be safely said is that all property types will be impacted by technology and escalating property technology--"proptech"--along with management and marketing of real estate, with more information digitized for analysis and fast response. (Pages 19-21)
* Infrastructure. Infrastructure deterioration is a major national problem, and state and local infrastructure expenditures are expected for rebuilding. The federal governments in 2019 promised a $2 trillion in infrastructure investment, hut the American Society of Civil Engineers has calculated that the need is for $4.5 trillion between now and 2025. The Emerging Trends report notes, "Three-quarters of all infrastructure investments occur at the state and local levels funded by a combination of resources, only some of which are dependent upon federal funding.... the trend in the meantime will likely be more influenced by action at the state and local levels." (Page 22).
Chapter 2, "Markets to Watch," in Emerging Trends presents six non-conventional groupings in discussing 80 markets:
1. The Top 20 Markets by Overall Prospects
2. Major Capital Magnets
3. Stalwarts, Surprises, and Determined Competitors
4. Markets Aligning with Expectations
5. Treasures Ripe for Discovery?
6. Potpourri: Thrifty Choices, Boutiques, and Special Situations
In discussing Top 20 Markets, the report notes that these are the markets "that received the highest scores for overall investment and development prospects in our annual survey." The top 10 and the "Next 10 Impressive Metro Areas" are individually discussed.
The other five groupings of markets, however, are clustered "according to relationships between the overall prospect scores and other rankings, such as investment flows or population size and growth rates. For each grouping, a brief explanation of common characteristics linking the markets is offered." (Page 23)
For the market rankings, the researchers augmented numbers about size, growth, structure, geography, and such with meeting with local experts in ULI district council focus groups. The results for the 80 metro markets studied are summarized in a number of exhibits:
* "Overall Real Estate Prospects" (Exhibit 2-1)
* "Homebuilding Prospects" (Exhibit 2-2)
* "Local Market Perspective: Investor Demand" (Exhibit 2-3)
* "Local Market Perspective: Development/ Redevelopment Opportunities" (Exhibit 2-4)
* "U.S. Industrial Property Buy/Hold/Sell Recommendations" (Exhibit 2-5)
* "U.S. Office Property Buy/Hold/Sell Recommendations" (Exhibit 2-6)
* "U.S. Multifamily Property Buy/Hold/Sell Recommendations" (Exhibit 2-8)
* "U.S. Retail Property Buy/Hold/Sell Recommendations" (Exhibit 2-9)
* "U.S. Hotel Property Buy/Hold/Sell Recommendations" (Exhibit 2-11) (2)
The section Markets That Are Major Capital Magnets discusses individually the markets that are magnets for investment. These include Manhattan (with 10% of the nation's office space), Chicago, California's Inland Empire, Northern New Jersey (with its disproportionately high concentrations of industrial property), Houston, Phoenix, San Diego, Oakland/East Bay, and Miami. The report notes that over 17% of total U.S. transactions over the past three years have occurred in these markets.
In the section Stalwarts, Surprises, and Determined Competitors, 12 markets are examined. This dozen accounted for about 11 % of national real estate investment in 2016-2018, and 11.7% in the first half of 2019. The markets addressed here include Philadelphia, Long Island, Fairfield County (CT), Westchester County (NY), New York's other four boroughs, Minneapolis/St. Paul, Sacramento, Kansas City, Las Vegas, Baltimore, Washington DC, and Detroit. The report then moves on to discussing Markets Aligning with Expectations, which include several Florida markets (Ft. Lauderdale, Palm Beach, Tallahassee, Daytona Beach/Deltona, and Gainesville), Richmond, Maryland suburbs of Washington DC, Birmingham, San Antonio, Honolulu, Cleveland, Albuquerque, Omaha, Tucson, and Buffalo.
The section Treasures Ripe for Discovery looks at markets that survey respondents viewed quite favorably but "are not attracting investment flows consistent with their perceived overall prospects." These markets include Jacksonville, Salt Lake City, Cincinnati, Louisville, Columbus, Pittsburgh, Greenville (SC), Oklahoma City, Boise, Des Moines, Spokane, Cape Coral/Ft. Myers/Naples, Tacoma, and Jersey City.
The report also examines various markets in a catch-all category, Potpourri: Thrifty Choices, Boutiques, and Special Situations. The markets here include some areas with potential but overlooked by most others. The 11 markets discussed are St. Louis, Memphis, New Orleans, Providence, Hartford, Virginia Beach/Norfolk, Milwaukee, Madison, Knoxville, Chattanooga, and Portland (ME).
In Chapter 3, "Property Type Outlook," Emerging Trends turns its attention to the performance of various property sectors as they relate to functionality and how real estate is used. This chapter begins with an interesting overview chart on "Prospects for Major Commercial Property Types, 2018-2020" (Exhibit 3-1), which shows a side-by-side comparison of investment prospects and development prospects for commercial property types.
The discussion then drills down into the data and survey results related to the industrial sector, multifamily housing (including special focus on senior housing and student housing), single-family housing, multi-use property, office property (including special focus on medical office), hotels, and retail and its subsectors.
Finally, Chapter 4, "Emerging Trends in Canadian Real Estate," wraps up Emerging Trends in Real Estate 2020 with a report on business prospects and housing trends in Canada. Here, special note is made of "the rise of real estate as a service (REaaS) [which] is transforming all areas of real estate. Although coworking is the most common example of REaaS, the concept cuts across property types. As the gig economy becomes more prevalent in Canada, all space--whether residential, office, or retail--will increasingly be viewed as a service that is rentable." (Page 77) The report notes there has been a significant uptick in discussion among survey respondents related to "proptech" developments. The interviewees believe that artificial intelligence, drones, autonomous vehicles, robotics, 3-D modeling, and virtual reality will have an impact on the real estate industry. (3)
Recommendation. Emerging Trends in Real Estate 2020 is a worthy read for real estate valuers, brokers, lenders, and others in the field. Emerging Trends is a decidedly citable resource, used and referenced for over forty years. In addition to the data and analysis, it has names of a host of exceptional experts in their respective specialties--potentially valuable resources for valuers and researchers. Valuers who are looking for even more predictions for 2020 and beyond will want to take a look at another PwC publication, Real Estate 2020?--Building the Future (https://pwc .to/30969yG), which looks at the changing real estate landscape and its implications for the real estate investment community. Both Emerging Trends in Real Estate 2020 and Real Estate 2020--Building the Future are quite readable and quotable, with narrative backed by facts and survey/ interview results with sources indicated. Opinions are evident where they appear.
Trend Discussions in Association Publications
A number of real estate-related organizations have weighed in with forecasts for the coming year, coming decade, and beyond. The following are items of particular interest.
From the National Association of Realtors
"Realtor.com Market Outlook." Presentation downloadable slides at https://bit.ly/2R9Uk76.
"Construction and Housing Starts Outlook for 2019-2028." Economist Outlook Blog at https:// bit.ly/36LXFQi.
"U.S. Real Estate Market Outlook." Presentation downloadable slides at https://bit.ly/2NfgZ08.
"Housing Experts Discuss 2020 Outlook, Housing Innovation at Realtors' Expo." News release at https://bit.ly/2Nj2KIa.
"NAR Real Estate Forecast Summit." Presentation downloadable slides, video summary, and news release at https://bit.ly/2FHM40.
"Housing 2020 Forecast." Realtor.com at https:// bit.ly/3ayYSwF. This forecast contains expectations for existing-home sale price change, home sales volume, housing starts, ownership rates, and mortgage rates; supply and demand factors behind home sales; affordability; myth vs. reality for understanding millennials in the real estate market; what buyers and sellers can expect; metro area sales and price growth breakdown; and the outlook and analysis for the "top housing markets of 2020": Boise City; McAllen-Edinburg-Mission (TX); Tucson; Chattanooga (TN-GA); Columbia (SC); Rochester (NY); Colorado Springs; Winston-Salem; Charleston; and Memphis (TN-MS-AR).
From the Counselors of Real Estate
2019-2020 Top Ten Issues Affecting Real Estate. Report at https:// bit.ly/37YPS23. Topics discussed include infrastructure problems and costs; housing, particularly affordability for millennials and Gen Z; (4) weather and changing climate risks; rapid advances in technology and resulting problems in cybersecurity, back office data handling, and specialized skills needed; position in economic cycles; political division; capital market risk; population migration and change; volatility and confidence (financial market jitters, performance expectations, and faltering demand for residential and commercial property assets); and public and private indebtedness (concern about US consumer debt, delinquency rates, and budget deficits).
"Cybersecurity of Building Technology: Smart Cities and Smart Buildings Require Smart Protection." Real Estate Issues at https://bit.ly/35Pztvq.
From the CCIM Institute
The CCIM Institute's magazine, Commercial Investment Real Estate (C1RE), offers a number of articles on real estate trends, which are listed below. To browse issues for additional articles, go to http://bit.ly/browseCIRE.
"The Retail Revolution Will Be Online." CIRE article at https://bit.ly/2uhskGZ, with on-demand linked webinar "Retail e-Volution: Predictions for 2025." This article looks to the future of retail and influences like autonomous vehicles for supply lines and consumer deliveries; key design changes likely in retail; and elimination of some legacy metrics for how activity is measured.
"Market Trends in Commercial Real Estate." CIRE article at https://bit.ly/30Gjwqp. This article includes information on capitalization rates for quick service restaurant properties; recent developments in land use (pop-up stores, pop-up parks) and mixed-use property recent developments; and apartment trends, such as increasing need for very short-term storage with security for deliveries from e-retailers, and box/carton disposal and recycling provisions.
"Understanding Quantitative Analysis." CIRE article at https://bit.ly/2unRlBu. This article deals with analyzing leases, particularly proposed leases for office space. This is an excellent read for valuers and analysts. It deals with economic comparisons, sample lease comparisons, and net present value of occupancy for each lease.
"Valuing Retail Properties." CIRE article at https://bit.ly/2NOCWEb. This article provides a number of significant insights into the thinking process for valuation and evaluation of retail properties. A graph points out the difference between investor sales and owner-occupant sales (price per square foot) from 2016-2018, which illustrates the margin or difference.
"Adapt or Die." CIRE article at https://bit.ly /2ui7qHV. In this article, tech experts weigh in on innovation and its impact on all sectors of commercial real estate.
"Fitting Plans for the Future." CIRE article at https://bit.ly/2TRGTvR This article examines new FASB standards for revenues, leases, and loan impairments that affect revenue recognition, lease accounting, and related matters. This discussion is important for valuers because it provides some insight into what market participants, particularly buyers, consider in their investment decision making. The article is supplemented by an embedded webinar video.
4Q19/1Q20 Commercial Real Estate Insights Report. Online version at https://bit.ly/2TMdfrM, downloadable PDF at https://bit.ly/2RfcNjR. This report addresses the outlook for commercial real estate; provides the Green Street Advisors' Commercial Property Price Index (overall and for commercial real estate sectors); (5) examines capital sources; and discusses what could go wrong in 2020. This report is well done and well documented.
Outlook for the Economy, Real Estate and REITs in 2020: What to Look for in Uncharted Waters. Nareit's latest Economic Outlook report at https://bit.ly/2tbNdTE. This report includes a link to Nareit's "T-Tracker" quarterly operating performance series, which has worthy information about past and current trends in REIT returns.
Trend Discussions within the Real Estate Industry
Across the real estate industry, players also have offered their prognostications.
"Why Smart Building Technology Buzz Is Living Up to the Hype." IoT (6) World Today article at https://bit.ly/2tVVStn.
"Smart Buildings Take Hold: 8 Ways Smart Tech Is Transforming Commercial Buildings." Building Design and Construction article at https://bit .ly/30gfapO.
Stability Amid Uncertainty: 2020 U.S. Real Estate Market Outlook. CBRE report at https://bit.ly /2FIi397. Report addresses overall US outlook as well as outlook by sector; report is supplemented with a video.
Deloitte Insights: 2020 Commercial Real Estate Outlook. Deloitte Center for Financial Services report; downloadable PDF at https://bit.ly /30de6Tt. Report includes sections on the real estate industry of tomorrow; sector performance and expectations for 2020; digitization and personalization of tenant experience; unlocking the value of data; artificial intelligence as the analytics backbone; cybersecurity and privacy; and real estate as a service. This report relies on research including surveys with analysis by the authors.
"#CW2020Trends: What to Watch in Commercial Real Estate." Cushman & Wakefield infographic at http://bit.ly/38qe64Z. Lists top-ten trends for 2020.
Real Estate and Housing Reports. Wells-Fargo report series at https://bit.ly/2tM9rvJ. The reports offer commentary and guides on developments and economic trends in commercial real estate and housing, with specific analysis of apartments, office space, student housing, and housing demographics as well as quarterly "chartbooks." Also includes US Economic Forecast table for 2020-2021 at http://bit.ly/2PMoBJd.
"8 Real Estate Market Predictions for 2020." Millionacres [Motley Fool] article at https://bit .ly/2TljNNT. Commentary addresses the outlook for retail, rent control, mortgage rates; homebuilding, venture capital funding, affordable housing, opportunity zones; and clashes over multifamily housing developments.
Trend Discussions in General Media
The following is a sampling of recent articles in the general media on business and technology developments that have implications for the real estate industry and property uses, features, and values.
From The Wall Street Journal (WSJ)
"Crowdfunding Firms Blow Up the Model to Survive in Real Estate." WSJ article at https://on.wsj.com/2NdJBHR.
"The Office of Tomorrow." WS] article at https://on.wsj .com/30c2mH.
"One Architect's Radical Vision to Replace the Open Office." WSJ article at https://on .wsj.com/2shygPI.
"Tech That Will Change Your Life in 2020." WSJ article at https://on.wsj.com/2uDi63X.
"Manufacturers Showcase AI Developments at CES." WSJ article at https://on.wsj.com/2Tcaa3P.
From The Washington Post (WaPo)
"Experts Predict What the 2020 Housing Market Will Bring." WaPo article at https://wapo.st /2R3IPhA. This article looks at the outlook for 2020 using information from Redfin, Zillow, Realtor.com, Mortgage Bankers Association, National Association of Realtors, National Association of Homebuilders, and Bankrate.com.
"The Conundrum Affordable Housing Poses for the Nation." WaPo article at https://wapo.st /2sZm7iR.
From The Alew York Times (NYTimes)
"What You Need to Know about 5G in 2020." NYTimes article at https://nyti.ms/3awXbzi. This article looks at the emerging 5G system and how it will impact not only phones, but also the internet of things and developments in artificial intelligence.
"A Glimpse of Our Connected Tech Future, Courtesy of CES 2020." NYTimes article at https://nyti.ms/37QVZ8m.
"2020 Real Estate Outlook: Expert Predictions for Mortgage Rates, Home Prices, Tech, and More." Forbes article at https://bit.ly/35LmLh3. This article offers general forecasting and is based on some well-founded research from cited resources.
"Lower Interest Rates and the Long-Term Outlook for Commercial Real Estate." Forbes article at https://bit.ly/36KjtM9.
"The Future Is Now: Five Smart Building Features Transforming Today's Workplace." Forbes article at https://bit.ly/2sm4FVi.
The outlook publications discussed here offer significant information on trends expected to impact real estate development, capital investment, and financial prospects. Analysts and valuers should take advantage of the many resources available that help them key into issues on the horizon.
Dan L. Swango, PhD, MAI, SRA, is president of Swango Real Estate Counseling and Valuation International in Tucson, Arizona. He is experienced in valuation and consulting involving equity investment, debt security, risk reduction, profit optimization, estate planning and settlement, buy/sell opportunities, and eminent domain. Swango is an instructor and communicator with domestic and international experience. He is namesake of The Appraisal Journal's Swango Award, past Editorial Board chair and editor-in-chief of The Appraisal Journal, and a current member of the Journal's Review Panel. Contact: email@example.com
If you know of additional resources of interest to real estate analysts and valuers--or would like to suggest topics for this column--please contact the author.
For easy, direct access to the URL addresses noted throughout this article, read this column online. Go to http://bit.ly/TAJjrticles and click on "Latest Issue." (Login required.) If using the print copy, the longer URLs have been shortened for easier entry.
(1.) In the Spring 2018 issue of The Appraisal Journal we looked at the 39th issue of Emerging Trends in Real Estate 2018. Take a look back to see what the publication had to say about the outlook then.
(2.) The report includes an interesting map ranking states according to individual income tax levels. States with the lowest individual income tax rates include Alaska, Florida, South Dakota, and Wyoming. States with the highest individual income tax include California, Hawaii, New Jersey, and New York. See Exhibit 2-7, Page 34.
(3.) Those interested in additional information on market trends in Canada should consult Morguard's 2020 Canadian Economic Outlook and Market Fundamentals, at https://bit.ly/37Xr3Dq, and "Tech and Service Sector Will Drive Canadian Commercial Real Estate Market in 2020: Survey," from The Logic, at https://bit.ly/2t76F3W.
(4.) "Millennials"--variously defined, but usually considered people born between 1980 and 1996/2000, now in the 20/24 to 40 age range; "Gen Z" (also called iGen or post-millennials)--variously defined, but usually considered people born between 1997/2000 and 2020, now in childhood to age 23.
(5.) As of December 2019. Green Street Advisors (https://www.greenstreetadvisors.com/) is a firm involved in REIT pricing, valuation, and outlook.
(6.) "IoT" is an acronym for the "internet of things."
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|Title Annotation:||Resource Center|
|Author:||Swango, Dan L.|
|Date:||Jan 1, 2020|
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