The Urban Land Institute sees a favorable outlook for real estate in the U.S. All is calm, all is bright—with some necessary caveats. No one can predict how a new administration in Washington will affect the real estate business nationally. At times of uncertainty, however, investors gravitate toward hard assets like real estate. What can we expect in the coming year?
On December 14, 2016, ULI Los Angeles, a District Council of the Urban Land Institute (ULI), convened its fourth annual Emerging Trends conference, held at Gensler in downtown Los Angeles. A sold-out audience of real estate industry and urban planning professionals gathered to hear a group of capital markets experts discuss the ULI’s annual “Emerging Trends in Real Estate” report, released in October. The keynote speaker was Mitch Roschelle, the US National Practice Leader for PwC’s Real Estate Advisory Practice. Distinguished panelists included moderator G. Ryan Smith, Senior VP, Jones Lang LaSalle; Mark Fluent, Head of West Coast real estate, Deutsche Bank; Tyson Skillings, Managing Partner, Rockwood Capital; Alice Gao, Head of Commercial Banking at Industrial and Commercial Bank of China; and Pete Cassiano, Managing Director, Invesco.
In Roschelle’s keynote, he remarked on today’s “kinder, gentler” real estate market, following years of upheaval from the recession to the ups and downs of the recovery. The PwC/ULI report describes a mature, leveling-off period, with little in the U.S. macroeconomic data to suggest overheating, which would be an early symptom of trouble ahead. “Demand is stable but unspectacular, and absorption is constant,” he said. “Stable checks and balances are in place.” However, he noted that the results of the November election have thrown a wild card on the table, a “shot of adrenaline” into today’s measured recovery, as questions and uncertainty dominate the discussion of upcoming reforms. Regulatory relaxation could help the industry, and financial institutions may loosen the reins on real estate lending.
According to the report, “optionality” is increasing as investors seek flexible, multi-use projects that can be adapted to satisfy different tenants, free of some traditional limitations—not just one use, not just one user, not just one user profile. “The potential extent of such optionality is as wide as the industry itself,” said the report. “Optionality gives property owners the ability to maximize highest and best use, based on immediate tenant demand.” The trend reflects Millennials’ preferences for co-working and not committing to home ownership. For example, one Virginia developer has launched a prototype of 1,000-square-foot units that can be housing, office space, or both.
The panelists presented their views of the investment market in 2017. Rockwood Capital’s Tyson Skillings noted that the company has $2 billion available to invest, with a focus on identifying evolving urban and suburban office markets. “The suburban office market offers some often-overlooked opportunities, as these assets are currently out of favor,” he noted. “All suburbs are not created equal, however. Rockwood ranks suburban core markets according to the CBDs where we are actively investing,” he added.
In another positive sign for the market, Industrial and Commercial Bank of China’s Alice Gao noted the increase in direct investment in the U.S. real estate market by Chinese citizens who are looking abroad for stable investments. “While the Chinese government has implemented new controls to restrict capital flight, Chinese demand for U.S. property remains strong.” she said. “There may be limits on the amounts of money that can leave China via official channels, but people find other ways to make investments.” By the end of the third quarter 2016, the U.S. has already seen $13 billion in real estate investment commitments from China.
The conference included discussion of some of the other major trends discerned in the ULI Emerging Trends report:
- ULI believes now is a good time for small, entrepreneurial developers, squeezed out of major urban developments, to grow and experiment in urban infill and smaller markets.
- Pressures are building in the real estate labor market, with shrinking workface participation. Construction employment is volatile, currently down by 1.1 million nationally.
- Cities are turning their attention to investing in housing affordability, not only for low-income renters and buyers, but also for middle-income households, and are changing zoning policies, instituting rent control measures and affordability targets for developments.
- “Smart city” technology is affecting the real estate industry, from energy efficiency and building control support to increased connectivity and networked transportation systems. New technologies demand investment in research, education, and implementation that can make cities succeed by being more attractive to investors.
- In a related development, brokers have long since been enthusiastic about virtual reality as a sales strategy, and now see great possibilities for “augmented reality” that allows viewing of a real-world environment that is enriched by computer-generated sound, video, graphics, and more. According to New Scientist, augmented reality, or AR, is “the next futuristic fantasy the tech industry wants to conquer, and in 2017 it may finally happen.”
ULI and its partners at PwC will be monitoring key indicators and industry perceptions in the months ahead, with a keen eye towards discerning the long-term impacts of November’s “wild card”.
This article was written by Nadene Gallagher of Lauter + Gallagher.