For months, the real estate market—and markets in general—have suffered a lack of security. From the Brexit aftermath to the U.S. election, political wildcards as well as structural market shifts have made prognostication and predictions difficult.
But there are still fundamental changes at play and, amid the ups-and-downs, the United States has emerged as a safe haven and investment opportunity. According to the Urban Land Institute’s annual Emerging Trends in Real Estate Report, which was just released this morning at their annual meeting in Dallas, real estate in the United States shows a more favorable outlook than much of the rest of the world. Of course, this attention carries plenty of risks and challenges.
Here’s a breakdown of the big topics that analysts at the Urban Land Institute and PriceWaterhouseCoopers, as well as hundreds of industry experts, believe will shape the real estate landscape for the years to come.
After cataclysmic economic disruption triggered by the foreclosure crisis, it seems the real estate market has entered a prolonged period of calm. According to the report, this current business cycle—which at 85 months has been much longer than average—has entered a “mature” phase. It’s been smooth waters for a while, and seems poised to stay level.
Real GDP growth has hit an unremarkable but steady 2 percent per year and the Federal Reserve doesn’t want to “take away the punchbowl” and raise interest rates. But, there are signs of a development slowdown, due to difficulties securing construction financing, and the amount of capital looking to pick up core properties means pricing has dramatically risen. Overall, investors are looking to avoid risk, even more than normal. While this has led to calmer seas, one investor quoted in the report said they’re at the “white knuckle phase” of the cycle.
Optionality is in
With the market flocking to safe bets, it makes sense that developers and investors are seeking flexible, multi-use projects. Buildings that can be adjusted to satisfy multiple tenants and changing neighborhoods lets owners maximize rent and seek the highest and best use.
The report cited a Fortune 500 company that entered into a flexible lease akin to coworking to house many of its staff. The owner now gets solid cash flow, and can backfill space when the opportunity arises. It’s an example of the coworking trend writ large, and the potential of those type of arrangements to turn aging buildings into productive office space is incredibly tempting.
Keeping open to the shifting winds of the market, as well as the societal changes wrought by the sharing economy seems like sound investment, especially in the residential sector. As one investor said: “Jobs are no longer careers, and millennials are not yet looking for the commitment of owning a home. They are footloose in the job market, and footloose as to roots in the community.”
Transformation through location choice
In pursuit of a “triple bottom line” of financial, social, and environmental success, some developers have seen the benefits of doing good for the community (as long as, of course, there’s a chance it does well for them as well).
A current wave of downtown redevelopment, which feeds the current urban revival across the country, not only helps catalyze urban cores, but also create live/work/play locations that show impressive growth possibilities. Planting a seed and positioning a project as something that can help bring back a city has both a positive PR spin as well as great potential for growth, since walkable urban centers have been a sure bet in recent years.
Examples exist nationwide, from Cleveland and Oakland to San Diego and Raleigh. The report points to downtown Las Vegas, where investment in City Hall, the Downtown Container Park, Airstream Village, as well as startups, has turned a moribund part of town into a vital part of the city. The report suggests that investing in vacant urban land, creating land trusts, and working with local government can spur similarly beneficial developments in other cities.
Recognizing the role of the small entrepreneurial developer
The amount of risk-averse capital, noted earlier in this article, suggests tough times for smaller to mid-size developers. And while numerous challenges exist, ULI researchers and industry sources believe now is an ideal time for experimentation and growth for these firms. Without the profit expectations of big cities or starchitect-led developments, these firms can zero-in on growth opportunities in urban infill and smaller markets, and take advantage of “contextual zoning” outside of core CBDs to try out new ideas.