From more, more, more, i.e., bigger houses with more stuff, and more deals at higher prices with more credit with funky financial structures, we are hitting the bottom of the cycle and entering the “era of less,” said Mitchell M. Roschelle, partner with PricewaterhouseCoopers, in his opening remarks at the Emerging Trends in Real Estate 2011 session at ULI’s Fall Meeting in Washington, D.C. But, he said, “it’s getting better.”

In the “era of less”, the real estate industry will be smaller, and returns in all markets and classes will be lower as we move toward more rational return expectations, said ULI senior resident fellow for Finance Stephen R. Blank. There is ample availability of equity, he noted, but buyers will remain selective, staying away from risky assets. There is still limited availability of debt, and lenders want recourse and large down payments. Delinquencies and defaults will increase next year. Total return expectations in 2011 will be 7.5 percent with REITs a bit higher; it will be very hard to get 15 to 20 percent. Without more risk and more leverage, we will have to be satisfied with single-digit returns.

It’s all about jobs. The U.S. is a high-cost labor market and both corporations and governments are making do with fewer workers and less space. Unless demand for space picks up, demand for real estate in the future may rely solely on population growth. Washington, D.C., New York, San Francisco, Boston, and Seattle made the top five list of markets to watch—all coastal global gateways with 24-hour cities, mass transit, international airports, and cultural amenities attracting new brainpower, young people, and empty nesters.

Apartments are the only thing that are happening: prime renters are entering the market, including housing-bust refugees; Fannie and Freddie are financing; vacancy rates are coming down; and rents are starting to rise. In some major markets, hotels and industrial are starting to come around. As for retail, Darwin rules, consumption rates are not expected to come back any time soon and not at past levels—there are zero regional malls being built and stores are getting smaller. Suburban office is way down the list, while foreclosures will be a drag for the next 18 months.

Session panelist Hessam Nadji, managing director, research services for Marcus & Millichap, noted that it’s not clear what the drivers will be, but even with moderate growth rate, the numbers don’t look that bad. The economy is changing all the time, and we need to think of markets in a whole different way, he said, maybe look at B assets in secondary markets. Pamela J. Herbst, managing director, AEW Capital Management, LP, projected job growth in professional business services, health care, life sciences, and new product innovation. Moderator Stephen J. Furnary, chairman and CEO, ING Clarion, sees us entering a good 7- to 10-year cycle of higher performance and return levels. Interest rates are expected to remain low for some time so the smart move is to use long-term financing.

In short, expect tempered returns, lock in leverage, focus on global gateways and 24-hour markets, favor infill over fringe, buy land, buy or hold REITs and multifamily, and build green, even if tenants aren’t willing to pay for it now.

Read the Emerging Trends in Real Estate® 2011 report, released by PwC US and ULI.