Though real estate experts keep worrying about a possible recession, the U.S. economy continues to perform well, and the prospects for real estate investment are still strong, panelists said at a ULI New York event at the TheTimesCenter in Manhattan during January.
“We probably still have room to run in this recovery,” said Mitch Roschelle, partner and business development leader for PwC. Roschelle is a coauthor of Emerging Trends in Real Estate® 2019, Americas edition, produced by ULI and PwC and based on 750 interviews with industry professionals and survey responses from more than 1,600 individuals.
The strong economy continues to attract investors from around the world to U.S. real estate. As prices rise, investors are most interested in watching markets with opportunities for growth rather than more expensive gateway cities, according to Emerging Trends. The Brooklyn submarket of New York City is near the top of the list in the report’s Markets to Watch listing. Partnerships between developers and local officials have created new opportunities for growth, even in one of the most expensive, gateway cities in the country.
“Brooklyn—in part that was a solution for how you get class A but low-cost office space,” said panelist Melissa Roman Burch, executive general manager for LendLease Americas.
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The U.S. economy remains strong, especially compared with the performance of other countries. “It certainly has the best gross domestic product fundamentals,” said Burch. “You will continue to see foreign investment want to come to the U.S.”
The overwhelming majority of U.S. survey respondents say their prospects for profitability in 2019 are fair to excellent, as they have for several years, said Burch. “The economy is as strong as it has ever been,” she said.
The average economic expansion in the United States after World War II lasted just 58 months. The longest, starting in 1991, ended after 10 years, or 120 months. The current expansion started in 2009 and has now gone on close to 116 months.
“I feel like last year we were kind of trying to talk ourselves into a recession, but there is nothing magic about that 120 months,” said Roschelle. Other economies have had expansions that lasted much longer than a decade. Australia’s current expansion began in 1991 and it is still going after 327 months, with average GDP growth of 3.2 percent per year.
“If anything could cause our economy to stall over time it could be the fact that we have a labor shortage,” said Roschelle. “We have a million more job openings than we have people to fill those jobs.” In particular, for skilled office jobs there are twice as many job openings as there are people to fill them. “That could be a headwind for office demand,” he said.
Declining birthrates could pose another long-term challenge. “People are the thing that uses space, whether it be office, industrial, retail, or housing,” said Roschelle. “If our population is shrinking, there is a longer-term demand fall-off.”
Interest Rates Begin to Rise
Rising interest rates will also put pressure on some real estate deals, but many real estate investors are also likely to benefit.
Interest rates have been at historically low levels for more than a decade, but have recently begun to rise as the Federal Reserve increases its benchmark rates. “As interest rates rise, you should obviously expect to see yields in the real estate space rise,” said Hilary Spann, managing director for the Canada Pension Plan Investment Board. Higher yields would also make U.S. real estate more attractive to investors like foreign institutions.
“For the global investor, as interest rates rise in the U.S., that should make the U.S. more attractive,” said Spann. “On a risk-adjusted basis, you want to be in the U.S.”
Brooklyn, Tampa Are Now Top Markets to Watch
This year, Brooklyn as well as Tampa/St. Petersburg and Orlando joined the list of the top ten markets to watch for real estate investment, according to Emerging Trends. Dallas/Fort Worth once again tops the list, which includes several other growing cities in Texas and Florida among the top 20, including Austin, San Antonio, Miami, and Fort Lauderdale. These places tend to have high employment growth and high employment stability, meaning jobs lost are quickly replaced.
Real estate experts are most interested in watching markets with potential for more growth rather than the traditional gateway markets, according to the survey. That is why Brooklyn at number two and “New York–other boroughs” at number 27 come in ahead of Manhattan, number 32 in the survey.
“Brooklyn is up there . . . because of the live/work/play dynamic,” said Roschelle. “People live there, they want to work there potentially, and they want to shop there.”
Brooklyn—and New York City in general—also benefits from a diverse economy encouraged by public/private partnerships between companies and the city. “There is a lot of cross-pollination across different kinds of technology,” said Rachel Loeb, chief operating officer for the New York City Economic Development Corp. That includes giant, waterfront redevelopments like Brooklyn’s Navy Yard and Industry City.
In Tampa, public/private partnerships have also created development opportunities on the waterfront after years of efforts. “Multiple mayors saw the ability to redo the waterfront,” said Roschelle. “They did not abandon a project because of politics.”
In New York City, these public/private partnerships have also created new centers for development, often including class A office space. For example, Hudson Yards, the massive new development on the far west side, began with a city proposal for a stadium. The redevelopment of Long Island City, soon to be the site of Amazon’s new campus, began with the city’s bid to host the Olympic Games.
“It’s not just about two central business districts,” said Burch. “There are now many different places where you can show up for work.”
Such long-term development projects present particular challenges. “Our largest lesson learned is time,” said Saul Scherl, president of the New York tri-state region for the Howard Hughes Corporation. He discussed the redevelopment of New York’s South Street Seaport, a successful waterfront project that look longer to complete than planned. “There were so many agencies involved.”
By creating these new business districts, New York City continues to attract jobs and workers, creating a virtuous cycle. By attracting more knowledge workers, New York will continue to be attractive to employers.
“If you want to grow as a tech company, you have to go where the people are,” said Loeb. “There are more people here with a bachelor’s degree than Boston, San Francisco, D.C., and Philadelphia combined.”
But to keep growing and attracting workers, cities need to find ways to become more affordable. “This is a huge issue in all of the gateway cities—rising inequality,” said Burch. “I don’t think it is going to self-correct. It is going to require some really sustained public/private partnerships. It’s not just housing affordability; it is also warehouse affordability, retail affordability, and office affordability.”