According to the latest survey by the Counselors of Real Estate (CRE), the most pressing issues facing the real estate industry include the need for infrastructure improvements, the mismatch of housing and jobs in cities, and the global uncertainty of political polarization. Scott Muldavin, the current chairman of CRE and a ULI full member, presented the research at a real estate journalism conference in Denver.
Muldavin, president of real estate advisory firm the Muldavin Company of San Rafael, California, characterized uncertainty and polarization as “the elephants in the room,” complicating any high-level decision making. Rising interest rates and inflation are expected to make homeownership more difficult for the middle class to attain, while also keeping relatively high earners in rental housing for longer. At the same time, political polarization prevents fixes to longer-term issues such as infrastructure, affordable housing, and education. Uncertainty about changes to trade, travel, and immigration policies hamper cross-border investment, at least in the short term, he said.
Compounding the uncertainty is the “seemingly relentless disruption in the economy and real estate sectors,” Muldavin said. But he added that opportunities for innovation lie embedded in each of these following potential challenges.
- Demographic shifts. Studies project that millennials ultimately will behave in a fashion similar to that of baby boomers but lag their timeline by about ten years. Boomers on the other hand are making the transition to an experience-oriented lifestyle, often renting in the same buildings as younger generations and abandoning suburbs for city or suburban locations. “Real estate developers, investors, owners and builders will need to understand not only the location preferences of each group, but the design and amenities of housing units, whether rental or owner occupied. One size will not fit all, and supply will need to match rapidly changing demand,” Muldavin cautioned.
- Technology boom. The recent boom in tech applications for real estate is far from over, he said. In 2016, $2.7 billion was invested in commercial real estate tech startups, and there were more than 1,600 real estate tech startups worldwide. Big data and real-time information will drive future development. What tenants want is changing with demands for less parking and better internet connectivity.
- Changing retail. Traditional retailers are adopting an Amazon-like approach with new warehouses, distribution methods, and fulfillment models, while Amazon continues to make inroads into traditional bricks and mortar, including the acquisition of Whole Foods Markets, which was announced shortly after this research was published. “Retail is not dying; it’s just changing,” Muldavin said, noting huge opportunities to repurpose malls that have closed.
- Infrastructure investment. Muldavin underscored the critical need for infrastructure investments, noting the possibility of limited federal investment and increasing reliance on the private sector, states, and municipalities. Private funds now oversee $360 billion in infrastructure money. Reliance on private funds means projects must have a strong revenue-generating capacity.
- Housing mismatch. Affordability, especially in locations with the strongest job growth, is one of the biggest issues facing housing. A critical disparity exists between housing needs and housing supply, Muldavin noted. Developers have only just begun to address the potential for construction of starter homes: high land costs and regulatory constraints inhibit developer interest.
- Middle-class incomes. In spite of a 5.2 percent gain in 2015, median household incomes still hover below inflation-adjusted levels of two decades ago. This stall in income growth is affecting real estate beyond demand for primary residences: retail properties serving middle-class customers are bearing the brunt of store closures. The rising cost of living and higher student debt levels also suggest that younger consumers will continue to postpone home purchases.
- Health and the built environment. Real estate has become a major player in the emergence of cost-effective ways to improve health outcomes, with clinics, urgent-care facilities, and ambulatory surgery centers replacing costly hospitals. Also, real estate professional groups are ramping up a focus on healthy buildings. One driver has been growing interest from business, with over 90 percent of companies adopting some form of wellness programs and incentives. More than 450 projects in 28 countries have been certified under the WELL building standard.
The survey data also indicate concerns regarding the potential disruption of immigration, which largely has benefited home prices in many areas, and the risk of climate change, extreme weather, and flooding, particularly in coastal areas near sea level. The Counselors of Real Estate also placed on its “watch list” additional issues—tax reform, monetary policy, and the role of legalization of cannabis—as representing longer-term disruptive scenarios for real estate.