SichelmanETUS_2_200The climb out of the real estate depression will be a long, slow one for all but one market sector, according to the annual Emerging Trends outlook.

The multifamily sector gains high marks in the 33rd edition of the report, which is one of the most highly regarded industry outlooks. “Everybody loves apartments,” said author Jonathan Miller. “The rest of the landscape is underwater.”

The report finds investors concentrating on just a handful of “wealth islands,” notably diversified, 24-hour gateways located along global trade routes. “Otherwise,” it says, “capital generally avoids the surrounding sea of mostly commodity real estate.”

But even in such places as New York City, Washington, D.C., San Francisco, and other “safe-bet” markets “where the nation does most of its business and the affluent settle,” the report warns of a “slow-going grind” because of stubbornly high unemployment that results in delays filling office space and a lack of consumer spending that is a drag on retail and industrial space.

The survey is based on the opinions of 950 investors, developers, lenders, consultants, and property company representatives. About 250 were interviewed face to face during the late summer to early fall, while the rest completed online surveys.

Miller, an independent consultant who has written the Emerging Trends report for more than 20 years, told reporters at ULI’s 2011 Fall Meeting in Los Angeles that “next year is not going to be as strong as our industry would like.” While there is plenty of capital flying around, he said, the lack of fundamentals is keeping it from landing.”

“It’s a real estate market with too many dollars for too few opportunities,” one respondent told the surveyors.

Interviewees mentioned a half dozen concerns that still weigh heavily on real estate, especially on the demand side. Perhaps first and foremost among these “anchors” is the continued loss of American jobs to workers in other countries. And a close second is improved productivity, which may help companies fatten their bottom lines but at the same time leads to reductions in hiring and therefore a decease in demand for space.

“Real estate needs jobs to recover,” commented Stephen Blank, ULI’s senior resident fellow for real estate finance.

Respondents also voiced their concerns about growth in both personal and government debt loads, demographic realities that could put a strain on primary wage earners, the construction slowdown, the global financial morass, and the recalibration of the financial sector.

Emerging Trends’ real estate barometer
, which Blank called the report’s “most telling graphic,” has closed the buy-sell gap substantially since the 2010 survey. But it still has not reached equilibrium.


Nevertheless, the 82-page study offers some best investor bets for next year. One, of course, is multifamily. “Everybody goes gaga” for apartments, said Blank.

The report says developers who start early “almost cannot miss.” And while an oversupply of apartments will eventually become an issue, a comfortable “two- to three-year” window remains wide open, especially with what one respondent called “stone cheap” financing available from not just Fannie Mae and Freddie Mac, but also insurance companies.

Another best bet is the so-called Blue Chip gateways. While each of these 24-hour markets has its own set of issues, the report says, they will dependably outperform because they lie along important global commercial routes and attract money from throughout the world.

Job centers where true employment growth actually occurs—particularly those that are heavily based on energy-, high tech–, and health care–related business as well as universities and government—also are seen as strong places in which to invest. Other good plays include nabbing single-family lots for pennies on the dollar, finding jewels in distressed debt, adding value to neglected Class B properties in good infill markets, and locking in long-term debt at today’s rock-bottom rates.

Despite the rather gloomy outlook for 2012, the report found that only one of the 51 markets surveyed failed to improve its investment score compared to last year’s report. And that was Washington, D.C., which still is the survey’s number-one choice for not just investment but also development and homebuilding.

Over Emerging Trends’ decades-long life span, no other market has performed better during a recession than the nation’s capital, which has a diversified job base that reaches well beyond government, associations, attorneys, and accountants into the technology, communication, and biomedical fields.

Coming as somewhat of a surprise, Austin slipped into the second spot on the list of top markets. Although the Texas capital is hardly considered a pathway city, it features most of the other ingredients needed for a local economy to prosper during the current economic malaise. Besides the buffer provided by the presence of state government offices, the city benefits from a huge academic environment that supports the University of Texas campus and serves as an incubator for burgeoning tech companies and other high-paying businesses.

Rounding out the top ten markets were the following: San Francisco, New York City, Boston, Seattle, San Jose, Houston, Los Angeles, and San Diego. All fit the definition as a 24-hour gateway market. And all rank high on the survey’s first-ever walkability score, which ranks markets on a scale of zero for total automobile dependence to 100 as a “walker’s paradise.”