A market as large and dynamic as United States real estate rarely moves quickly. But the most striking narrative running throughout the annual Emerging Trends report from the Urban Land Institute is the sense of static and stasis.
Economic and political uncertainty have made things feel unmoored, but the overall insight conveyed by the authors—Urban Land Institute and PricewaterhouseCoopers researchers personally interviewed 750 industry members, and surveyed 1,450 more to create this report—is that we’re in for a soft landing, not a sudden crash. There may be less sudden moves, but that doesn’t mean some of the trends emerging this year won’t become breakout investments in the near future.
Who’s afraid of a recession?
While recession fears have certainly spooked those expecting the current record-setting economic cycle to eventually correct itself, industry sources consulted for the report believe the housing sector is still in great shape. Confidence is “palpable,” due in large part to the fundamentals. Analysts don’t see the same oversupply or over-leverage issues that caused a panic and set off the Great Recession.
The market has flashed warning signs—the last year has witnessed a decline in residential permits, a softening of housing starts, and languid car sales—but instead of a precipitous drop, the real estate world may enter a sustained slow down. With unemployment already relatively low and growth expected to just inch up over the next few years—just under 2 percent annually, according to the Congressional Budget Office—we may see homeownership levels plateau. The new normal, in other words, might be a slightly small, less active version of what we see today.
Capital with no place to go
Underscoring the broad feelings of uncertainty—and in some cases, surprise that the economy is still performing well—there’s a worldwide search for safe investments that in many cases is coming up short. One investor told Emerging Trends researchers that there’s “a continued shortage of deals with desirable yields; there are more investors chasing deals than there are good deals available.”
There’s a paradox of plenty taking place in the capital market, with too much money looking for a place to invest, yet most institutional investors have taken a conservative approach. The abundance of capital is a blessing and a curse; there’s liquidity on the market, but there’s also a temptation to yield to the pressure and “invest anywhere, somewhere,” which could lead to bad bets and more uncertainty.
Top ten markets present little surprise
Emerging Trends didn’t redraw the map with its predictions for the top 10 markets for 2020, favoring large and mid-sized metros in the “smile states” (west and east coast, plus the Sun Belt). By and large, the cities on the list have benefitted from a combination of tech-driven growth and booming populations: Austin, Raleigh/Durham, Nashville, Charlotte, Boston, Dallas/Fort Worth, Orlando, Atlanta, Los Angeles, and Seattle round out the top 10. The next 10 on the list include a few smaller metros, such as Charleston, South Carolina; Portland, Oregon; and Indianapolis, as well as suburban areas such as Orange County in California and Northern Virginia, which expects to see a big bump from Amazon’s new headquarters.
The great housing unraveling
Inequality has become a feature, not a bug, of our current housing market. The report found that “price recovery has so far outstripped household incomes that affordability has reached the breaking point even in markets that previously boasted of the low cost of housing.” Rents and home prices have skyrocketed, becoming untenable in markets nationwide; there’s no county in the country where a worker clocking in 40 hours at minimum wage can afford a two-bedroom apartment, per the National Low-Income Housing Coalition.
And conditions appear to be getting worse, as the type of regulatory action and investments needed to overcome a severe shortage of affordable and workforce house aren’t materializing. “We are building 90 percent of our housing for 10 percent of our households” said one interviewee. The affordability issue has so warped local economies that even big tech giants, such as Google and Microsoft, have pledged millions of dollars to help fund affordable options. Candidates on the campaign trail have taken note, making housing a bigger issue than it’s been in decades.
The trend toward community-oriented development is here to stay
WeWork IPO aside, the future of coworking, of shared commercial space, is bright. Coliving, led by companies like Common, is poised for a huge increase in capacity across the country. And the number of urban green markets, which grew from roughly 2,000 to 8,700 in the last 25 years, shows the continuing appeal of foodie-centric public spaces, as well as food halls. This year’s Emerging Trends found that collaborative consumption—integrated platforms of products, services, and experiences—is increasingly popular with younger generations favoring sustainability and social interaction. As traditional retail continues to struggle, this type of business, or placemaking effort, can be a big draw for a larger project.
As more millennials become parents of school-age kids, and urban areas continue what seems like an inexorable rise in real estate prices, there’s a slow but steady push toward the suburbs. But, in what the report dubs “the rise of Hipsturbia,” the hot locations outside of big cities are evolving: In addition to being more diverse, they’re also becoming more walkable, with developments that favor density, retail, recreation, and transit access. Examples of this phenomenon include Hoboken, Maplewood, and Summit in New Jersey, Yonkers and New Rochelle in New York, Evanston in Illinois, and Santa Clara in California. Many, especially on the East Coast, are linked by old commuter rail stops, and have seen a renaissance with new apartments, eateries, and office space. But all of them have developers taking the live/work/play formula that revived downtowns to the ’burbs, with much success.
The “silver tsunami” of senior housing
A number of demographic trends are cresting at the same time, namely life expectancy has risen overall as the baby boomer generation begins to enter prime retirement years. The number of Americans over 80 will double, from 6 million to 12 million, in the next two decades, according to statistics from Harvard’s Joint Center for Housing Studies, and by 2035, one out of three U.S. households will be headed by someone over 65. The last boomers won’t turn 80 until 2044. This will mean a huge flood of seniors looking for a variety of housing options, including active lifestyle living and even upscale urban apartments (especially as many boomers downsize). There are huge implications for housing, both in terms of renovations for those who want to age in place, and new options for seniors looking for a new post-retirement lifestyle.
The potential, and pull, of principled investment
Millennials, and younger generations, are increasingly factoring social good into their investment decisions, which the report labels ESG (environmental, social, and governance). What does this mean for real estate? Well, projects that can lay claim to being more community-oriented, or have a bottom line beyond just profit, have the potential to become more popular investment vehicles over time, and attract more of this community-focused capital.
This includes more sustainable multifamily construction or instruments such as green bonds, which are intended to encourage sustainability, especially projects aimed at energy efficiency, clean transportation, sustainable water management, and the cultivation of environmentally friendly technologies. One Wall Street firm surveyed even says this type of investment has a performance premium of 10 to 40 percent. Doing good can do well for a developer’s bottom line.
The slow and steady march of technology
Technology in the real estate sector—both smart home devices for residential settings and proptech, which are startups bringing new ideas to the larger real estate business—have been on the verge of a breakout for years. And while the relatively slow adoption of tech in real estate continues, it is starting to make a real impact. In addition to the proliferation of iBuyers and new means to analyze and act on property data, and new tools to digitize the homeselling process, one of the biggest areas of renewed attention is the multifamily sector, where companies are developing new products to simplify management and operations, as well as new amenity-laden services for residents, such as package delivery and digital concierges. But smart home adoption, especially digital assistants and security cams, are increasingly common, and will be even more so with the rise of 5G.
Infrastructure: As Washington fumbles, states and cities pick up the ball
As the recurring jokes about “infrastructure week” suggest, the current administration’s early plans to focus on rebuilding the country’s roads, bridges, trains, and ports have not come to pass. This lack of action on the federal level to improve our degrading infrastructure has led to cities and states picking up the baton: Places like Denver and Seattle have levied taxes to help build and expand their transit systems. Considering the potential of transit-oriented development, these kind of local investments can help create important real estate development opportunities. Without sustained federal investment in this arena, there will be a tale of two cities dynamic at play; areas that invest in their own infrastructure will send a signal that they’re a good place to invest.