PwC & ULI Emerging Trends 2019 – Real Estate Research Roundup

Managing Director
Emerging Trends in Real Estate 2019 - PwC ULI

PwC and the Urban Land Institute (ULI) annually produce one of the most comprehensive outlook reports in the real estate industry. Because of their long-running track record in producing this report, as well as their unprecedented access to C-level executives in the real estate industry, it is an absolute must-read for all real estate market participants.

We especially like the survey-based approach and the “direct quote” format, as well as their ability to draw on many years of results.

We strongly encourage you to download the full report and review in detail, however for brevity’s sake we will outline some of the findings below.

Intensifying Transformation

The overall theme of the responses seems to indicate that the market is coming off a peak, but perhaps more of a plateau than a decline. As the cycle emerges, deal-chasing is changing rapidly as real estate investors and developers use technology more than ever to evaluate and execute on deals as the prime prospects become harder to find and more competitive to win.

New technologies and deeper data insights also enable more broadly diversified real estate investment strategies to take hold as niche product types and specialized uses are being employed to construct portfolios with true differentiation.

Easing into the Future

The Emerging Trends report has been sounding the warning call for a couple years now about the lack of population growth in coming years and the need for the United States to strategically leverage immigration to backfill a declining labor force. This year is no different.

Productivity improvement is viewed as a key to offsetting at least some of the issues related to the continuing labor shortage, but over the long-term the population erosion is likely to dampen GDP growth substantially, which will inevitably lead to lower levels of real estate market activity.

Successful strategies are likely to elude those that cling to old school approaches to new world problems.

18-Hour Cities 3.0: Suburbs and Stability

Emerging Trends has also sung the praises of 18-hour cities for several years now, and that song also continues. Nine of the top ten, and 17 of the top 20 markets are not considered gateway markets.

As the 80-million strong population of the millenial generation is lured to the suburbs by larger homes, more green space, and better schools, they (not surprisingly) demand amenities such as access to mass transit and walkable neighborhoods near shopping and entertainment.

Investors are confident that these markets are finally diversified and resilient enough to provide the stability which can withstand any potential economic headwinds.

Amenities Gone Wild

In a clear sign of market frothiness, tenants are increasingly demanding (and landlords are increasingly providing) an almost unlimited package of amenities in virtually every property type, no longer just the purview of the high-end hospitality sector.

Office buildings and multifamily properties alike shower tenants with amenity overload as they compete for the almighty rent dollar, a trend which is blending uses and increasing densification as retail and co-working become a part of almost every property.

Demand doesn’t stop at amenities alone. Tenants increasingly want access to services as well. A fitness center and bellhop will no longer cut it, free yoga and cooking classes are the “new standard” in many markets.

Pivoting Toward a New Horizon

Real estate has historically been characterized as an industry which is slow to adopt new technology, but that perception may finally be turning. As the real estate industry realizes that they can not only take part by deploying technology, but also by investing in those firms, their interest is piqued indeed. As hungry investors, they see the potential to gain and become built-in cheerleaders for the very tools they have historically shunned.

Open eyes prevail as they realize the true value and the body of evidence suggests that the perfect storm of price and potential may provide an opportune time to pivot towards the future.

Get Smart: PI + AI

Artificial Intelligence (AI) has been cast as everything from optimistic to devastating, and everything in-between, however there is no conclusive proof we are headed in any specific direction. There is agreement, however that once AI starts, the capabilities grow exponentially.

At this point it certainly seems like AI’s impact will be focused on enhancing the Personalized Intelligence (PI) of individual workers, and is likely to create winners and losers. Secretarial and administrative jobs are likely to see continued declines, while business and financial occupations are expected to see strong growth. Many of the growth professions are those such as financial analysts that employ AI tools in their day-to-day jobs as a way to increase PI and improve productivity.

Disintermediation is already plowing headlong through the residential brokerage industry and is unlikely to abate any time soon. However, because of the heterogeneous data and complex decision-making processes involved in commercial and multifamily real estate investments, doubts remain whether it will be able to replace the judgement and trust that experienced industry professionals bring to the table.

The Myth of Free Delivery

It is an economic principle that when cost is zero, demand is infinite. But the “last mile problem” is bearing down on many who are unable to handle the burden.

Over two-thirds of the parcel delivery in the United States is still B2B, despite the huge growth in e-commerce and B2C shipping. One of the biggest problems is that B2B shipments generally must arrive during business hours, which adds to the already congested roadways. This increases traffic and environmental issues alike, while also adding serious wear-and-tear to an aging infrastructure.

Even as “free shipping” and “free returns” are widely marketed to consumers, there are hidden costs to retailers, municipalities and ultimately taxpayers. And sooner or later, the books will have to balance.

Solutions range from inventive permitting and taxation strategies to urban planning and capacity management.

Retail Transforming to a New Equilibrium

If anything has been proven over recent years, it is that the brick-and-mortar retail sales channel is far from dead. New entrants to the retail space are simply taking an “online first” approach or at the least an omnichannel view of retail where they can smoothly transition to physical storefronts.

As the required amount of retail real estate square footage per capita continues to decline, not because of a lack of demand but instead because the space is being retooled into more efficient uses, leasing decisions and underwriting metrics are changing drastically. Long-term leases may no longer represent the surefire way to reduce risk in an environment where non-traditional metrics such as a tenant’s social following may hold more sway than sales-per-square-foot.

As the extremely resilient retail market evolves, the Retail Armageddon looks more and more like a fairy tale.

Unlock Capacity

The demand for affordable housing is almost unlimited with half of all renters paying more than 30 percent of of their income on housing, yet new development has commenced almost exclusively at the luxury end of the spectrum.

Public-Private-Partnerships (P3s) are likely the only solution out of the situation, and as successful examples emerge, hopefully others follow suit.

Qualified Opportunity Zones are a new program that flew under the radar in the 2017 Tax Cuts and Jobs Act. This sleeper provision which provides incentives for investors through Qualified Opportunity Funds endeavors to help unlock some of the capacity in markets that desperately need capital.

We’re All in This Together

The Emerging Trends survey results largely point towards “hold” as the new buzzword in the industry, and in a world where transaction velocity is easing, executing on outstanding asset management becomes a competitive advantage in the field of capital raising. Demonstrating the ability to extract additional value through astute asset management is crucial to attracting future investment.

Environmental, Social and Governance (ESG) issues are also becoming more visible and are often being treated as ways to differentiate one fund or investment against another. The real estate industry has long pushed energy efficiency standards such as LEED certification, and that trend has continued as the WELL Building standards offer further separation.

Expected Best Bets for 2019

  • Industrial Development
  • Garden Apartments
  • Quick-Flip Value-Add Deals
  • Redeployment of Obsolescent Retail Assets

Issues to Watch in 2019

  • Insurance Costs
  • Cybersecurity Risk Management
  • Infrastructure
  • Immigration
  • Complacency

2019 Market Ranking Highlights

  • Dallas/Fort Worth earns the top spot
  • Brooklyn takes the number-two spot as markets adjacent to gateway locations gain favor
  • Florida markets make a strong showing with Orlando (#3) in the top five, Tampa/St Petersburg (#10) in the top ten, and Miami (#12) and Fort Lauderdale (#17) both in the top 20
  • Raleigh/Durham (#3) and Nashville (#5) both rank in the top five
  • Texas has three spots in the top 20: San Antonio (#20), Austin (#6), and Dallas/Fort Worth (#1)
  • Boston (#7) is the highest-ranked gateway market
  • Los Angeles (#14) dropped from last year, but is still in the top 20
  • Washington DC (#18) is back in the top 20
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