Donald Bouchard, CRERecently, the Counselors of Real Estate have released their list of The Top Ten Issues Affecting Real Estate for 2016-2017. As I read the document, it became clear that there are generational shifts at work in the world that continue to evolve at an ever increasing pace. Much of the material that follows is taken directly from the CRE Top Ten List and considers some of the challenges facing real estate in the foreseeable future.
The huge post World War II Baby Boomer generation has finally been overtaken by the Millennials, a group defined as those now between the ages of 18-35. The implications for multi-family development are strong with a trend towards increasing amenities and broader housing options to service both groups. Look for a rise in renting over home ownership.
The retail sector is seeing a shift in brick and mortar retail venues towards more “experiential” shopping/dining/entertainment focused activities, but buying power is lower due to income stagnation. Traditional retail is reacting to changes by adapting with major retailers shuttering stores and downsizing their footprints and moving more to online options. As retailers retrench and rethink their business models, large online retailers thrive. Amazon has replaced Wal-Mart as the biggest retailers in terms of dollars. This creates not only challenges but opportunities.
Destination retail development is emerging. Malls are being reimagined as “experiential” – providing service options, “showroom” spaces (e.g., Tesla) while many actual store purchases are being made online. Malls are redefining the concept of “anchor” stores, with hi-end food courts replacing department stores. “Mixed-use experiences” - such as a hotel/restaurant/sports (bowling) combination in addition to traditional stores – are growing. Watch for new retail ideas to attract consumers, including offering more local and regional shops and fewer large chains, in an effort to create more unique shopping experiences.
The economic strains faced by a disappearing middle class are taking their toll. A recent Pew Research study shows that the median income for middle-class households fell by nearly five percent between 2000 and 2014. Their median wealth (assets minus debt) declined by 28% after the housing market crisis and the subsequent recession. Costs have risen dramatically for many large-dollar items that affect middle class families, including college tuition and out-of-pocket costs under employer healthcare plans. Confidence in a comfortable retirement is wobbly, with concerns over rising costs and declining benefits in corporate retirement plans.
Implications: Middle-market retailers (ie.g., Sears, Macy’s) have weakened and closed some retail outlets. The purchasing power divide drives new opportunities to serve diverse markets (i.e., Wal-Mart and Dollar General at the low end of the spectrum and luxury retailers such as Neiman Marcus and Tiffany at the other end). Stagnant or declining purchasing power affects where people can live as their housing choices diminish. There are opportunities in high-density multi-family and affordable housing. Luxury development continues to do well (malls, office, hotels, retail). But there is less opportunity in the middle. There will be a shift from home ownership to renting over time. A lack of home and business ownership–and such investment in communities–can easily lead to or contribute to growing social unrest.
The trend prompting urban growth at the expense of the suburbs is likely to continue. “Transportation options, walkability, extensive work/live/play options continue to draw people of all ages into the urban core and to close-in “urbanized” areas. The move to higher density areas continues, as job growth and dynamic urban centers attract new residents and businesses.
Implications: There is a growing trend toward the development of high density mixed-use centers such as The Domain in Austin and the West Loop in Chicago that offer luxury living spaces, retail, work and entertainment spaces, parks, and gathering spaces. The emergence of “innovation centers” and “education centers,” which represent dynamic economies and cultural environments continues. There is pressure on suburbs to become more “urban.” These impacts are being experienced here in the Greater Boston market as demand from both Millennials and empty nester Baby Boomers drives demand for urban homes and apartments.
Another issue of some concern going forward is the health and strength of the Debt and Capital markets. “Debt markets for commercial real estate are slowing sharply. Regulators are telling bank lenders to curtail CRE lending (that’s 50% of the debt market), and the CMBS markets are slowing down, with no legislative fixes to retention rules that are due to go into effect in the summer of 2016. Many insurance companies that traditionally invest in real estate are approaching their real estate allocation limits. Implications: The search for permanent CRE debt capital will become more intense and competition for capital will become an issue in 2016 and 2017. The lending environment is likely to become more restrictive. This could present opportunities for some other, less regulated, lenders to enter the market.”
Other major issues include the changing global economy, the political environment, housing affordability and credit constrains, energy, and the “sharing” economy, (Airbnb, Uber, Divvy). Ultimately, it is likely that the pace of technological change will continue to accelerate, impacting societal and business norms and the appeal and marketability of real property. With the potential for market externalities and functional obsolescence to become increasingly more impactful, prudent portfolio management and staying ahead of the curve is crucial going forward to protect investments and react to emerging opportunities.
Donald Bouchard, CRE is a senior vice president at Lincoln Property Company, Boston and is the 2016 chair of the New England Chapter of the Counselors of Real Estate.