Energy, jobs, and the far-reaching influence of the Millennial
generation are the issues that will have the most significant impact
on real estate both near- and long-term, according to The Counselors
of Real Estate® organization.
The CRE Top Ten Issues Affecting Real Estate, developed annually
by The Counselors of Real Estate External Affairs Committee,
considers independent research; qualitative interactive feedback from
members via polling at the association’s spring conference; and a
member survey.
David J. Lynn, Ph.D., CRE, CEO and Founder, Lynn Capital
Management and K.C. Conway, CRE, Chief Economist USA, Colliers
International, lead The Counselors’ External Affairs Committee and
led development of the 2014 Top Ten Issues Affecting Real Estate
list.
1. Energy: The U.S. is becoming
increasingly energy independent. Changes in U.S. energy
production are impacting jobs, income growth and the quality of life
– key determinants of real estate value and successful investment.
The mix of energy types produced–crude oil, natural gas and
alternatives such as wind and solar energy–provide investment
opportunity and risks. The impact of energy production changes varies
by state and community depending on access to resources, regulatory
trends and other factors; however, many communities involved in
increased energy production are experiencing a jobs boom with related
housing and services growth for workers. Uncertainty in the
energy sector created by dueling reports from environmentalists and
the oil and chemical companies provide investors with opportunities.
The potential for relatively low natural gas prices (now one-fifth
the cost of Europe and Asia) in combination with other factors has
improved the outlook for manufacturing and could significantly
advance the expansion of rail, shipbuilding and related industries
should gas exports increase.
2. Jobs: The job market is expected to
remain strong in 2014. If the U.S. economy grows by the
forecasted 2.8%, the number of new jobs likely to be added will
continue to number 200,000 to 250,000 per month. Strong job
creation is expected to have a positive impact on the residential and
multifamily sectors. The types of jobs being offered should move up
the quality scale, raising average wages and boosting purchasing
power for consumers as well as the ability of landlords to extract
rents. Demand for office space may also increase, but employers
continue to pare per-employee space requirements, carefully
considering space needs because of changing technology and noting the
younger workforce’s preference for living in cities and working in
open format workspaces. Job reductions, however, in
retail and branch banking, largely due to changes in consumer
behavior and online technology, will take a toll on housing, may
benefit the apartment sector and could negatively impact commercial
real estate. Service sector jobs may absorb some of those displaced.
Communities and neighborhoods that once valued big-box stores may be
well served by courting schools, physical therapy services and even
independent and assisted living facilities for senior citizens drawn
to a retail/lifestyle/entertainment environment.
3. The Millennials: The Millennial generation, born
after 1980, represents 27% of the U.S. adult population–and their
influence is far-reaching. This group is the first to fully
embrace new technology, including the Internet, eCommerce, mobile
communications and social media. Their practices are poised to
change the way society interacts, receives information, shops and
lives. Millennials show a strong preference for urban living
and working, value mass transit, and “work, live, play”
communities where residents of all ages, ethnicities, and income
brackets live side by side. They carry high levels of student
loan debt, drive fewer cars, marry later, and often choose smaller
living spaces than the typical homes in the suburbs that appealed to
their parents a generation ago. Their preferences are already
having an effect on both city and suburban residential, multifamily,
office and retail sectors.
4. Healthcare: A wide range of newly constructed
healthcare facilities will be needed to treat the large numbers of
newly insured Americans under the Affordable Care Act.
Providers will increase market share by constructing specialized
consultative care or treatment facilities, many in non-urban
locations, providing wide-ranging services at a considerably lower
cost. Some big-box stores are being converted to house clusters
of medical offices in “medical malls.” Considerable
consolidation of hospital and healthcare organizations is underway,
with an enormous impact on real estate – mergers and acquisitions
create both excess properties and an increased demand for updated
facilities. These new entities are building satellite
healthcare centers, urgent care and diagnostic facilities.
Pharmacy chains are installing wellness clinics in stores and some
large employers are building health clinics within their companies.
All of these factors will spur development of different forms of
housing and expanded retail centers, serving not only an aging
population but those seeking access to the medical assistance and
products to which they are now entitled.
5. Globalization: In the next five to ten years,
expect a remaking of the global supply chain emanating from eCommerce
and expansion of the Panama Canal; advancing technolog;, availability
and cost of energy; and political strife. As traditional
pathways for goods and materials change – decoupled from political
boundaries and increasingly automated – the resulting
“efficiency” will potentially cause widespread labor strife from
Europe to Asia, and even to the U.S. west coast. Energy
will continue to influence globalization as energy dominance by the
Middle East decreases. More U.S. energy production could
disrupt manufacturing activity in Europe and Asia, adding to labor
strife and a possible return to protectionism. Historically,
political strife has been the primary impediment to globalization.
Unresolved wars in Afghanistan and the Middle East, the situation in
Ukraine, and continued volatility in resource-rich nations, such as
Africa, could put globalization into hibernation.
An additional factor is increasing manufacturing technology, which
has the potential to revolutionize production, warehousing and
purchasing over the next decade. The reality of 3-D printing
technology is perhaps the most significant development, with its
ability to produce on-site goods and materials to exact
specifications without manufacturing plants or inventory warehouses.
6. Water: Global demand for fresh water is
projected to exceed supply by 40% by 2030. While water scarcity
is a reality in much of the developing world – where 780
million people have no access to clean water; 2.5 billion have no
access to modern sanitation; and over three million die each year
from water, sanitation and hygiene-related causes – the U.S. will
likely experience serious water shortages as well. Aging water
infrastructure, droughts (particularly in the southwest) and reduced
water deliveries to agriculture have the potential to cause
water-related economic problems. A number of states face severe
water challenges; Las Vegas’ Lake Meade, which supplies 100% of the
city’s water needs, is projected to have a 50% chance of drying out
by 2025. A 2013 U.S. government report showed that groundwater
depletion in the U.S. for the years 2000 to 2008 was nearly three
times greater than the average rate of depletion for the preceding
108 years – from 1900 to 2008. Some future projections
project 1.8 billion people living in regions with confirmed water
scarcity by the year 2025. The implications for real estate are
enormous – affecting land value, community desirability, future
viability and investment. Consider also that China is home to
20% of the world’s population, but only seven percent of its fresh
water. Water may become a political issue as well as a health
issue in a relatively short timeframe.
7. Capital Markets: This issue is included in
the Top Ten list for the second year in a row. The availability
of capital to commercial real estate from 2014 to 2017 will be vital
to the health of the industry. The enticement of riding a
high-yield wave is luring capital back into real estate, with
investment in a wide variety of choices, from agricultural land to
commercial mortgage backed securities. A new round of
commercial refinancing will begin this year, with an estimated $360
billion in permanent securitized loans needing to be refinanced by
year end 2017. While the sheer numbers are larger than the
volume that matured between 2010 and 2012, the quality is different –
with much of this wave suburban in nature where there is an
oversupply of properties. Action by the Federal Reserve will
affect the market as investors await extraction of Quantitative
Easing, scheduled to be completed before year end. The question
is whether or not we are headed for another “bubble.”
8. Housing: The housing market appears to be in
recovery mode, but home ownership continues to lag. While Case
Schiller reports home prices rising by about 13% over last year, not
all areas of the U.S. experience encouraging price increases.
Despite moderate growth in the economy, U.S. Census data reflects the
lowest rate of home ownership since 1995. Credit is again
tight, but as the job market improves, home purchases are expected to
increase. The multifamily sector may feel downward pressure
caused by transition from renting to buying – at the same time
an avalanche of new multifamily units is becoming available as a
result of boom development in that sector over the past few years.
9. Manufacturing: Robotics, self-service kiosks
and 3-D printing technologies are dramatically transforming
manufacturing. The effect on commercial real estate is
accelerated at a more rapid and dynamic pace than previously thought,
with unintended consequences. Manufacturers, ports and
supply chains are embracing automation to increase efficiency and
reduce labor costs – for example, a modern auto or textile
manufacturing facility utilizing new technology may employ just 20%
of the labor force of a predecessor plant a decade ago.
Robotics applied to retail services and self-service kiosks are
replacing workers in call centers, banks, fast food and retail
locations, resulting in erosion of the Labor Participation rate and a
smaller working population in the U.S.
10. Agriculture: Agriculture debt is near
all-time lows, which has helped push farmland prices to all-time
highs. Livestock prices are at similar highs with “producing”
animal numbers near all-time per-capita lows. The outlook for
land values is mixed, with “more productive” farmland, primarily
irrigated, expected to show moderate increases. Ranchland
prices are expected to strengthen after lagging behind the feed grain
and vegetable producing lands. High water yielding, irrigated
farmland areas such as those found in the northwest Panhandle of
Texas, Brazos River Bottom and in Kansas and Nebraska appear to hold
long term opportunity, but investors should note the strong land
prices in the heartland and Midwest, as valuations cannot continue to
increase at the same pace. The recent passage of the Agricultural Act
of 2014 (“Farm Bill”) will help stabilize agricultural returns as
well as rural property values. Currently, U.S. consumers spend
an average of 6.8% of their income on food, lower than in many other
countries, partly due to higher average wages in the U.S. – for
example, in Canada it is 9.6%; in Pakistan 50%.
Source: The Counselors of Real Estate.
