Emerging Trends in Real Estate

Future uncertainty meets mostly sound fundamentals

By PATRICK DUFFY

As they have for the past 41 years, the Urban Land Institute (ULI) and PricewaterhouseCoopers (PWC) recently published their 2020 Emerging Trends report for the United States and Canada. Based on interviews with 750 real estate and lending professionals, 1,500 responses from surveys, and despite ongoing fears of an impending recession throughout much of 2019, what instead happened was a sort of stasis based on mostly sound fundamentals. Looking ahead to 2020, the general consensus for real estate development is more of the same, whereas homebuilding itself could see a boost from demographic demand and lower interest rates.

One primary reason for some uncertainty in real estate markets is the behavior of different demographic groups shifting from past projections. For example, while some Baby Boomers will certainly have the means to retire to age-restricted communities in Sun Belt states, many others will continue working (whether by necessity or by choice) far longer than originally planned. And if they do move, it may be to suburbs closer to their children, or even to enjoy urban amenities in smaller spaces.

Hit hard by The Great Recession a decade ago in terms of both homeownership and job prospects, members of Gen X may not have the means to fund their retirement goals, instead looking at down-scaling their housing options. Millennials, recently thought to prefer urban locations even as they age, are increasingly moving to the suburbs as they start families and their priorities change. Finally, members of tech-savvy Gen Z are expected to converge on those urban areas which have experienced the greatest job growth or offer the best opportunities for the gig economy.

Still, with housing costs rising over the last several years at rates in excess of income growth, affordability remains a concern, especially for traditional single-family homes. Although some analysts see the drop in the

homeownership rate back to historic levels of 63 or 64 percent as a positive sign that excess inventory has been wrung out of the system, community opposition to higher-density housing options can often make them risky. That’s partly why larger and richer tech-related employers are seeking to plug some local gaps with the development of affordable housing alternatives to house their workers. But it’s also why billions of dollars of potential capital lay waiting on the sidelines, as investors don’t want to be forced to deploy their resources if current margins aren’t worth the risk.

Not wanting to wait for the traditional housing market to solve this impasse, entrepreneurs pushing co-living arrangements are seeing more success. Built loosely on the workspace model of sharing what used to be private spaces, co-living options by emerging leaders may be appealing to urbanites in their 20s and 30s seeking to share common spaces with like-minded people. In a similar trend, seniors with larger homes in the suburbs are also finding that renting out extra rooms can provide both needed company and income.

Yet these local housing solutions will be somewhat limited without adequate investments in the country’s eroding infrastructure. With increasing partisanship in the country’s capital making it more challenging to address major long-term issues, local cities and states are taking on more of this responsibility. In Los Angeles, voters approved their own half-cent sales tax increase in 2016 to create what could be the country’s largest public works project over the coming decades. Once known as a car lover’s paradise, systemic gridlock throughout the county of 10 million people is slowly giving way to rail lines, dedicated bus lanes and a single payment system which can work on multiple systems (and which my family easily used to avoid driving to and from this year’s Rose Bowl for $3.50 each).

Certainly the ease of this New Year’s Day trip was enabled by technology, and that is another area that is increasingly impacting
the business of real estate. Both considered to be underestimated and over-hyped by survey respondents, the march of technological progress is certain to continue, but will also bring its own unintended consequences which have already been seen in the industrial and retail sectors. Looking forward, an industry often known for being more conservative in its practices will still require “tech without the mystery,” especially as companies from outside the industry continue to impact the way cities are developed, buildings are constructed and communities are managed. As 5G gradually deploys around the world, the future could be here faster than expected.

Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He may be reached at pduffy@metrointel.com or 310-666-8288.

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