Four macro disruptions to watch in real estate
- The impact of millennials on commercial real estate has generally been very positive for everything from office space to housing.
- A decreasing demand for commercial real estate, driven by the rise of e-commerce, is being countered by an increase in industrial real estate.
- Because of the relative stability of the U.S. economy, the industry in the United States can expect the flow of capital to continue.
- Most of the spending in construction will take place in multifamily dwellings in urban areas.
Several significant macro disruptions have taken place in the real estate industry. These trends are having a notable impact on investors and other stakeholders. Following are highlights of a conversation with Joe Brusuelas, the chief economist at RSM US LLP, Lee Menifee of PGIM Real Estate (formerly Prudential Real Estate Investors) and David Snow of Privcap:
The impact of millennials
Even before they surpassed baby boomers as the largest demographic cohort in the United States, millennials—those born between 1982 and 2000—were making their presence felt on several fronts: where they lived, where they worked and, of course, what they bought.
Notably, their impact on commercial real estate since the end of the recession has been very positive. More millennials are showing up in the workplace and bringing expectations of advanced technology being available, even in older office properties. Whereas premium office spaces were until recently located in the suburbs—presumably close to where employees lived—millennials are flocking to the urban locations and forcing employers to locate in the city.
Increasingly, housing is also being affected by increasing demands for multifamily units, condominiums and cooperatives. With the increased pace of hiring, millennials are driving a significant increase in household formations.
The demand for retail
Retail real estate is undergoing a tremendous disruption, with many sectors, such as office supply, electronics and even groceries, continuing a consolidation trend. The threat from e-commerce has investors concerned, but that does not mean that good trade areas and retail centers are going away. Good trade areas are not going away just yet, and investors should keep in mind that, whatever happens in the coming years, there will be businesses that will want to be in those trade areas.
In addition, there has been a profound behavioral shift in how and where consumers are spending. An emerging demographic majority is turning away from purchasing tangible items and instead is buying memories in the form of travel and entertainment. This could result in a significant shakeout in the commercial real estate environment and the number of anchor stores in malls across the country.
Notably, a decreasing demand for commercial real estate, driven by the rise of e-commerce, is being countered by an increase in industrial real estate. The growing share of e-commerce is having a positive effect, particularly on the need for distribution centers that enable retail companies to deliver products to consumers quickly.
The flow of capital
In 2015, there was a tremendous flow of capital flowing into real estate from overseas. On average, overseas capital usually is about 9 percent to 12 percent of total real estate transactions each year; in 2015, overseas capital accounted for 18 percent of the total. There were increases coming from regions around the world and every type of capital source. Because of the relative stability of the U.S. economy, many of these overseas investors were driven by expectations of solid returns. Rather than flow to smaller markets in the United States, which are a less competitive, much of the foreign capital coming in is targeting larger markets, in part because investors want to have some familiarity with where they’re investing.
With the ongoing volatility of overseas economies, the real estate industry in the United States can expect to the flow of capital continuing—but certainly not at last year’s pace.
The outlook for growth
The sluggish global growth in real estate continues a trend that began some time ago. That said, expectations are for 1.4 or 1.5 percent annualized growth, which would be the strongest since the recession but would not fully utilizing the capacity to produce. Without a doubt, most of the spending in construction will take place in multifamily dwellings in urban areas; single family residences are not expected to reassert themselves until the next business cycle.