As new digital technologies and the value shift toward real estate services transform the private real estate sector, what's next for the industry? RSM partner and senior real estate analyst Laura Dietzel sat down with Preqin to discuss the impact of volatility, technology and generational change in the United States for their 2020 Global Real Estate Report.
Preqin: According to Preqin’s latest survey, 57% of real estate investors see opportunity in the United States. What is driving demand?
Dietzel: 2019 was a volatile year. Across continents and markets, protests grabbed headlines and economies teetered on the brink of collapse. Global instability is a major factor causing global investors to look favorably at the United States because of its relative stability. Despite an exodus of Chinese investors in U.S. real estate, and U.S. investment in general, other foreign investors have filled the void.
Canada, Israel and Germany comprise about half of all inbound capital into the United States. Investors from those countries will accept lower returns relative to their markets just to pay for greater stability.
Preqin: What are some noteworthy regional U.S. trends?
Dietzel: Global investors continue to prefer the valued gateway markets of San Francisco, New York and Washington, D.C.—these have proven track records of performance even though cap rates compressed significantly later in the economic cycle. On the West Coast, the tech boom has driven outsized growth in office markets; vacancies are coming down and rents are up relative to the rest of the country. Conversely, investors are weary of entering states unfavorable to business; they are seeking business- and tax-favorable alternatives like Florida and Texas.
Preqin: Given the slowdown in U.S. economic growth, what is your outlook for U.S. real estate?
Dietzel: We see a significant generational shift as baby boomers exit the labor market. Millennials, the largest U.S. cohort, are driving longer-term trends such as a preference for e-commerce and housing rentals.
The office market has thrived with these two largest generations in history. In 2020, the tide will turn as boomers continue to age out. Office densification, a mobile workforce and the tight labor market present headwinds for landlords, and 2020 will mark a fundamental downshift in the market.
Meanwhile, retailers with omnichannel strategies, including a robust online consumer experience, are seeing significant growth, while traditional brick-and-mortar stores have been challenged; many stores have closed. The trend presents an opportunity to reposition some assets as part of the retail transformation, which includes pop-up stores and smaller-footprint showrooms for goods primarily sold online. Online sellers offer commercial real estate another opportunity—the need for warehousing spaces that can move three times the transactional traffic of traditional retail stores.
In the multifamily sector, millennial homeownership remains relatively low. Affordability is the significant issue causing buyers to delay ownership, keeping that generation largely in the rental market.