Emerging Trends in Real Estate

Here are some insights from the PWC Emerging Trends in Real Estate: USA

Document Link: https://www.pwc.com/us/en/asse...

The Great American Move:

"A significant single-family-housing market trend emanating
from the COVID-19 pandemic is “the Great American Move.”
People (and businesses) are moving in all sorts of ways—to
different geographies, from denser cities to the suburbs, from
an apartment to a home, and, for some, back “home” to live
with family members. There is no better evidence of the Great
American Move than the booming single-family-housing markets—especially in the more attainably priced areas of the
United States. Some observers argue that large events, like
a pandemic, do not create new trends but rather accelerate
existing ones. That certainly seems to be the case with housing today. The “move” was occurring prior to the pandemic,
already spurred by geographic, demographic, and consumer
shifts in the United States." (p. 9)

Boom Markets:

"The Austin, Phoenix, Salt Lake City, and
Tampa metro areas have less exposure to the industries
most affected by COVID-19 and are also affordable markets with pro-growth governments. In September 2020
research by John Burns Real Estate Consulting (JBREC),
these markets garnered “very strong” ratings—meaning
high demand and rapid price appreciation.
● New boomtowns. Charlotte, Denver, Dallas, Nashville,
Portland, and Seattle are six favorite boomtowns, attracting far more than their share of smart young workers.
These markets are already starting to recover from massive job losses due to COVID, and JBREC rates most of
these housing markets as “strong.” (p. 13)

The Retail Industry:

"The retail property sector must right-size and reinvent.
Retailers and shopping centers were already struggling
before COVID-19, and now conditions threaten to worsen
materially as the pandemic and its economic fallout accelerate the pace and magnitude of preexisting issues.
● Nonetheless, people still purchase the vast majority of their
retail products and services in stores, and some current setbacks will prove to be only temporary once it is safe to shop,
socialize, and recreate.
● The industry, however, faces a painful shakeout as millions
of small businesses and familiar national brands shutter their
doors, shrinking the ranks of tenants for shopping centers
and driving down occupancy and rents."

Markets to Watch:

"Looking at the markets moving up in the overall real estate
prospects rankings, the suburban markets tracked in the
survey have gained the most over the past year. Suburbandominated markets that survey respondents are looking at more
favorably for 2021 include Long Island, Northern New Jersey,
Westchester/Fairfield, and the Inland Empire. (It could be a
coincidence, but many of this year’s New York–based interviewees were best reached in the Hamptons area of Long Island.)
Rounding out this picture are the Washington, D.C., suburbs,
with the Maryland suburbs moving up 14 spots and Northern
Virginia moving up just six places but ranked highly at eighth in
overall prospects. These results are somewhat skewed, but still
likely illustrative, since suburban markets were broken out only in
New York, Los Angeles, and Washington, D.C. Future versionsof Emerging Trends may look at more suburban markets separate from center cities.
Other markets with higher rankings compared with a year ago
include Cape Coral/Fort Myers/Naples, a retirement/secondhome magnet, and boutique/affordable markets such as
Omaha, Boise, Tucson, Greenville, and Madison."

The 18-Hour Cities. This category is an Emerging Trends
classic that still works for a select number of medium-sized
cities, although COVID-19 has temporarily slowed both daytime
and nighttime activity in many of them. The 18-hour cities are
popular in-migration destinations due to lifestyle, culture, and
employment opportunities. They are not necessarily inexpensive markets but are more affordable than the establishment
markets, from which they draw many newcomers. The dynamic
economies of these markets continue to make them popular
with developers and investors for 2021—as illustrated by the five
of the 10 highest-ranked markets in overall real estate prospects
that fall into this category: Austin, Charlotte, Nashville, Raleigh/
Durham, and Salt Lake City.
While a number of the 18-hour cities are located in the U.S.
South, the characteristics that define an 18-hour city are found
in a more geographically diverse set of markets. The other
18-hour-city markets of Denver, Minneapolis/St. Paul, Portland
(Oregon), San Diego, and Seattle all have active downtowns
and urban-like suburban nodes. The following comment was
made about Seattle, but it applies broadly: “Seattle benefits by
not being a mega city. It is a midsized city with some big-city
attributes, such as sports teams, food and arts, and access
to outdoors.”
The Sunshine State. This grouping includes the South Florida
metro areas of Miami, Fort Lauderdale, and West Palm Beach,
plus the northern Florida city of Jacksonville. These four East
Coast Florida markets have substantial and varied economic
bases. Job growth in all four locales has been and is forecast
to be well above the U.S. average, and the three South Florida
markets have science, technology, engineering, and mathematics (STEM) scores almost double the U.S. average. South Florida
does face some challenges related to climate change, however.
The focus group in this market noted that “pre-COVID, hospitality investors were concerned with climate resilience in Southeast
Florida,” a statement that likely applies to other property types.
Participants also noted that “South and Central Florida should
benefit in the long term from the Virgin & Brightline Train plus
transit-oriented development [TOD] stations.”

"The metro areas of Boston, Chicago, Los Angeles, New York,
Philadelphia, the Bay Area (Oakland, San Francisco, and San
Jose), and Washington, D.C., have been among the country’s
biggest and most influential cities for over a century. Although
Dallas and Houston have caught up population-wise, these
“established” markets are economic, government, and cultural
powerhouses and have provided real estate investment and
development/redevelopment opportunities for quite some time.
Multitalented Metro Areas. Although all the establishment cities are large and economically diverse, some are more diverse
than others, specifically the multitalented metro areas of Boston,
Chicago, Los Angeles, New York, and Philadelphia. The diversification lines that separate these cities from the next group
(specialized economies) are admittedly fine. For example, many
consider Boston to be a tech market, and it is indeed a leader in
biotech, but Boston is also a leader in education and health care
and has a big finance sector.
Boston is the only multitalented metro area to be among the
10 highest-ranked markets this year, likely due to unique mix of
industries. Despite higher-than-average business and housing
costs, Boston has relatively good growth prospects—forecast
population and job growth is just below the U.S. average and
well ahead of comparable East Coast cities. Boston gets high
marks for governance by the focus group in this market: “The
leadership in Boston and Massachusetts and the ability for
different parties and levels of government to work together
continue to make Boston an attractive market.” The Boston area
has seven of the top 50 U.S. News & World Report universities,
the most in any one city in the United States. Many of the participants think that Boston’s history and character are a strong
asset. “Boston will continue to draw people who want to live here
. . . and not just because of the jobs. It feels like a real place.”
Looking ahead, the redevelopment of “Suffolk Downs in East
Boston will provide thousands of housing units in a live/work/
play environment, just a few miles from downtown.” (p. 35-36)

Property Types:

"Perhaps the biggest change from a year ago is the ability of the
real estate industry to feel comfortable about the future state
of each property type. Over the past decades, the evolution of
each property type has been slow and measured. Industrial
buildings have higher ceilings and more truck parking than
20 years ago but are mostly unchanged. New office buildings
may have larger windows and destination-based elevators, but
a cubicle in a new building is very similar to one in a vintage
structure from the 1970s. Buildings are built to last 50 years or
more and—until this year—developers and investors were in the
main confident about their usability and financial viability over
that time frame.
COVID-19 has kicked real estate certainty to the ground.
Confidence in future demand for and use of retail space,
office buildings, apartments, and other mainstays of property
has dropped significantly. Economists call this phenomenon
“Knightian uncertainty.” Named after famed University of
Chicago professor Frank Knight, Knightian uncertainty refers to
the lack of quantifiable information about an outcome. This is in
contrast to risk, where there is quantifiable data (vacancy rates,
rents, returns) that (we believe) provides guidance regarding
the future.
The list of factors for which we have little or no quantifiable information is a long one: the long-term impacts of COVID-19, the
viability and timing of a vaccine, the participation rate in a future
vaccine program, and the parameters of herd immunity are a
few. New areas of real estate uncertainty include fundamental
challenges such as how we use office space in the future, the
future of travel and large gatherings, and the role of stores.
Professor Knight and his colleagues were concerned about the
distorting effects of uncertainty on human behavior, acknowledging that in the absence of quantifiable information, human
beings rely on other factors (e.g., personal experiences and past
practices) to guide their decisions.
Despite the uncertainty that COVID-19 has promulgated, investors and developers still form views about the market and their
business prospects. This willingness to think and plan ahead
shows up in the Emerging Trends interviews and survey results.
As we talked with hundreds of real estate professionals for this
year’s Emerging Trends report, we asked them to assume that
an effective vaccine would be available and widely accepted
over the next year or two. We think that is the best way to think
about the future of real estate. But we would be the first to
admit that there is no data to support this assumption—only
(Knightian) uncertainty about some elements of the future.

Industrial:

"In recent years, relative and absolute return outperformance of
logistics real estate has been underpinned by multiple structural
drivers. These long-term demand catalysts include e-commerce,
speed-to-consumer supply chain strategies, and customer adoption of high-throughput modern logistics facilities. COVID-19 not
only validated the value proposition offered by these established
structural demand drivers, it also accelerated their growth trajectory and provided a buoy amid cyclical economic crosscurrents." (p. 50)

Single Family:

"Migration from downtowns to walkable suburban and exurban
new communities has been a glacially persistent, 21st-century
population pattern. Furthermore, technology’s exponential
effects—transforming the present and future of work, how and
where it happens, and the value it produces—albeit evident
in nuanced signs during the past few years, finally crossed an
inflection point after the pandemic declared itself. From now
onward, talented new-economy workers enjoy freer rein to work
from anywhere, opening secondary and tertiary “destination”
markets to new residential growth.
Add the rocket-fuel accelerant of historically attractive mortgage
rates—the likes of which homebuying borrowers may never see
again—and the run starts to look sustainable.
Then, of course, there is a downside scenario. This darker
outlook views early-innings sales momentum as a momentary
involuntary “dead-cat bounce”—attributable equally to pent-up
and pull-forward demand. “We haven’t yet felt the full brunt of
the collapse in our economy,” said the chief executive officer of
a top-15-ranked multiregional homebuilding firm. “We’ve gotten
big affirmation in this environment that what we sell—singlefamily new homes—is very valuable, but until we fully recognize
the impact on the real economy, past all the temporary rescue
measures, we don’t know whether the wherewithal will match up
to what people say they want to buy.”
Whether the outlook for 2021–2022 and beyond appears
luminous or ominous comes down to beliefs in both the deep,
real economy’s essential resilience and the bounty of the U.S.
Treasury. To most, fundamental demand drivers look bumpy,
choppy, iffy, and scary at best.
Single-Family Housing as a Recovery Engine
The 800-pound gorilla question of the moment is this: Will
single-family new construction and development emerge as real
estate investment’s “safe haven” in a global economy rocked by
pandemic, political risk, international trade disputes, and social
upheaval? Its close corollary is this: Has the American dream
of new-home ownership regained footing as the surest bet for
return of yield on capital investment?
To get a grip on these questions, it is important to track back to
phenomena that sprang from the throes of the highly contagious
infectious disease. One was humanity’s most powerful motivator, fear—namely, fear of other human beings being too close
for comfort. This caused people in dense, vertical, urban areas
to feel that maybe the downtown life was too scary. Two kindred
vibrations emerged under this pandemic-fueled incubus of
dread. One was an increased scarcity of homes for potential
resale. People who might have listed existing homes for sale
were loath to do so during a time when hosting open houses
felt—for the past few months—tantamount to inviting a contagious disease through the front door. So, listings during the first
half of 2020 declined.
Second, months of sheltering in place and working from
home gave many working adults something they had never
had before: time—24 hours a day, seven days a week with all
household members sharing space—at home. Time itself, then,
became a stimulus. Time spent at home—working or not—
has emerged as one of COVID-19’s wild-card forces, tripping
thoughts to motivations, tripping interest to pursuit, and tripping
new-home purchases into a higher gear.
In late March, new-home searches, virtual tours, contactless
orders, and curbside, socially distanced tech-enabled settlements proliferated. Quickly, through the lens of 20/20 hindsight,
industry executives mapped it all as bound to happen, meant
to be.
Uncle Sam, animal spirits, biological clocks, and strategic timing
around price segmentation at the lower, entry-level tiers of the
market all figure as the stars that have aligned. Conventional
wisdom calls for a solid run ahead for the broad ecosystem of
new single-family construction players. “We’ve got a cautious
approach, but we’re absolutely in the land market, buying lots
because we’ve been selling out much quicker than we could
have imagined,” said the CEO of a top-five-ranked homebuilder." (p. 57)

Multifamily:

"A 10-year, trillion-dollar-plus bull run for market-rate multifamily rental housing development and construction—an era of
empire-building delta-force exuberance; 3.1 million–plus new
rental units; and transformative community development—is
now over.
During that decade, builders, developers, investors, and their
partners of the multifamily sector’s 3 million or so properties of
five units or more came out of their shells as real estate residential landlords. They emerged as experience-economy consumer
enterprises. They learned—with a big assist from demographic
and economic mojo—to put a bigger dollar delta between their
own costs and rent collections on their units. Better consumer
focus brought dividends—a deeper, broader addressable
universe of prospective customers: renters by choice. They
expected the decade to come—if politically trickier at a local
level—at least to mirror the one just past in prosperity, demand
growth, and continued business improvement fueled by new
technologies."

"The decade to come—they expected—would address the business’s biggest, most chronic challenge: meaningful affordability.
In other words, access to good, safe, healthy, secure shelter for
more Americans would be an achievable goal by 2030.
The pandemic and concurrent economic shock destabilized the multifamily sector’s utterly basic measure of worth.
Destabilization of millions of households’ capacity to pay rent
creates a world of pain for businesses built on predictability
models of that single input.
Clearly, the nature of demand remains, unaltered. In sheer numbers of people, at least three adult generational cohorts, births,
and household formation patterns that press against supply of
rental communities still apply. Moreover, those fundamentals still
suggest a compelling, supportive near-, mid-, and longer-term
market hypothesis for more geographically diverse and more
attainably priced multifamily development. Still, structural drivers
now—for the duration it is impossible to calculate—await a new
next chapter. What is disrupted is any semblance of predictability, which materially undercuts the nature of value in the world of
multifamily rental community development.
Federal fiscal and monetary policy stopgaps that kicked into
rapid DEFCON 5, all-points-alert effect—from Capitol Hill to Wall
Street to Main Street to kitchen tables—stanched a cataclysmic
national meltdown with an enormous safety net. Uncle Sam has
lent society its sole source of predictability. This grand bargain
keeps financial markets functioning despite the obvious gaping
wounds of sky-high unemployment, wrecked business sectors,
and structural questions as to what’s viable—and what’s not—in
the economy in the mid-term and longer-term future." (p. 62)