Top 10 Commercial Real Estate Trends

Survey finds coastal cities taking back seat to other markets

Improving fundamentals and robust domestic and foreign investor appetite will continue to sustain the U.S. commercial real estate industry’s strong performance in 2015, according to a new report.

The 36th annual Emerging Trends in Real Estate, co-published by PwC US and the Urban Land Institute, provides outlooks for the real estate and land use industry based on interviews and survey responses from more than 1,000 real estate investors, fund managers, developers, property companies, lenders, brokers, advisors and consultants.

“Unlike previous reports and previous cycles, we are seeing sustained growth,” said Mitch Roschelle, PwC U.S. real estate advisory practice leader, in a statement. “In the past several years, we reported that real estate market participants’ main fears revolved around the uncertainty with the economy.

“Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of megatrends impacting society and the global economy. These mega trends include accelerating urbanization, demographic shifts and the impact of distributive technological advancements.” 

This year’s Emerging Trends marked the continued rise of markets other than the largest coastal cities as top choices for overall real estate prospects.

“Investors are looking closely at opportunities beyond the core markets,” ULI Global’s chief executive Patrick Phillips said in the statement. “These cities are positioning themselves as highly competitive in terms of livability, employment offerings and recreational and cultural amenities.”

Survey respondents ranked these cities the top five markets:

  1. Houston ranked first in both investment and development expectations for next year, and its housing market expectations ranked No. 2.
  2. Austin was the top choice for both the office sector and the single-family housing sector and the second-ranked market for retail.
  3. San Francisco was the No. 1 choice for hotel investment in 2015, and its office market ranked third and the retail market fourth.
  4. Denver’s retail ranked fifth and office sixth.
  5. Dallas/Fort Worth’s single-family housing was the highest ranked property sector, and its industrial sector was No. 4 — highest among the top five markets in this year's survey.

Following are PwC and ULI’s top trends in real estate for 2015:

The 18-hour city comes of age

1. The 18-hour city comes of age

America’s urbanization has greatly increased the number of cities that thrive around the clock and on weekends. Downtown transformations have combined housing, retail, dining and walking-distance offices to generate urban cores, spurring investment and development and raising the quality of life for a roster of cities.

The changing age game.

2. The changing age game

The real estate industry must plan for a nation with less household formation, fewer new consumers and a meager number of work force entrants in the coming decade. Millennials’ tendency to postpone homeownership and rent longer could change in the 2020s, and the emergence of a smaller Generation Z will result in further industry changes. Moreover, baby boomers will continue to significantly influence real estate development and investment for at least two more decades.

Labor markets are heading for a tipping point.

3. Labor markets are heading for a tipping point

Forward-looking businesses realize that while the “jobless recovery” is a current concern, longer-term labor market trends are moving in the opposite direction. Retirements will accelerate even as the peak of millennial labor force entrants has already passed. Within a few years, the talk will be about labor shortages, not surpluses. Survey respondents see job growth as the most important issue for real estate, closely followed by the related concerns of wage and income growth.

Real estate's love-hate relationship with technology.

4. Real estate's love-hate relationship with technology

Technology is pushing change in space use, locations and demand levels at an accelerated pace. It is now the norm to anticipate, strategize and respond to new technologies before they become mainstream. Overall, the fear factor about technological disruption is easing. Surveyed respondents viewed e-commerce and crowdfunding, for example, as an adaptation challenge, as retailers become "omnichannel distributors" and e-tailers begin to open brick-and-mortar stores.

Event risk is here to stay.

5. Event risk is here to stay

The trend of seeing investors along the continuum from “core” to “opportunistic” will be especially evident in 2015 because concern about event risk — geopolitical risks, global unrest and natural disasters — is troubling more and more respondents. This explains why the survey found that they considered international investors the best prospect for increasing investment volume next year.

A Darwinian market squeeze.

6.  A Darwinian market squeeze

Competition is unrelenting, and the need to have a clear “brand identity” is important as firms navigate the swift stream of capital. Recent spinoff activities in the retail, office and hospitality REIT sectors will be a trend in 2015. The drive for efficiency and effectiveness in both service delivery and cost will filter from investor expectations down to the service providers.

A new 900-pound gorilla.

7. A new 900-pound gorilla

The Defined Contribution Real Estate Council was set up to help plan sponsors and their participants achieve better investment outcomes through the use of institutional quality real estate. With a combined $12.6 trillion in capital, IRA and defined contribution funds will identify and take advantage of the benefits of having high-quality commercial property in a mixed-asset portfolio.

Infrastructure.

8. Infrastructure

Despite vaunted technological innovations, U.S. commerce’s foundation is eroding — and not just bridges and roads. Since 2009, spending on educational buildings and health care facilities by both the public and private sectors is down by one-third in real-dollar terms.

Housing steps off the roller coaster. (Photo: AP)

9. Housing steps off the roller coaster

Residential real estate appears to be returning to the classic principles of supply and demand, putting the excesses of the bubble and the ensuing collapse behind it. As this major segment of the economy returns to textbook fundamentals, confidence in the residential sector should continue to rise.

Eye on the bubble.

10. Eye on the bubble

The generally positive outlook in this year's Emerging Trends interviews and survey has a dark side. Upcycles breed optimism, and when excessive can promote bad investment patterns. But to the degree that overbuilding and excess leverage haven't gained traction by now, the industry looks as if it has learned some lessons in self-regulation and self-correction.

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