Energy, jobs, and the far-reaching influence of the Millennial generation are the issues that will have the most significant impact on real estate both near-and long-term, according to The Counselors of Real Estate® organization, which recently released its official 2014 Top Ten Issues Affecting Real Estate, a list it compiles annually.
The list reflects growing economic and political turmoil, changing demographics and the lifestyle choices of an emerging generation, rising energy independence in the United States and a strengthening job market fueled in part by massive changes in the delivery of health care.
The Counselors of Real Estate organization is well known for thought leadership, extraordinary professional reach (more than 50 real estate specialties are represented by its member experts) and objective identification of the issues and trends most likely to impact real estate now and in the future.
1. Energy: The U.S. is becoming increasingly energy independent. Changes in U.S. energy production are impacting jobs, income growth and the quality of life – key determinants of real estate value and successful investment. The mix of energy types produced—crude oil, natural gas and alternatives such as wind and solar energy—provide investment opportunity and risks. The impact of energy production changes varies by state and community depending on access to resources, regulatory trends and other factors; however, many communities involved in increased energy production are experiencing a jobs boom with related housing and services growth for workers.
2. Jobs: The job market is expected to remain strong in 2014. If the U.S. economy grows by the forecasted 2.8%, the number of new jobs likely to be added will continue to number 200,000 to 250,000 per month. Strong job creation is expected to have a positive impact on the residential and multifamily sectors. The types of jobs being offered should move up the quality scale, raising average wages and boosting purchasing power for consumers as well as the ability of landlords to extract rents. Job reductions, however, in retail and branch banking, largely due to changes in consumer behavior and online technology, will take a toll on housing, may benefit the apartment sector and could negatively impact commercial real estate. Service sector jobs may absorb some of those displaced.
3. The Millennials: The Millennial generation, born after 1980, represents 27% of the U.S. adult population—and their influence is far-reaching. They are the first to fully embrace new technology, including the Internet, eCommerce, mobile communications and social media. Their practices are poised to change the way society interacts, receives information, shops and lives. Millennials show a strong preference for urban living and working, value mass transit, and “work, live, play” communities where residents of all ages, ethnicities, and income brackets live side by side. They carry high levels of student loan debt, drive fewer cars, marry later, and often choose smaller living spaces than the typical homes in the suburbs that appealed to their parents a generation ago. Their preferences are already having an effect on both city and suburban residential, multifamily, office and retail sectors.
4. Healthcare: A very wide range of newly constructed healthcare facilities will be needed to treat the large numbers of newly insured Americans under the Affordable Care Act. Health providers will increase market share by constructing specialized consultative care or treatment facilities, many in non-urban locations, providing wide-ranging services at a considerably lower cost. Considerable consolidation of hospital and healthcare organizations is underway, with an enormous impact on real estate – mergers and acquisitions create both excess properties and an increased demand for updated facilities. These new entities are building satellite healthcare centers, urgent care and diagnostic facilities. All of these factors will spur development of different forms of housing and expanded retail centers, serving not only an aging population but those seeking access to the medical assistance and products to which they are now entitled.
5. Globalization: In the next five to ten years, expect a remaking of the global supply chain emanating from eCommerce and expansion of the Panama Canal; advancing technology; availability and cost of energy; and political strife. As traditional pathways for goods and materials change – decoupled from political boundaries and increasingly automated – the resulting end “efficiency” will potentially cause widespread labor strife from Europe to Asia, and even to the U.S. west coast. Energy will continue to influence globalization as energy dominance by the Middle East decreases. More U.S. energy production could disrupt manufacturing activity in Europe and Asia, adding to labor strife and a possible return to protectionism.
6. Water: The global demand for fresh water is projected to exceed supply by 40% by 2030. While water scarcity is a reality in much of the developing world – where 780 million people have no access to clean water; 2.5 billion people have no access to modern sanitation; and over three million die each year from water, sanitation and hygiene-related causes – the U.S. will likely experience serious water shortages as well. Aging water infrastructure, droughts (particularly in the southwest) and reduced water deliveries to agriculture have the potential to cause water-related economic problems. A number of states face severe water challenges. The implications for real estate are enormous – affecting land value, community desirability, future viability and investment. Water may become a political issue as well as a health issue in a relatively short timeframe.
7. Capital Markets: The availability of capital to commercial real estate from 2014 to 2017 will be vital to the health of the industry. The enticement of riding a high-yield wave is luring capital back into real estate, with investment in a wide variety of choices, from agricultural land to commercial mortgage backed securities. A new round of commercial refinancing will begin this year, with an estimated $360 billion in permanent securitized loans needing to be refinanced by year end 2017. While the sheer numbers are larger than the volume that matured between 2010 and 2012, the quality is different – with much of this wave suburban in nature where there is an oversupply of properties. Action by the Federal Reserve will affect the market as investors await extraction of Quantitative Easing, scheduled to be completed before year end. The question is whether or not we are headed for another “bubble.”
8. Housing: The housing market appears to be in recovery mode, but home ownership continues to lag. While Case Schiller reports home prices rising by about 13% over last year, not all areas of the U.S. experience these encouraging price increases. Despite moderate growth in the economy, U.S. Census data reflects the lowest rate of home ownership since 1995. Credit is again tight, but as the job market improves, home purchases are again expected to increase. The multifamily sector may feel downward pressure caused by transition from renting to buying – at the same time an avalanche of new multifamily units is becoming available as a result of boom development in that sector over the past few years.
9. Manufacturing: Robotics, self-service kiosks and 3-D printing technologies are dramatically transforming manufacturing. The effect on commercial real estate is accelerated at a more rapid and dynamic pace than yet previously thought, with unintended consequences. Manufacturers, ports and supply chains are embracing automation to increase efficiency and reduce labor costs. Robotics applied to retail services and self-service kiosks are replacing workers in call centers, banks, fast food and retail locations, resulting in erosion of the Labor Participation rate and a smaller working population in the U.S.
10. Agriculture: Agriculture debt is near all-time lows, which has helped push farmland prices to all-time highs. Livestock prices are at similar highs with “producing” animal numbers near all-time per-capita lows. The outlook for land values is mixed, with “more productive” farmland, primarily irrigated, expected to show moderate increases. Ranchland prices are expected to strengthen after lagging behind the feed grain and vegetable producing lands. High water yielding, irrigated farmland areas appear to hold long term opportunity, but investors should note the strong land prices in the heartland and Midwest, as valuations cannot continue to increase at the same pace. The recent passage of the Agricultural Act of 2014 (“Farm Bill”) will help stabilize agricultural returns as well as rural property values.