Emerging Trends
in Real Estate®
United States and Canada 2016
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Emerging Trends in Real Estate® 2016
A publication from:
2016_EmergTrends US_C1_4_F.indd 4
9/16/15 8:10 PM
i
Emerging Trends in Real Estate® 2016
Contents
2 Chapter 1 Coordinating Offense and Defense in 2016
5 18-Hour Cities 2.0
6 Next Stop: the Suburbs . . . What Is a Suburb?
9 Offices: Barometer of Change
10 A Housing Option for Everyone
12 Parking for Change
13 Climate Change and Real Estate
15
Infrastructure: Network It! Brand It!
16 Food Is Getting Bigger and Closer
16 Consolidation Breeds Specialization
17 We Raised the Capital; Now, What Do We Do with It?
18 Return of the Human Touch
19
Issues to Watch
20 Expected Best Bets for 2016
22 Chapter 2 Capital Markets
23 The Debt Sector
28 The Equity Sector
35 Summing It Up
36 Chapter 3 Markets to Watch
36 2016 Market Rankings
38 Market Trends
39 The Top 20 Markets
49 Perspectives on Regions
60 Chapter 4 Property Type Outlook
61
Industrial
64 Apartments
67 Office
70 Hotels
71 Retail
75 Housing
77 Chapter 5 Emerging Trends in Canada: Changing Opportunities
78 Emerging Trends in Canadian Real Estate
85 Markets to Watch in 2016
90 Property Type Outlook
94 Expected Best Bets for 2016
95
Interviewees
Emerging Trends
in Real Estate®
2016
ii Emerging Trends in Real Estate® 2016
Editorial Leadership Team
Adam Boutros*
Aki Dellaportas
Alex Tanchez*
Alexander P. Stimpfl
Allen Baker*
Amy Brohman*
Amy E. Olson
Andrew Alperstein
Andrew Paterson*
Andrew Popert*
Andrew Stansfield
Annie Labbé*
Brian J. O’Donnell
Brian T. Nerney
Brion L. Sharpe
Bud Thomas
Carlo Bruno
Charles P. Alford
Chase C. Evans
Chris Potter*
Chris Vangou*
Christina Howton*
Christine Lattanzio
Christopher A. Mill
Christopher L. Nicholaou
Constance Chow*
Courtney S. McNeil
Dan Crowley
Daniel J. O’Neill
Daniel D’Archivio*
David Baldwin
David Baranick
David Khan*
David M. Voss
David Seaman
David Yee*
Deborah Dumoulin*
Dominique Fortier*
Donald Flinn*
Doug Purdie*
Douglas B. Struckman
Dwayne MacKay*
Edward Sheeran
Eli Rabin
Elliot Kung
Emily Pillars
Eric Andrew*
Eric St-Amour*
Ernest Hudson*
Eugene Chan
Frank Magliocco*
Fred Cassano*
Gabrielle Mendiola*
Haley M. Anderson
Heather M. Lashway
Howard Ng*
Howard Quon*
Ian Gunn*
Isabelle Morgan
Jackie Kelly
Jacqueline Kinneary
Jaime D. Phillips
James Oswald
Janaki Sekaran
Janice McDonald*
Janice Zaloudek
Jasen Kwong*
Jeff Kiley
Jill Lising*
John Gottfried
John Paul Pressey*
Joseph H. Schechter
Joseph R. Fierro
Joshua Hookkee
Julia Powell
Kelly Nobis
Kelsey Edelen
Kristen Conner
Kristen D. Naughton
Kristianne M. Marchart
LaRon E. York
Laura Daniels*
Lawrence A. Goodfield
Leah Waldrum
Leandra M. Charsky
Lisa Guerrero
Lona Mathis
Lori-Ann Beausoleil*
Mark Williams
Martin J. Schreiber
Martina Scheuer
Marvin A. Thomas
Mary Wilson-Smith*
Mathilde C. Hauswirth
Matthew Berkowitz
Maxime Lessard*
Meghan O’Brien
Michael Anthony
Michael Shields*
Michael T. Grillo
Mike Herman
Miriam Gurza*
Nadia King*
Nadja Ibrahim*
Naveli Thomas*
Neal P. Kopec
Nicholas Mitchell
Nick Ethier*
Nicole M. Stroud
Noah Weichselbaum
Oliver Reichel
Philippe Thieren*
Rajen Shah*
Rajveer Hundal*
Renee Sarria
Richard Fournier
Rick Barnay*
Rob Christmas*
Rob Sciaudone
Ron Bidulka*
Ron Walsh*
Rosanna Musto*
Ross Sinclair*
Ryan Dumais
Ryan Thomas*
Sean Hiebert*
Seth E. Kemper
Shannon M. Comolli
Shareen Yew
Stephan Gianoplus
Stephen W. Crisafulli
Steve Tyler
Steven Weisenberger
Susan M. Smith
Tim Bodner
Timothy C. Conlon
Tracy L. Howard
Victoria M. Music
Warren Marr
Wendi Pope*
Wendy J. Wendeborn
Wesley Mark*
William Croteau
William Hux
William Keating
Yvens Faustin
* Canada-based.
PwC Advisers and Contributing Researchers
Emerging Trends Chairs
Mitchell M. Roschelle, PwC
Kathleen B. Carey, Urban Land Institute
Principal Advisers and Contributing Authors
Andrew Warren, PwC
Anita Kramer, Urban Land Institute
Author
Hugh F. Kelly
Senior Advisers
Christopher J. Potter, PwC, Canada
Miriam Gurza, PwC, Canada
Frank Magliocco, PwC, Canada
ULI Contributing Researchers
Sarene Marshall
Maureen McAvey
Dean Schwanke
Stockton Williams
ULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing Editor/Manuscript Editor
Betsy Van Buskirk, Creative Director
Anne Morgan, Cover Design
Deanna Pineda, Muse Advertising Design, Designer
Craig Chapman, Senior Director of Publishing Operations
Marc Andrew Curtin, Project Assistant
Rebecca Lassman, Project Intern
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© September 2015 by PwC and the Urban Land Institute.
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Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate®
2016. Washington, D.C.: PwC and the Urban Land Institute, 2015.
ISBN: 978-0-87420-366-0
1
Emerging Trends in Real Estate® 2016
Notice to Readers
Emerging Trends in Real Estate® is a trends and forecast publication now in its 37th
edition, and is one of the most highly regarded and widely read forecast reports in the
real estate industry. Emerging Trends in Real Estate® 2016, undertaken jointly by PwC
and the Urban Land Institute, provides an outlook on real estate investment and devel-
opment trends, real estate finance and capital markets, property sectors, metropolitan
areas, and other real estate issues throughout the United States and Canada.
Emerging Trends in Real Estate® 2016 reflects the views of individuals who completed
surveys or were interviewed as a part of the research process for this report. The
views expressed herein, including all comments appearing in quotes, are obtained
exclusively from these surveys and interviews and do not express the opinions of
either PwC or ULI. Interviewees and survey participants represent a wide range of
industry experts, including investors, fund managers, developers, property compa-
nies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally
interviewed 404 individuals and survey responses were received from 1,465 individu-
als, whose company affiliations are broken down below.
Private property owner or developer
34.3%
Real estate services firm
26.5%
Institutional/equity investor or investment manager
11.5%
Bank, lender, or securitized lender
7.4%
Real estate brokerage
6.5%
Homebuilder or residential land developer
5.5%
Equity REIT or publicly listed real estate property company
3.1%
Other entity
2.6%
Private REIT or nontraded real estate property company
2.1%
Mortgage REIT or real estate debt investor
0.4%
Throughout the publication, the views of interviewees and/or survey respondents
have been presented as direct quotations from the participant without attribution to
any particular participant. A list of the interview participants in this year’s study who
chose to be identified appears at the end of this report, but it should be noted that all
interviewees are given the option to remain anonymous regarding their participation.
In several cases, quotes contained herein were obtained from interviewees who are
not listed. Readers are cautioned not to attempt to attribute any quote to a specific
individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing
valuable time and expertise. Without the involvement of these many individuals, this
report would not have been possible.
2 Emerging Trends in Real Estate® 2016
3
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
Every major college and NFL football team sees its game plan
shaped by its offensive and defensive coordinators, working in
concert with the head coach. The coordinators are expected
to have both technical and strategic skills, the ability to work
under pressure, and the capacity to adjust to rapidly changing
conditions.
For the offense, the coordinator is charged with marshalling the
team’s resources to maximize opportunities and to translate
them into points on the road to victory. For the defense, the
coordinator is constantly assessing risks, both before and dur-
ing the game, and countering them. In limiting the competition’s
advantages, the defensive coordinator seeks to put his team
in the best position on the field by managing adversity and,
as much as possible, turning an opponent’s risk taking into an
opportunity for his own squad.
For real estate, 2016 will see investors, developers, lenders,
users, and service firms relying upon intense and sophisticated
coordination of both their offensive and defensive game plans.
In an ever more competitive environment, with well-capitalized
players crowding the field, disciplined attention to strategy and
to execution is critical to success.
A lending officer at a large financial institution said, “You can
never forget about cycles, but the next 24 months look doggone
good for real estate.” At the same time, as one senior capital
markets executive said, “The first 15 minutes of any committee
discussion is on the potential risk in the deal.” We’ve learned
some lessons in the not-too-distant past.
Coordinating Offense and Defense in 2016
“You can never forget about cycles, but the next 24 months look
doggone good for real estate.”
Exhibit 1-1 U.S. Real Estate Returns and Economic Growth
NAREIT
NCREIF
2016*
2014
2012
2010
2008
2006
2004
2002
2000
1998
–5%
–3%
–1%
1%
3%
5%
GDP
–40%
–30%
–20%
–10%
0%
10%
20%
30%
40%
In
de
x
ch
an
ge
G
D
P
c
ha
ng
e
NAREIT total
expected return
7.0
NCREIF total
expected return
8.0
Sources: NCREIF, NAREIT, Bureau of Economic Analysis/U.S. Department of Commerce,
World Economic Outlook, Emerging Trends in Real Estate 2016 survey.
* GDP forecasts are from World Economic Outlook.
Note: NCREIF/NAREIT data for 2015 are annualized as of first-quarter 2015. Forecasts for
2016 are based on the Emerging Trends in Real Estate 2016 survey.
Exhibit 1-2 Emerging Trends Barometer 2016
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
abysmal
poor
good
excellent
fair
Sell
Buy
Hold
Source: Emerging Trends in Real Estate 2016 survey.
Note: Based on U.S. respondents only.
4 Emerging Trends in Real Estate® 2016
Real estate has become ever more dynamic as it adapts to a
networked world. Everything is connected to everything else, so
market participants cannot afford to ignore developments well
beyond the property markets themselves. The major forces of
globalization, technology, urbanization, and demography are
constantly interacting with each other. A lapse of attention or a
misstep in execution can result in being blindsided, foiling even
a well-considered plan of action.
Because of this, it is important to understand that none of the
trends we identify and discuss should be considered in isola-
tion. The “Keep It Simple, Stupid” rule has its strengths, but
only if it also recognizes that a complex world punishes any
overly rigid approach to change in the markets. In business,
as in biology, adaptation is the key to survival and competi-
tive advantage.
Exhibit 1-3 Firm Profitability Prospects for 2016
0%
20%
40%
60%
80%
100%
2016
2015
2014
2013
2012
2011
2010
Good–excellent
Modestly poor–modestly good
Abysmal–poor
P
er
ce
nt
ag
e
of
r
es
po
nd
en
ts
Source: Emerging Trends in Real Estate surveys.
Exhibit 1-4 Real Estate Business Prospects
Property managers
CMBS lenders/issuers
Commercial bank
real estate lenders
Real estate consultants
Insurance company
real estate lenders
REITs
Architects/designers
Homebuilders/residential
land developers
Commercial builders
Real estate
investment managers
Institutional real
estate owners/
developers
Private real estate
owners/developers
Real estate brokers
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
1
Abysmal
2
Poor
4
Good
2
Poor
4
Good
3
Fair
5
Excellent
1
Abysmal
3
Fair
5
Excellent
4.02
3.91
3.62
3.21
2.95
3.98
3.86
3.52
3.18
2.84
3.81
3.76
3.46
3.18
3.02
3.85
3.80
3.72
3.68
3.49
3.14
3.70
3.62
3.56
2.64
1.66
3.67
3.62
3.27
2.49
2.09
3.67
3.72
3.42
3.46
3.27
3.61
3.63
3.51
3.32
3.22
3.61
3.59
3.33
2.87
2.67
3.55
3.57
3.43
3.04
2.76
3.52
3.45
3.29
2.74
2.44
3.44
Source: Emerging Trends in Real Estate surveys.
5
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
So as we discuss the top trends for 2016, we will be empha-
sizing granularity, the weaving together of several strands of
change, and the continuing capacity of the economy and the
real estate markets to surprise by their flexibility, resilience, and
innovation as both local and macro forces compel ever-greater
open-mindedness about the future.
1. 18-Hour Cities 2.0
Last year, Emerging Trends identified the rise of the 18-hour city.
This year, the real estate industry is expressing growing confi-
dence in the potential investment returns in these markets. We
are finding a tangible desire to place a rising share of investment
capital in attractive markets outside the 24-hour gateway cities.
Global as well as domestic investors are casting wider nets as
they look at U.S. real estate markets. One such investor, at a
large international institution, marveled at the number of second-
ary markets that are suddenly “hip.” Austin, Denver, San Diego,
and San Antonio are examples, and rightly so. They rank in
the top ten markets for entrepreneurship in the 2015 Kauffman
Foundation study, and all four are in Emerging Trends 2016 ’s list
of top 20 markets for real estate investment and development.
What supports this trend? To start, strengthening U.S. macro-
economic performance is bolstering absorption and improving
occupancy in the majority of American real estate markets.
Secondly, the 18-hour cities have seen more moderate cap-rate
compression, and so provide an opportunity for superior yields.
Investors themselves are demonstrating greater risk tolerance,
moving gradually from defense to offense as their playing field
position improves. And, lastly, the inexorable expansion of data
availability has generated more confidence that decisions about
secondary market opportunities can be grounded in good
statistical evidence.
The 18-hour cities have been consistently making headway in
replicating pieces of what makes the gateway cities so attrac-
tive. The development and application of technology make it
possible for these markets to offer the benefits of a larger urban
area at a significantly lower cost. In addition, a number of the
markets in the top 20 rankings of this year’s survey are consis-
tently tagged as “cool” markets that are expanding on their own
unique culture.
Should the market be concerned that this wider investor interest
could diminish in the face of a downturn? Although 18-hour
cities and all higher-growth markets have historically been more
volatile than their gateway counterparts, there are factors that
could diminish the volatility going forward. During the current
economic expansion, the capital markets have demonstrated a
much greater degree of restraint when it comes to funding new
development. So the 18-hour cities face lower-than-average
supply pressure, compared with history. Investors, meanwhile,
have become more sophisticated. And the greater information
across all markets, mentioned above, allows investors to have
Exhibit 1-5 Survey Market Outlook Change, 2010 to 2016
1
4
7
10
13
16
19
22
25
28
31
34
37
40
2016
Ch
ica
go
No
rth
ern
Ne
w J
ers
ey
Ho
ust
on
No
rth
ern
VA
Wa
shi
ng
ton
, D
C
Sa
n A
nto
nio
Mi
am
i
Mi
nn
eap
oli
s/S
t. P
aul

Ph
oen
ix
Sa
n D
ieg
o
Ne
w Y
ork
Ci
ty
Ora
ng
e C
ou
nty
, C
A
Bo
sto
n
Sa
n J
ose
Ra
leig
h/D
urh
am
Lo
s A
ng
ele
s
Po
rtla
nd
, O
R
Sa
n F
ran
cis
co
Na
shv
ille
De
nve
r
Atl
ant
a
Se
att
le
Ch
arl
ott
e
Au
stin
Da
llas
/Fo
rt W
ort
h
2010
2016 Top 20
Notable others
Source: Emerging Trends in Real Estate surveys.
6 Emerging Trends in Real Estate® 2016
a laser focus on their investment, focused on more precisely
defined areas and asset characteristics within a submarket or
neighborhood. The belief that “anywhere in the market is good”
is likely a thing of the past.
An ever-restless search for returns persists, and deals are
framed on a risk/reward matrix. As an executive with a private
equity investor explained in his interview, “In Nashville, we
bought an office building for a 7.25 cap. We plan to redo the
lobby, roll the leases to market, hold for four years, and then sell.
Nashville is a strong secondary market with some risk, but the
price was much more reasonable than core assets in primary
markets.” That’s an 18-hour city story, a deal that works in a
vibrant downtown that is drawing residents and businesses
to the core.
Going forward, this trend should intensify. More capital is avail-
able than a handful of 24-hour markets can absorb.
2. Next Stop: the Suburbs . . . What Is a
Suburb?
“The suburbs are a long way from dead,” said one interviewee
emphatically. Another industry veteran counseled, “There are
only about ten dynamic downtowns in the county; the rest of the
areas, people are in the suburbs.” As prices have risen in the
core gateway markets, it is apparent that a fresh look at subur-
ban opportunities is gaining favor.
Many feel that time is on the suburbs’ side. They argue that the
deferral of marriage and family formation by millennials, and the
related preference for downtown living in denser, more active
“mating markets,” is just that: deferral. Eventually, the logic goes,
generation Y will follow the baby boomers’ path and head to the
suburbs in the child-rearing years. That may very well be, and
numbers are on the side of that argument as well. Survey results
from ULI earlier in 2015 show that a smaller number of millen-
nials prefer to live in the city than currently do and, conversely,
a larger number of millennials prefer to live in the suburbs than
currently do. Another ULI survey shows that six out of ten gen-Y
respondents expect to live in a detached single-family home
five years from now (although these results did not specifically
indicate location). It should be pointed out that, overall, there is
a slightly larger group of millennials who ultimately prefer city
living (37 percent) to suburban living (29 percent), but the gap
between the two locations is expected to be smaller than cur-
rent location patterns (46 percent and 24 percent, respectively).
There is enough of this 80 million–plus generation intending to
relocate to the suburbs to make an impact.
An economist with a national real estate data firm observed,
however, that “this group won’t move to the suburbs of their
parents. The attractive suburbs will be more like the airline hub-
and-spoke model. These ‘diet urban’ locations will offer urban
and suburban benefits.” The critical descriptors seem to be sub-
urbs that are close-in, transit-oriented, and mixed-use. A 2015
National Association of Realtors/Portland State University study
Exhibit 1-6 Change in Value, by Market Category and Property Type, 12 months through June 2015
0%
5%
10%
15%
20%
25%
30%
Nonmajor
Major
Suburban office
CBD office
Retail
Industrial
Apartment
18.2%
12.1%
11.7%
13.0%
6.9%
13.5%
26.9%
15.0%
13.4%
16.8%
Sources: Moody’s and Real Capital Analytics.
7
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
Exhibit 1-8 Current Location of Millennials within Cities
0%
10% 20% 30% 40% 50% 60% 70% 80%
Downtown/
near downtown
Other city
neighborhoods
73%
27%
Source: UDR/Lachman Associates Survey, Gen Y and Housing, Urban Land Institute, November 2014.
Exhibit 1-7 Current and Desired Location—Cities, Suburbs, Rural/Small Towns, by Generation
Baby boomers
Total
Millennials
Gen Xers
Baby boomers
Desired
Current
War/silent
Cities
Total
Millennials
Gen Xers
Desired
Current
War/silent
Suburbs
Total
Millennials
Gen Xers
Baby boomers
Desired
Current
War/silent
Rural/small towns
36%
26% 27%
24%
29%
25% 25%
30%
24%
27% 28%
46%
49%
51%
39%
44%
38%
32%
30%
42%
37%
29%
46%
37%
36%
28%
30%
22%
24% 23%
Source: Urban Land Institute: America in 2015: A ULI Survey of Views on Housing, Transportation, and Community, 2015.
Note: Response to America in 2015 survey question: “If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized
city, a big city, a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?”
8 Emerging Trends in Real Estate® 2016
Exhibit 1-9 Detail of Current and Desired City Location—Medium-Sized vs. Big City, by Generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Medium-sized city
Big city
Desired
Current
Desired
Current
Desired
Current
Desired
Current
Millennials
Gen Xers
Baby boomers
War/silent
54%
46%
39%
61%
53%
47%
52%
48%
53%
47%
41%
59%
65%
35%
30%
70%
Source: Urban Land Institute: America in 2015: A ULI Survey of Views on Housing, Transportation, and Community, 2015.
Note: Drawn from response to America in 2015 survey question: “If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized city, a big city,
a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?”
Exhibit 1-10 Detail of Current and Desired Suburban Location—Suburbs within 20 Minutes vs. Farther Than
20 Minutes from City, by Generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Desired
Current
Desired
Current
Desired
Current
Desired
Current
Millennials
Gen Xers
Baby boomers
War/silent
70%
30%
76%
24%
68%
32%
21%
79%
81%
19%
24%
76%
78%
22%
19%
81%
Suburbs within
20 minutes of city
Suburbs farther than
20 minutes from city
Source: Urban Land Institute: America in 2015: A ULI Survey of Views on Housing, Transportation, and Community, 2015.
Note: Drawn from response to America in 2015 survey question: “If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized city, a big city,
a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?”
9
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
found that millennials prefer walking over driving by 12 percent-
age points (see trend 7). One investment manager said that
“transportation, not affordability or schools” will be the key driver
in a world where two-income households are the social norm.
So, how do these cross currents sort themselves out?
The interaction between jobs and homes is the dynamic that
must be carefully understood. Since 2002, job growth (in annual
percentage terms) has been higher in the core than the periph-
ery in the majority of top 40 U.S. metropolitan areas. That trend
accelerated during the Great Recession and in the immediate
post-recession years. This was true for the usual suspects like
New York City and San Francisco. But it was also true for Austin,
Charlotte, Nashville, and Portland, and for cities like Hartford,
Milwaukee, Philadelphia, Pittsburgh, and Oklahoma City as well.
And access to these expanding employment opportunities is
one of the keys to suburbs with future growth potential.
Still, the suburbs, obviously, are not starting from scratch. Even
in the big metro areas, suburbs represent a major share of the
existing jobs base. In the top 40 metro areas, 84 percent of
all jobs are outside the center-city core. That is the basis for
optimism for the suburban future. The configuration (and recon-
figuration) of suburban commercial real estate will play a role in
building on the existing employment base.
And the configuration of the suburbs is not standing still. More
“suburban downtowns” are densifying, especially if they have
a 20-minute transportation link to center-city jobs, Main Street
shopping, and their own employment generators. These sub-
urbs exhibit many of the attributes of an 18-hour city. These are
typically in metro areas where close-in suburbs can both access
center-city job growth and act as employment nodes in their
own right. And they have the advantage of being less costly
than the densest coastal markets. Three out of four millennials
preferred such close-in (within 20 minutes of the city) locations
if they considered suburban choices.
In Texas, San Antonio joins Dallas and Houston in suburban-
dominated job growth. San Diego and Phoenix are in this club
as well. Denver’s growth marginally favors its suburbs. And
even in cities like Chicago, which has been seeing a trend of
corporate in-migration from suburb to center, suburban offices
have been marking positive absorption and a slow but measur-
able decline in vacancies. Granularity trumps generalizing in
the discussion of the future of suburbs, as it does in other trends
discussed in this report.
As in all real estate discussions, location matters and general-
izations based on U.S. averages are less relevant. Where the
jobs are growing will shape the trend of residential choices over
time. It would be a mistake to paint that trend with too broad a
brush. But the suburbs may adopt Mark Twain’s legendary com-
ment that reports of his death were “greatly exaggerated.”
3. Offices: Barometer of Change
On the subject of jobs, the office sector has been benefiting
from the strengthening employment numbers in this maturing
recovery. Employment is up by more than 2.9 million year-over-
year, as it has been since late 2014, and the July growth rate
for jobs was a solid 2.1 percent. Job gains have now spread to
the vast majority of metro areas, with New York/Northern New
Jersey (168,900), Los Angeles (152,000), and Dallas/Fort Worth
(117,800) leading in absolute change, and only a few metro
areas registering moderate decreases.
With office-using jobs, as tallied by a national brokerage firm,
accounting for 39 percent of the employment gain, both central
business district (CBD) and suburban office absorption has
been brisk, bringing vacancy down 90 basis points and rents
up 2.9 percent year-over-year. The outlook for the year ahead is
“more of the same.”
Redesign of office space to do away with walls and cubicles—
and the rethinking of “work” that goes along with it—remain
prominent in the minds of our interviewees. It is no longer an
issue of overall space per employee compression. Some see
the redesign as a way to accommodate an alteration in work
style itself; others view it as a workforce capture tool—key
to attracting and keeping the desired talent; and for others,
it’s both. And hip, cool open spaces are not just for startups.
Corporate space is accommodating a mix of open areas and
a variety of private or semiprivate configurations.
Interestingly, one veteran of the insurance industry remarked,
“Insurance companies, decades ago, had these big open
offices with desks next to each other. The floor plan was like
100,000 square feet, with big signs that hung from the ceiling
that said ‘Area 1-J’ or ‘Area 3.’ It was old-school: they had the
regular employee dining room and the officers’ dining room, but
in both cases employees could get lunch for free. I just went to a
social media company’s building in San Francisco. It reminded
me that what’s old is new again: open space and a cafeteria
where lunch is free.”
Entrepreneurial businesses—often seen as the key to a vibrant
local economy—urban or suburban, also are contributing to
changes in office space, as startups have special space needs.
10 Emerging Trends in Real Estate® 2016
This is a significant opportunity for the office market, with the
U.S. Government Accountability Office estimating “the contin-
gent workforce” (self-employed and unincorporated workers) at
8 percent of the workforce, or 11 million jobs.
Coworking space firms have been actively providing for this
emerging element of office workers. Computer coders, business
consultants, lawyers, and other knowledge workers are among
those taking on space through coworking venues, which have
become a major office leasing force in some large markets. This
spreads across the geography of the United States.
Entrepreneurs and so-called gig workers are the customer
mainstays for such tenants’ companies. The business model
for coworking companies, incredibly, is based upon levering up
the price of conventional office space, even in such expensive
markets as Manhattan—which has the highest concentration of
coworking firms of any office market. The coworking sponsor
leases space from the primary landlord, and then subleases
by the desk, the private office, or the suite at a premium, while
providing a menu of amenities and the promise of collaboration
and synergy, as well as a more professional environment than a
wi-fi–enabled coffee shop.
There is, of course, risk in the fixed obligation of the basic
lease, but the reported operating margin for coworking firms
is reported to be about 30 percent and their growth trajectory
has been spectacular. In the New York area, such firms have
branched out into Brooklyn and Hoboken, New Jersey. Los
Angeles, Chicago, D.C., San Francisco, Miami, Dallas, and
Austin also are target markets for coworking. There are niche
players focusing on health care technology, engineering and
design, women-owned businesses, and even entrepreneurs
focused on social and environmental causes. Depending upon
the specialization, amenities range from conference rooms, to
car-sharing memberships, to three-dimensional printer access.
The range of innovation and experimentation is impressive.
Traditional landlords have embraced the coworking enterprises
up to now. Not only do these firms represent immediate market
demand for office space, but some see them as the private sec-
tor laboratory for “incubator space” that hitherto depended on
public or institutional subsidies for the most part.
Emerging Trends interviewees did have some reservations
about jumping on the bandwagon, however. Skeptics included
a prominent academic and consultant who looked at the sharing
membership model and told us, “Do I want to be a tenant in a
building where you have 30,000 members who can just drop by
and use the space? Forget about this space taken separately;
think about the rest of the tenants. . . . I don’t know what office
building you’ve been in lately, but you don’t ‘just stop by’ the
modern office building post-9/11, security-wise.”
Perhaps. But the real estate market seems to be figuring out
issues like that. And, meanwhile, coworking spaces are not gen-
erating the same kind of regulatory push-back as the apps for
ride sharing and room sharing. In the coworking spaces, then,
we have entrepreneurial innovation matched up with industry
acceptance and at least a benign noninterference from public
regulators. Is this a small part of the real estate industry future?
Probably. Will it be growing? Most assuredly. One more reason
we’ll see changes in office space? For sure.
Altogether, the speed at which all these changes appear to be
taking place is reflected in interviewees’ unusually frequent men-
tion of repositioning and reuse of existing assets.
4. A Housing Option for Everyone
If the “work” component of “live/work/play” is evolving, so is the
“live” element—housing. We normally think of change in terms
of trends or cycles. Sometimes, we acknowledge patterns of
maturation. But the global financial crisis began with disruptive
change in the bursting of the housing bubble, which, in turn, has
been sorting itself out in a “change of state” whereby homeown-
ership is pulling back from the nearly 70 percent of households
seen at the extreme of the bubble to 63.4 percent in the second
quarter of 2015.
Exhibit 1-11 Share of Job Growth by Company Size,
since 2013
Sources: U.S. Bureau of Labor Statistics; Moody’s Analytics, as of June 30, 2014.
46+38+6+10C
1 to 49
500 to 999
1,000+
50 to 499
37.8%
6.0%
9.8%
46.5%
Number of
employees
11
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
As the market sorts itself out, a reasonable expectation is for
the homeownership rate to settle in a narrow range around its
50-year average of 65 percent. In the short run, that means the
advantage remains with investors and developers in the rental
housing sector. Over the longer haul, though, it means that
housing demand will be greater across all residential segments.
Economic and demographic factors are influencing the housing
market as it deals with issues around providing the type of hous-
ing desired by the peak of the baby boom generation, aging
millennials, a population making an urban/suburban choice, and
finding a way to provide affordable housing to support a vibrant
workforce.
Cohousing solutions, micro housing, and other design trends
are addressing some of the scarcity and lifestyle issues shaping
household preferences. One company, for example, is target-
ing an age segment as young as the late 40s, who may want
community amenities like catered meals, happy hours, shared
recreation—and who might become the market for more senior-
oriented facilities in later decades of life. We see a trend toward
greater diversity in demand and supply across different sectors
of the housing market, not to mention the migration of hous-
ing styles from one target market to another. An example is the
expansion of the student housing model of renting by the bed
being applied to a nonstudent market. The concept of renting
your own bedroom and bathroom in a group setting may well
appeal to millennials even after they have graduated.
Housing is a field where it pays to look “under the equator.” By
that, we mean that the tendency of analysts (as well as investors
and developers) to focus on averages or medians can gravely
miss key statistical points that can illuminate both opportunities
and risks in the marketplace. The impact of big data on real
estate should improve the situation, but only if the data are used
to the fullest. Superior profit potential has skewed recent hous-
ing production toward the luxury end of product. What is not so
obvious is that a shortfall of supply in the mid-to-lower end of the
residential market is putting upward pressure on pricing for such
units, exacerbating already severe affordability issues.
Affordable and workforce housing is ranked higher in impor-
tance in Emerging Trends surveys this year than in the last five
years, and the “Issues to Watch” section later in this chapter
looks at some looming regulatory issues of concern to the indus-
try. The pressures already exist, and are building. Since housing
affects everyone, it is no wonder that voters will be pushing poli-
ticians for action. Creative ideas, though, will likely depend upon
the real estate sector’s savvy if they are going to be effective.
Getting ahead of the pressures would be a salutary trend for the
industry. Elements of success would mean developing housing
products targeted to a variety of income-range cohorts. Some
would be rental, some ownership, some rent-to-own. Sharp
pencils will be needed to delineate the amounts and the form of
government supports. Tax credits, flexible zoning, public/private
finance tools, and land trusts are all possible avenues to be
explored. Developing improved housing options for everyone,
Exhibit 1-12 Decline in U.S. Homeownership, 1994 to Present, by Generation
25%
35%
45%
55%
65%
75%
85%
95%
Current
High
65 and older
55 to 64
45 to 54
35 to 44
Under 35
Total
69.2%
63.4%
43.6%
34.8%
70.1%
58.0%
77.4%
69.9%
82.4%
75.4%
81.8%
78.5%
Source: U.S. Census Bureau, Table 19: Homeownership Rates by Age of Householder: 1994 to Present.
12 Emerging Trends in Real Estate® 2016
however, is passing from the realm of “nice to do” to “must do.”
That’s going to be shaping the housing trends going forward.
5. Parking for Change
Should we be phasing out parking lots and parking structures
even before the widespread adoption of the autonomous
vehicle (a.k.a., the driverless car)? Miles traveled by car for
those people 34 years old or younger are down 23 percent. The
American Automobile Association reports that the percentage
of high school seniors with driver’s licenses declined from 85
percent to 73 percent between 1996 and 2010, with federal data
suggesting that the decline has continued since 2010. The new
Yankee Stadium, built in 2008, provided 9,000 parking slots for
its 50,000 seating capacity. But that has turned out to be too
many, since most fans come by mass transit, and the parking
structure is left at just 43 percent occupancy.
Many interlocking trends come into play where parking is
concerned. The automobile shaped cities and suburbs, influ-
enced building and zone codes, and helped form the psyche
of a couple of generations after the end of World War II. Siting
real estate development often involved identifying not only the
nearest freeway cloverleaf, but even whether a right or left turn
from the access street was needed. Was land so dear that
structured parking was a required solution, or could acres be
devoted to striped asphalt for shoppers or workers? How many
spaces per residential unit? How many per 1,000 square feet
of commercial space?
And now, in an era of change, what’s next?
Exhibit 1-13 Automobile Drivers, as a Percentage of
All Commuters
60%
65%
70%
75%
80%
85%
90%
2013
2010
2006
2000
1990
1980
1970
1960
64.0%
77.7%
84.1%
86.5%
87.9%
86.7% 86.3% 85.8%
Sources: U.S. Census Bureau, 1960–2000; American Community Survey, 2006–2013.
Exhibit 1-14 Importance of Issues for Real Estate in 2016
Federal fiscal deficits/imbalances
State and local budget problems
Energy prices
New federal financial regulations
Strength of U.S. dollar
Inflation
Tax policies
Global economic growth
Interest rates
Income and wage growth
Job growth
Regional/global epidemic
Social equity/inequality
Rising cost of education
Immigration
Federal government actions
Political gridlock
Lack of qualified workers
Terrorism/war
Risks from extreme weather
Wellness/health features in buildings
Sustainable buildings
Deleveraging
CMBS capital availability
Increasing water conservation
State and local water regulations
NIMBYism
Future home prices
Affordable/workforce housing
Refinancing
Transportation funding
Vacancy rates
Infrastructure funding/development
Land costs
Construction costs
Economic/financial issues
Social/political issues
Real estate/development issues
1
No
importance
2
Little
importance
3
Moderate
importance
4
Considerable
importance
5
importance
4.56
4.10
3.95
3.53
3.44
3.38
3.33
3.24
3.13
3.05
2.94
1
2
3
4
5
Great
3.37
3.32
3.16
3.14
3.13
3.00
2.84
2.80
4.13
4.03
3.83
3.78
3.57
3.51
3.30
3.26
3.22
3.20
3.19
3.14
2.99
2.84
2.82
2.61
Source: Emerging Trends in Real Estate 2016 survey.
13
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
Climate Change and Real Estate
Are the risks recognized?
This year’s Emerging Trends in Real Estate survey reveals
the real estate industry’s lukewarm opinions on how climate
change—or government actions to address it—might affect
their business. Compared with their thoughts on issues like
job growth and construction costs, respondents placed
much less importance on the risks of extreme weather,
energy prices, sustainable buildings, water conservation,
and water regulations (see exhibit 1-14).
Regarding extreme weather (which ranked lowest), data from
the National Oceanic and Atmospheric Administration reveal
that 178 “$1 billion weather disasters”—including droughts,
wildfires, hurricanes, floods, and winter storms—occurred
from 1980 to 2014. The average event cost $5.8 billion, much
of that directly to property, while losses in other sectors (e.g.,
agriculture and tourism) clearly ripple to affect real estate.
The science is clear on the upward trend of disasters like
these, given rising global temperatures, changes in rainfall,
and warming oceans.
Alarmed by these impacts, the public sector is responding.
California, for instance, has adopted strict water conserva-
tion measures in the face of historic drought. With them, golf
courses and swimming pools become difficult amenities to
maintain, while efficient building features become impera-
tives. Motivated to address not just climate change effects,
but also their cause, more than 30 U.S. jurisdictions have
passed energy benchmarking or disclosure laws, echo-
ing the approach of ULI’s Greenprint Center for Building
Performance. And numerous cities have incorporated LEED-
like standards into their green building codes, making them
mandatory. These measures and others—like the president’s
Clean Power Plan—should dramatically increase demand for
greener buildings, and may even affect energy prices.
Why this difference in rankings?
Perhaps these issues are obvious, and are already being con-
sidered? (Emerging Trends interviewees indicated that many
see LEED measures as “second nature,” for example.) Or
maybe it is simply a matter of mismatched timescales—with
climate change impacts perceived as beyond the investment
horizon for most real estate projects? Attitudes on that front
may shift: 26 percent of Emerging Trends respondents report
a ten-year or longer time horizon for investing, compared with
16 percent last year. Another hypothesis for these results is
the perception that climate change requires collective action
at a significant scale.
Industry is responding.
Some industry stakeholders are beginning to incorporate
resilience thinking and adaptation measures into their busi-
nesses. When Emerging Trends respondents were asked
what measures, if any, they were taking to address risks
posed by extreme weather, several key strategies rose
to the top:
●
● Installing backup and on-site power;
●
● Investing in higher-quality construction to withstand risks
(often above code);
●
● Avoiding construction in high-risk areas;
●
● Conducting risk assessments that incorporate severe
weather impacts;
●
● Securing enhanced insurance; and
●
● Developing emergency management, disaster recovery,
and contingency plans.
Cities see things differently.
To compare Emerging Trends respondents’ perspectives
with those of city leaders, we collaborated with CDP—an
organization that works to transform the way the world does
business to prevent dangerous climate change and protect
natural resources. CDP uses measurement, transparency,
and accountability to drive positive change in the world of
business and investment, and holds the world’s largest col-
lection of self-reported climate change, water, and forest-risk
data from cities and companies.
Risks are recognized. Forty-six U.S. jurisdictions—from
New York City and San Francisco to Aspen, Colorado, and
Arlington County, Virginia—publicly disclosed responses to
CDP’s 2015 information request. CDP’s data reveal that many
U.S. cities recognize significant risks from climate change:
14 Emerging Trends in Real Estate® 2016
●
● 91 percent said that current and/or anticipated effects of
climate change present a significant risk to their city;
●
● 87 percent said their cities face social risks as a result of
climate change (including the loss of traditional jobs);
●
● 76 percent said that the effects of climate change could
threaten the ability of businesses to operate successfully
in their city; and
●
● 74 percent said they foresee substantive risks to their city’s
water supply in the short or long term.
Of the 245 expected climate change effects disclosed by
these cities, 58 percent were deemed current or short-term.
The public sector takes action. Cities don’t just see these
challenges; they are acting to address them. Many of their
strategies could have impacts on real estate, including the
following:
Top markets move to increase resilience. Municipal
leaders are acting for many reasons, and some of the very
strategies that reduce climate-changing carbon emissions
and help buffer climate-induced extreme weather also make
cities healthier and wealthier, making them more attractive
to employers and residents. Or, as Austin, Texas, noted in
response to CDP’s 2015 information request: “By reduc-
ing greenhouse gas emissions and better managing water
resources, we will also have cleaner creeks, less air pollution,
and other ancillary benefits.”
A number of the cities that ranked in the top 20 in the
Emerging Trends survey (see chapter 4) were those asked
by CDP about their strategies for reducing climate change–
related risks. These include the following:
Disclosure about risks (and actions to address threats) provides
the real estate industry with important transparency around
market conditions; it can help cities and businesses align their
efforts to address climate change together; and it helps asset
owners in developing strategies for their own portfolios.
City Strategies to Reduce Climate Change–Related
Risks to Infrastructure, Citizens, and Business
Atlanta
Creating incentives for water-efficient equip-
ment and appliances to lessen the risk of more
intense droughts.
Austin
Setting a 140-gallon-per-capita daily water goal
and revising the water conservation code to
address long-term drought conditions.
Denver
Developing a recycled-water program that uses
treated wastewater for irrigation and other non-
potable uses to combat water scarcity.
New York Published A Stronger, More Resilient New York,
which led to “the passage of more than a dozen
new laws to make new construction in the
floodplain more resilient” to increasingly strong
storms and associated flooding.
Phoenix
Increasing the tree canopy from 9 percent to 25
percent to counteract the effect of hotter summers.
Seattle
Providing incentives and technical assistance
for green roofs to absorb more intense rainfall.
Addressing energy use
Addressing water risks
Setting citywide green-
house gas (GHG) reduction
targets
Water use restrictions
Setting citywide renew-
able energy and electricity
targets
Water conservation
incentives
Taking specific actions to
reduce GHG emissions
from the building sector via:
●
● Building codes and
standards
●
● Building performance
rating and reporting
●
● Energy efficiency and
retrofitting*
●
● On-site renewable energy
generation*
*Including through codes
and incentives
Water metering
Stormwater manage-
ment, including fees or
ordinances, or green infra-
structure incentives
Use of nonpotable water
inside (e.g., via permitting
graywater systems)
Use of nonpotable
water outside (e.g., for
landscaping)
15
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
The urbanization trend and gen-Y preferences already are
suggesting that existing parking represents a suboptimal use of
land. In both 24-hour cities and 18-hour cities, that is foment-
ing change. In the highly dense San Francisco market, a pilot
program is using variable, demand-responsive fees for both
metered and garage parking. In Minneapolis, the traditional
one-parking-spot-per-unit rule is giving way to a zero-parking
requirement for small (i.e., with fewer than 50 units) apartment
developments and a 50 percent reduction in required parking
for larger buildings outside downtown, provided they are within
a quarter-mile of mass transit running at 15-minute frequencies
or greater. Seattle has a new apartment development with a
walk score of 98 (“walkers’ paradise level”) with little parking
to start with, but even that little amount is thought to provide
excess capacity.
And in Los Angeles, the avatar of the automobile-oriented city,
development consultants are thinking about the city’s expanding
mass transit. “If there is a transit line coming, how do you think
about parking in the short run, and can the parking structure be
reused for something later? We are looking at a project right now
where there will be an extension of one of the train/subway lines,
but it could be ten to 15 years away. So you’re going to have to
build the parking structure, but maybe there is a way to build the
parking structure where it can convert to something else in the
future.” In the inner-ring Washington, D.C., suburb of Bethesda,
Maryland, surface parking lots in business parks are already
giving way to mixed-use developments with an emphasis on
multifamily housing.
Even if we still have a ways to go before we reach the point
where we forget that the gas is on the right and the brake is on
the left, we will be seeing change trending in the parking pat-
terns of real estate developments. “How cool would it be,” that
development consultant mused, “if I looked out my window and
saw a park instead of a parking lot?”
With lowering the overall cost of construction ranked the
number-two issue of importance in the Emerging Trends in Real
Estate 2016 survey, it is easy to see why a Jetsons-like future is
capturing the industry’s imagination. “Years away” is the con-
sensus of our interviewees, but this is an emerging trend caught
in its early stages.
It may seem far-fetched, but the pace of technological change
and the consumer’s willingness to adopt and adapt suggest that
the future may come faster than many expect. For this trend,
call the offensive coordinator and figure out the best way to get
down the field.
6. Infrastructure: Network It! Brand It!
“The U.S. is losing the battle globally,” when it comes to infra-
structure, complained one investment manager interviewed this
year. “What is our problem?”
The conventional approach to infrastructure improvement is
utterly disheartening. The most recent (2013) American Society
of Civil Engineers (ASCE) Infrastructure Report Card give the
United States a grade of D+. At present, state-by-state updating
is going on, and the results are not showing much improve-
ment. Arizona rates a C, as does Georgia. ASCE scores Utah
a bit better at C+, but Illinois, Iowa, and Virginia get only a C–.
And none of these states is in the oldest region of the nation—
the New England/Mid-Atlantic corridor—or the heart of the
factory belt in Ohio and Michigan. The ASCE estimate of $3.6
trillion in infrastructure spending needed by 2020 seems way,
way out of reach.
Clearly, there is a lot of need to play defense, to prioritize urgent
repair and maintenance, and to tackle critical needs in areas
like water supply and distribution, aviation, highway bottlenecks
and rail safety. With voters in many parts of the country loathe
to approve local and state bond issues, public financing is a
tough sell. Yet it can be done, as Colorado has demonstrated
in passing bond referendums repeatedly, and as the state of
Washington is now doing to address its transportation needs.
Many have put hope in public/private partnerships and in vehicles
like infrastructure real estate investment trusts (REITs). But the
REIT market has focused more on clearly commercial assets, like
cellphone towers, energy pipelines, transmission networks, and
solar generation than on roads, dams, bridges, and hazardous
waste disposal. So public money—where available—needs to go
almost exclusively to urgent needs, rather than toward important
future needs.
Nevertheless, some creative plans are shifting toward playing
offense. High-frequency bus networks, for instance, provide
greater transit capacity with superior flexibility and lower cost
than fixed-rail operations—especially in less dense cities.
Bus rapid transit is often effectively connected to other transit
modes such as rail stations or park-and-ride hubs. Minneapolis,
Portland (Oregon), Omaha, and Austin have installed high-
frequency systems, and Columbus (Ohio), Houston, and Los
Angeles have plans in the works.
The private sector has stepped up as well, as one private equity
manager noted, “The tech firms are providing bus service, paying
some of the costs of freeway exits, even investing in educational
16 Emerging Trends in Real Estate® 2016
facilities.” That’s not purely charity. The idea is helping to better
conditions that attract and retain productive employees.
With traffic congestion costing U.S. businesses and individu-
als $124 billion per year and with interest in shorter commutes
and general walkability growing, here is where infrastructure
improvement meets the 18-hour city and the densifying suburb.
Places that address this intersection well will trend upward.
Places that don’t will be competitively disadvantaged. And with
a denser network of transit, soaring land costs around transit
nodes can be mitigated, with multiplier effects on reducing
housing and commercial property development costs as well.
Green infrastructure, another creative instance, is a growing
field with aspects of both offense and defense. On offense, an
expanding set of tools is available for water management for
both local governments and private developers. Permeable
pavement, green rooftops, greener parking lots, rainwater har-
vesting, and other strategies are being employed in New York,
Philadelphia, Chicago, Milwaukee, and Seattle, among other
large and midsized cities. With the recent evidence of increased
storm severity and frequency, these are not only quality-of-
life tactics; they also have the defensive strength of dealing
preemptively with potentially massive repair and replacement
needs. Many localities support private efforts with either rebates
or tax advantages, as in Portland, Oregon’s Grey to Green initia-
tive. State and local governments, commendably, have stepped
up while Congress has dawdled.
As the need to do more with little (let’s not concede “less”)
becomes more acute, a greater attention to innovative solutions
to America’s massive infrastructure needs is likely to mark the
latter half of this decade and beyond.
7. Food Is Getting Bigger and Closer
This may be the ultimate in niche property types: adaptive use
with a vengeance (or at least with veggies).
The classic theory of urban places relegates agriculture to
the hinterlands, as virtually every kind of vertical construction
has superior “highest-and-best-use” characteristics, bringing
greater investment returns to land value than growing food. This
is absolutely true in most cases. But there are places in more
cities than we might imagine where neighborhood land is cheap
or older buildings sit idle, and where median incomes are low
and the need for fresh food is high. Some are the “hollowed out”
areas of Detroit as well as Camden and Newark, New Jersey.
But there is a surprisingly significant level of activity in places
like Brooklyn, Chicago, Philadelphia, and Washington, D.C.,
where “foodies” of all generations abound.
“Small potatoes,” some might think. While it is true that fruits,
vegetables, and products like honey grown in urban envi-
ronments are no threat to large-scale agribusiness, there is
surprising scale to a number of operations. New York City is
home to one operation that produces more than 300 tons of
vegetables in three hydroponic operations in Brooklyn and
Queens. In Chicago, a local business has grown its output
to about a million pounds of salad greens and herbs, and
contracts with four dozen upscale supermarkets. Detroit’s com-
munity and commercial farming operations brought 400,000
pounds of food to market in 2014. The term locavore has entered
the vocabulary of the cuisine cognoscenti.
This, not incidentally, fits hand in glove with the phenomenon of
specialty restaurants buoying shopping centers, generating traf-
fic, holding customers for longer periods, and creating “buzz.”
Foodies are at the sweet spot of retailers’ desired demograph-
ics—upscale, knowledgeable, and spending-oriented.
In the Ironbound neighborhood of Newark, a 69,000-square-
foot former steel factory is being converted into the world’s
largest indoor vertical farm. The $30 million investment has
attracted institutional capital as well as public dollars from the
city of Newark and the state of New Jersey. The Ironbound is
poised to be for Newark what revitalizing neighborhoods have
been just across the harbor in Brooklyn.
What is the “trend” here? Are we likely to see barns and silos
dotting our cityscapes? No, that is hardly the point. What is
important—and trending—is the new vision that has urban land
as that most precious and flexible of resources. The idea that
the end of one productive use of a real estate asset spells the
extinction of value and the sunsetting of opportunity is an idea
whose time is over. Just as the reinvention of the suburbs is an
emergent story for the decade ahead, so is the creative adapta-
tion of inner-city uses.
Vegetables aren’t the only things sprouting. So is productive
activity in places that have long lain fallow.
8. Consolidation Breeds Specialization
If “size matters,” that is not the same as “bigger is better.”
The playing field itself is changing. While size and scale have
brought advantage over the years, the evolutionary trends in
development, equity investment, and lending are showing that
“small can be powerful” as well.
This works on many levels. Developers find it hard to access the
best capital unless they have scale; but this means fitting the
quality demands of conservative lenders. That requires niche
17
Emerging Trends in Real Estate® 2016
Chapter 1: Coordinating Offense and Defense in 2016
lenders can fund the smaller projects, and small developers with
their lenders may be accessing the most innovative parts of the
business. Also: think brokerage and fund management.
Firms may find themselves in the middle and will need to choose
which side—smaller or larger—they wish to be on. A Chicago
developer who had long operated as an independent with
the capacity to execute high-end urban construction recently
moved under the umbrella of a large firm with cross-border
businesses. He said, “The builders and owners of property
now are entirely different. Small builders just aren’t designed to
withstand cycles.” He also cited “the pursuit costs” of deals—
not only having substantial equity that will stay at risk, but also
the length of time that capital is at risk. “With the average pursuit
of a significant deal taking a minimum of 18 months and millions
of dollars, I just need deeper pockets behind me to do busi-
ness I used to be able to accomplish with resources I could put
together myself.” Big projects are the domain of big organiza-
tions, especially in an era of lower leverage.
At the same time, large lenders are more cautious in the greater
regulatory scrutiny they face. If you are designated a systemi-
cally important financial institution (SIFI), you face hurdles that
limit activities that might have been your norm in the years be-
fore the global financial crisis.
As the historically more powerful banks are now more regu-
lation-constrained, community and regional banks are more
active. A Midwest banker with a regional footprint felt his
SIFI-designated competitors were somewhat handicapped by
capital surcharges, while the community and smaller banks
were being encouraged to lend as a way to promote macroeco-
nomic growth. However, he noted that “the smaller banks are
being stretched for yield” by the sheer volume of capital. “Are
they being paid for the risk they are taking?”
The community lenders themselves must watch their portfolios
so they don’t grow to a size that tips them into more regulations.
Right now, those banks are a go-to source of development
financing, and local developers are increasingly knocking on the
doors of those banks for projects in the $20 million to $50 million
range. Many real estate projects are right in that size class.
What it means—and what the trend looks like going forward—is
another instance of how granularity is the texture of the industry.
Or, to change the metaphor, the sharpness of your picture is
really dependent on the density of its pixels. Success will be a
matter of “high resolution” operations in 2016 and beyond.
9. We Raised the Capital; Now, What Do
We Do with It?
The flow of capital into U.S. real estate continues to increase.
Total acquisition volume for the 12 months ending June 30,
2015, was $497.4 billion, up 24.6 percent year-over-year. While
this pace of growth is probably not sustainable, investors across
the board (with the exception of the government-sponsored
enterprises [GSEs]) are anticipated to have capital availability
in 2016 that is equal to or greater than 2015 levels. With pricing
already near record levels in a number of markets and property
types, where will this new capital be invested?
●
● Additional markets. Capital is expected to begin to flow
more freely to 18-hour cities, as discussed in Trend 1.
Exhibit 1-15 Time Horizon for Investing
0%
10%
20%
30%
40%
Percentage of total survey respondents
10+ years
5–10 years
3–5 years
1–3 years
9.0%
31.7%
32.9%
26.4%
Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
Exhibit 1-16 Potential Investment Universe, by Market
Classification
$0
$400
$800
$1,200
$1,600
$2,000
Secondary
Big six
Total
Office
Multifamily
Retail
Industrial
Flex
US$ billions
Sources: CoStar and PwC.
18 Emerging Trends in Real Estate® 2016
●
● Alternative assets. The definition of what constitutes real
estate is likely to continue expanding. We have seen the
expansion of REITs to include cell towers and outdoor adver-
tising. Retailers and restaurants continue to look at unlocking
the potential value in their real estate holdings so that they
can devote the capital to their core business. Discovering
a way for private investors to creatively and profitably invest
in infrastructure could also expand the real estate–related
investable universe.
●
● Old is new again. Renovation and redevelopment are
not new concepts, but the fervor with which the market is
embracing older space is making the market consider a
wider range of potential investments. Reports from markets
about the popularity of office space housed in rehabbed
industrial space demanding rents above new Class A prod-
uct serve only to support this idea. Much of this is related to
the changing work environment discussed in Trend 3. Other
uses for obsolete urban industrial space include “last mile”
distribution facilities and even urban farming as discussed
in Trend 7.
●
● Alternative property types. Institutional investor inter-
est begins to expand to alternative property types that to
date have been dominated by a more limited investor set.
Property types such as medical office and senior housing
could potentially see a benefit from changing demograph-
ics. Data centers and lab space may be positioned to be in
demand due to