Emerging Trends
in Real Estate®
United States and Canada 2015
JU
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Emerging Trends in Real Estate® 2015
A publication from:
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Emerging Trends in Real Estate® 2015
Contents
2 Chapter 1 Sustaining Momentum but Taking Nothing for Granted
4 The 18-Hour City Comes of Age
4 The Changing Age Game
6 Labor Markets Are Trending toward a Tipping Point
9
Real Estate’s Love/Hate Relationship with Technology Intensifies
9 Event Risk Is Here to Stay
11 A Darwinian Market Keeps the Squeeze on Companies
12 A New 900-Pound Gorilla Swings into View
13
Infrastructure: Time for the United States to Get Serious?
14 Housing Steps Off the Roller Coaster
15 Keeping an Eye on the Bubble—Emerging Concerns
17 Expected Best Bets
20 Chapter 2 Real Estate Capital Flows
21 Looking across the Debt Sector
24 Meanwhile, on the Equity Side . . .
30 The View from the Bridge
31 Chapter 3 Markets to Watch
31 2015 Market Rankings
33 Capital Flow by Market
34 Continuing Urbanization Trend
35 Generational Impacts: The Potential for Change
36 Technology and Energy Leading the Recovery
36 Jobs Go Where It Costs Less
38 The Top 20 Markets
47 Perspective on Regions
60 Chapter 4 Property Type Outlook
60
Industrial
64 Hotels
65 Apartments
67 Retail
70 Offices
73 Housing
76 Chapter 5 Emerging Trends in Canada
77 The Business Environment
80 Emerging Trends in Canadian Real Estate
84 Capital Markets
87 Opportunities by Property Type
90 Markets to Watch in 2015
96 Local Market Opinion
96 Expected Best Bets in 2015
97 A Summary of Canadian Real Estate Trends
99
Interviewees
Emerging Trends
in Real Estate®
2015
ii Emerging Trends in Real Estate® 2015
Editorial Leadership Team
Adam Boutros*
Adam S. Feuerstein
Adriane Bookwalter
Aki Dellaportas
Allen Baker*
Allen Topaloglu*
Alysha Brady
Amanda Gruskos
Amy E. Olson
Amy Perron*
Andrew Alperstein
Andrew Popert*
Andrew Stansfield
Andrew Warren
Brad Wood
Brett Matzek
Bud Thomas
Carlo Bruno
Chris Dietrick
Chris Mill
Chris Vangou*
Christina Howton*
Christine Hill
Christine Lattanzio
Christopher J. Potter*
Cynthia Chandler
Daniel Cadoret*
Daniel D’Archivio*
David Baldwin
David Baranick
David Glicksman*
David Khan*
David M. Voss
David Ross
David Seaman
David Yee*
Deborah Dumoulin*
Dennis Goginsky
Dillon Long
Dominique Fortier*
Doug Purdie*
Douglas B. Struckman
Emily Pillars
Eric Andrew*
Eric St-Amour*
Ernie Hudson*
Eugene Chan
Frank Magliocco*
Franklin Yanofsky
Fred Cassano*
Ian Gunn*
Ian T. Nelson
Jack Keating
Jackie Yau*
Jacqueline Kinneary
James Oswald
Jane Ma*
Jasen Kwong*
Jason Chessler
Jay Schwartz
Jay Weinberg
Jeff Kiley
Jeffrey Nasser
Jerry Kavanagh*
Jim D’Amore
John Amman
Julia Powell
Ken Griffin*
Kent Goetjen
Kevin Nishioka
Kourosh HoorAzar
Kristen Anderson
Kristen Conner
Laura Daniels*
Lori-Ann Beausoleil*
Louis DeFalco
Matt Lopez
Mel Fowle
Mike Herman
Miriam Gurza*
Nadja Ibrahim*
Nicholas Mitchell
Philippe Thieren*
Rachel Klein
Rajveer Hundal*
Raymond J. Beier
Renee Sarria
Rich Fournier
Rick Barnay*
Rob Sciaudone
Ron Bidulka*
Ron Walsh*
Russell Sugar*
Ryan Dumais
Scott Tornberg
Scott Williamson
Sean Hiebert*
Sergio Lozano
Stacie Benes
Stephan Gianoplus
Stephen Cairns
Steve Baker
Steve Hollinger*
Steve Tyler
Steven Weisenburger
Susan Smith
Tim Conlon
Tori H. Lambert
Warren Marr
William Hux
William Keating
*Canada-based.
www.pwc.com/structure
PwC Advisers and Contributing Researchers
Emerging Trends Chairs
Mitchell M. Roschelle, PwC
Kathleen B. Carey, Urban Land Institute
Authors
Hugh F. Kelly
Andrew Warren, PwC
Principal Researchers and Advisers
Stephen Blank, Urban Land Institute
Anita Kramer, Urban Land Institute
Senior Advisers
Christopher J. Potter, PwC, Canada
Miriam Gurza, PwC, Canada
Susan M. Smith, PwC
ULI Editorial and Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing Editor/Manuscript Editor
Betsy VanBuskirk, Creative Director
Anne Morgan, Cover Design
Deanna Pineda, Muse Advertising Design, Designer
Craig Chapman, Senior Director of Publishing Operations
Xiaoning Mao, Project Intern
Emerging Trends in Real Estate® is a trademark of PwC and is regis-
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may sometimes refer to the PwC network. Each member firm is a sepa-
rate legal entity. Please see www.pwc.com/structure for further details.
© October 2014 by PwC and the Urban Land Institute.
Printed in the United States of America. All rights reserved. No part of
this book may be reproduced in any form or by any means, electronic
or mechanical, including photocopying and recording, or by any infor-
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publisher.
Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate®
2015. Washington, D.C.: PwC and the Urban Land Institute, 2014.
ISBN: 978-0-87420-355-7
1
Emerging Trends in Real Estate® 2015
Notice to Readers
Emerging Trends in Real Estate® is a trends and forecast publication now in its 36th
edition, and is one of the most highly regarded and widely read forecast reports in the
real estate industry. Emerging Trends in Real Estate® 2015, 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® 2015 reflects the views of more than 1,400 individu-
als 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
companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers
personally interviewed more than 391 individuals, and survey responses were received
from 1,055 individuals, whose company affiliations are broken down below.
Private property company investor, or developer
29.3%
Real estate service firm
20.8%
Institutional/equity investor or investment manager
13.3%
Commercial/institutional real estate developer
9.2%
Bank, lender, or securitized lender
8.7%
Publicly listed property company or equity REIT
6.1%
Private REIT or nontraded property company
2.9%
Homebuilder or residential land developer
7.0%
Mortgage REIT or real estate debt investor
1.2%
Other
1.5%
Throughout the publication, the views of interviewees and/or survey respondents have
been presented as direct quotations from the participant without attribution to any par-
ticular 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 interview-
ees 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.
PricewaterhouseCoopers has exercised reasonable care in the collecting, process-
ing, and reporting of this information but has not independently verified, validated,
or audited the data to verify the accuracy or completeness of the information.
PricewaterhouseCoopers gives no express or implied warranties, including but not
limited to any warranties of merchantability or fitness for a particular purpose or use
and shall not be liable to any entity or person using this document, or have any liability
with respect to this document.
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® 2015
3
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
Another year, another look at the Emerging Trends expected to
affect real estate in the coming year and beyond. It’s a healthy
discipline for our industry, taking a periodic look ahead to evalu-
ate the contenders and pretenders among the forces shaping
the real estate business. By survey, by interview, by a review of
data, and by a thoughtful sifting through of fact and opinion to
arrive at considered judgments, nothing is taken for granted.
Each prospective “trend” has to prove itself to a cross section
of the industry if it is to make the list.
For 2015, we propose ten top trends for your attention. What are
their salient characteristics?
Since real estate’s value is a function of how it serves its users—
workers, consumers, businesses, travelers, homeowners, and
apartment renters—we look to human elements for signs of
trends. Demographics, labor force characteristics, location
preferences, and motivations discerned by observed behaviors
and the interpretation of real estate professionals are among the
most reliable indicators of trends.
The physical attributes of the built environment also count.
Interviewees consider how properties either enhance or detract
from productivity. They worry about obsolescence in the face of
change. They care about physical supports such as transporta-
tion infrastructure, the power and communications grids, and, in
a significant part of the nation, water. None of those issues has
emerged overnight; none of them will go away soon. Tackling
them effectively can enhance the property markets. Ignoring
such issues threatens the economy generally and the property
markets in particular.
Sustaining Momentum but Taking Nothing
for Granted
“It is possible to stretch for opportunities—you just have to be
aware of how much runway you have left in the current cycle.”
Exhibit 1-1 U.S. Real Estate Returns and Economic Growth
NAREIT
NCREIF
-5%
-3%
-1%
1%
3%
5%
GDP
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
2015*
2014*
2011
2009
2007
2005
2003
2001
1999
1997
In
de
x
ch
an
ge
G
D
P
c
ha
ng
e
NAREIT total
expected return
8.0
NCREIF total
expected return
8.0
Sources: NCREIF Fund Index Open-End Diversified Core Equity (NFI-ODCE); NAREIT Equity
REIT Index; Bureau of Economic Analysis/U.S. Department of Commerce; World Economic
Outlook, July 2014; Emerging Trends in Real Estate 2015 survey.
*GDP forecasts are from World Economic Outlook; NCREIF/NAREIT data for 2014 are as of
second-quarter 2014; 2015 forecasts are based on the Emerging Trends in Real Estate 2015
survey.
Exhibit 1-2 Emerging Trends Barometer 2015
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
Sell
Hold
Buy
abysmal
poor
good
excellent
fair
Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
4 Emerging Trends in Real Estate® 2015
Financial factors also help define trends, this year and always.
The volume and form of our savings as a society count. The
flow of capital from around the world influences U.S. real estate
mightily. The appetite for risk and the pricing of risk help direct
that capital to the preferred geographic locations and property
types. Competition hones the pricing of real estate itself, and the
various services needed to get the most out of properties. The
wide variety of investment opportunities—equity and debt, direct
and indirect investment vehicles, the legal structures that offer a
range of choices to property professionals—requires us to dis-
cuss trends in a specified and nuanced way. Even with a limited
number of “top trends,” it is important to tell the stories carefully.
With these salient principles in mind, we herewith present our
selection of the top trends in real estate for 2015. Let the discus-
sion and debate begin!
1. The 18-Hour City Comes of Age
Twenty years ago, Emerging Trends identified the distinction
between nine-to-five downtown markets and 24-hour urban
markets as the key to superior investment performance. That
has proved to be exceptionally prescient, as shown by capital
flows, occupancy rates, and relative pricing changes since then.
The “24-hour city” concept has become part of the common
lexicon of the real estate industry and of city planners.
That trend is expanding and looks to be increasing in influ-
ence. No longer is it accepted that only the great coastal cities
can be alive around the clock and on weekends. Downtown
transformations have combined the key ingredients of hous-
ing, retail, dining, and walk-to-work offices to regenerate
urban cores, spurring investment and development and
raising the quality of life for a roster of cities. So let’s call these
reemergent downtowns “18-hour markets.” Though they quiet
down noticeably in the wee hours, deep into the evening the
mix of shops, restaurants, and entertainment truly generates
excitement. This is catalyzed by walk-to-work housing that
encourages employers in the knowledge and talent industries
to keep their offices downtown.
The 18-hour city is emerging across the country. A Nashville
developer, for instance, notes that “national players are coming
in, drawn by our job growth. The urban core is competing again.”
“Under the radar, downtowns like Greenville and Charleston have
become diverse, following the 24-hour model,” says a prominent
Southeast broker. “They are alive in the evenings.”
Take a look at our 2015 Emerging Trends rankings:
●
● Raleigh-Durham, Charlotte, and Denver are newly placed in
the top ten overall scores.
●
● Charlotte is rated in the top ten for investment—as is
Brooklyn, New York. And, they are also listed as best places
for development in 2015.
●
● With homebuilding coming back, at long last, we find
Charlotte, Raleigh-Durham, and Denver joined by Portland
and Atlanta among the ten most promising markets.
What do most of these 18-hour markets have in common? An
ambition expressed in tangible efforts to strengthen their centers
as live/work/play environments.
Seeing is believing, and belief in the value proposition for
markets getting out of the nine-to-five doldrums has taken root.
The trending cities are not Manhattan, and probably don’t want
to be. But that is their polestar, the model that has demonstrated
that the right urban mix bolsters occupancy, that density raises
values, and that vibrancy attracts investment capital.
Investing requires a deep knowledge of these local markets.
Buyers have more markets to consider now that the 18-hour
centers are putting the elements in place to ratchet up their
investment capital flows.
2. The Changing Age Game
The millennials are an even bigger cohort—and still growing
through immigration—than the baby-boom generation, which
has been shaping U.S. economic geography, marketing, con-
sumption, and real estate use since the 1950s. The millennials
Exhibit 1-3 Firm Profitability Prospects for 2015
0%
10%
20%
30%
40%
50%
60%
70%
80%
Good–excellent
Modestly poor–modestly good
Abysmal–poor
2015
2014
2013
2012
2011
2010
P
er
ce
nt
ag
e
of
r
es
po
nd
en
ts
Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
5
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
have been much talked about, but for all their impact thus far,
there is much more to come. And the changes will accelerate
and become more complex over the next ten years.
An institutional investor notes, “Renter-by-choice is still a potent
force. Apartments will retain their appeal for a while for millenni-
als, spooked by what happened to homeowning parents.” Over
time, of course, homeownership will increase as the millennials
age. A number of interviewees agree that “investors should
be thinking about what millennials will look like in six to seven
years.” A horizon into the 2020s was cited several times: “Watch
for a seven-year trend before millennials will have to make the
decision about whether to stay urban or move to outer areas or
the suburbs.” Condos can enter the picture as well.
Economically, “Millennials have to feel the pressure as $1 trillion
in student debt needs to be paid off.” A lot will depend upon
improved income mobility, since most “millennials are only
getting average jobs and they do not have the means to own a
home.” Investors do not have to plan on this remaining constant
since emerging trends take time to unfold. “A typical investment
hold period for a core investment fund is ten years. What will the
impact of the millennials be then?”
A healthy amount of disagreement exists about what will hap-
pen. One camp is convinced that the millennials will revert to
the mean and want private offices and will move to the suburbs
to raise families. The other side feels like they will continue with
the same behavior they have exhibited. But the key is that we
are talking about a large generational cohort that will evolve and
segment over time. Painting them with too broad a brush will
lead to misplaced expectations—as it has with the baby boom-
ers. One size will not fit all millennials.
The 77 million–strong generation of boomers has not gone out
to pasture, even though its leading edge has now reached the
putative retirement age. A decade or two ago, the expecta-
tion was that resort and retirement communities, mostly in the
Exhibit 1-4 Real Estate Business Prospects
2012
2013
2014
2015
2012
2013
2014
2015
REITs
Commercial developers
Real estate
investment managers
Private local
real estate owners
Real estate brokers
Multifamily developers
CMBS lenders/issuers
Commercial bank
real estate lenders
Real estate consultants
Architects/designers
Homebuilders/residential
land developers
Insurance company
real estate lenders
3.95
3.68
3.49
3.14
3.91
3.62
3.21
2.95
3.86
3.52
3.18
2.84
3.76
3.46
3.18
3.02
3.72
3.68
3.49
3.14
3.72
3.42
3.46
3.27
3.63
3.51
3.32
3.22
3.62
3.56
2.64
1.66
3.62
3.27
2.49
2.09
3.59
3.33
2.87
2.67
3.57
3.43
3.04
2.76
3.45
3.29
2.74
2.44
1
Abysmal
2
Poor
4
Good
2
Poor
4
Good
3
Fair
5
Excellent
1
Abysmal
3
Fair
5
Excellent
Source: Emerging Trends in Real Estate surveys.
Notes: Based on U.S. respondents only. Before the 2015 survey, “Commercial developers”’ and “Multifamily developers” were combined under the category “Commercial/multifamily
developers.”
6 Emerging Trends in Real Estate® 2015
Sunbelt, were going to be the “hot property types” just about
now. The Emerging Trends survey this year, however, ranked
such property as the least desirable investment and develop-
ment opportunities.
“Aging baby boomers will continue to set trends,” said one
investor with an international fund. “The leading edge is now
65 to 73 years old. The move to city centers by this group may
have more staying power than the millennial generation.” As the
boomers trend away from stereotypical golf-course retirement,
they are creating multiple markets that are “inch deep, not mile
deep.” Our interviewees considered opportunities in health care
properties and seniors’ housing “oversold,” and underscore the
desire of retiring boomers “to own properties near their chil-
dren.” It must be said, though, that under the influence of the
Affordable Care Act, new approaches to urgent care, and the
repurposing of retail properties both in the suburbs and in the
center cities, medical office use can be identified as a strength-
ening trend for 2015 and the years ahead.
With better health, longer life spans, and net worth that is still
seeking to recover from the battering it experienced during the
Great Recession, boomers are staying in the workforce—to
some degree at the expense of the millennials, notes one inter-
viewee. As that trend wanes, look for increasing income mobility
potentially reinvigorating the middle class. As the boomers
eventually do retire in greater numbers, “think Carolinas rather
than Florida,” says one investor.
So, with all the deserved attention being lavished on millennials,
let’s not ignore the boomers. They will be influencing the market
both as workers and retirees for a couple of decades to come. In
fact, it is the combined impact of the millennials and the boom-
ers—all 160 million people in the two cohorts—that is making
demography such a hugely powerful driving trend right now.
And while we’re at it, let’s not forget the smaller “generation
Z” that is coming along next. Planning for a nation with lesser
household formation, fewer new consumers, and a really mea-
ger number of workforce entrants is the challenge ahead for a
real estate industry with its eye on the 2020s.
3. Labor Markets Are Trending toward
a Tipping Point
Raise your hand if you are thinking about a coming shortage of
workers. Not skilled workers—that’s already here. Those seeking
specialists to write computer code are already scanning the
continents for those who can produce customized programs and
business apps. Forward-looking businesses are waking up to a
realization that while we were worried about the “jobless recov-
ery,” longer-term labor market trends were moving in exactly the
opposite direction. Retirements will accelerate, while the peak of
millennial labor force entrants has already passed. Within a few
years the talk will be about labor shortages, not labor surpluses.
That trend reshapes things in remarkable ways. The notion that
“jobs are chasing people” will morph into a primary rule of the
labor market. What now applies particularly to people with tal-
ent, knowledge, and skill will soon become a widening search
Exhibit 1-5 2015 U.S. Population by Age
M
ill
io
ns
0
1
2
3
4
5
Greatest generation
Boomers
Gen X
Millennials
Gen Z
80
79
78
77
76
75
74
73
72
71
70
69
68
67
66
65
64
63
62
61
60
59
58
57
56
55
54
53
52
51
50
49
48
47
46
45
44
43
42
41
40
39
38
37
36
35
34
33
32
31
30
29
28
27
26
25
24
23
22
21
20
19
18
17
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Source: U.S. Census Bureau.
7
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
for workers across the entire occupational spectrum. A global
search for talent is underway, and the United States needs to
prepare for that. The steps need to start immediately.
Survey respondents place job growth at the top of the list
of most important issues for real estate, closely followed by
the related concerns of wage and income growth. A leading
economic consultant says, “Labor force growth in the next few
years will drop to the slowest growth rate since the end of WWI
and the influenza breakout. Without a change in immigration
policy, the U.S. will face a severe shortage of workers.” (Yes,
you read that right: “since the end of World War ONE.”) Some
developers in the Southwest are already reporting feeling the
pinch. And what about the disincentives in our visa system?
Both the E-5 “investor immigrant” program’s constraints and a
student visa program that educates international students and
then sends them home to compete against the United States are
considered ripe for change by our interviewees.
Exhibit 1-6 U.S. Labor Force Growth
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
-500,000
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Labor force growth
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Average projected growth,
2008–2025
Annual percentage change
Average growth, 1980–2007
Sources: U.S. Bureau of Labor Statistics; Moody’s Analytics (Economic & Consumer Credit Analytics) forecast.
Exhibit 1-7 Potential Skills Gap by Market
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
M
ad
is
on
Ho
no
lu
lu
Ra
le
ig
h/
Du
rh
am
M
in
ne
ap
ol
is
/S
t.
Pa
ul
Tu
cs
on
Ch
ar
le
st
on
Om
ah
a
Bo
is
e
Ok
la
ho
m
a C
ity
Po
rtl
an
d,
O
R
Au
st
in
No
rfo
lk
Ka
ns
as
C
ity
De
nv
er
Sa
lt
La
ke
C
ity
De
s M
oi
ne
s
Se
at
tle
Al
l-
m
ar
ke
t a
ve
ra
ge
M
em
ph
is
At
la
nt
a
Bi
rm
in
gh
am
Cl
ev
el
an
d
Ri
ch
m
on
d
Da
lla
s/
Fo
rt
W
or
th
Lo
ui
sv
ill
e
Ch
ic
ag
o
In
la
nd
E
m
pi
re
La
s V
eg
as
Lo
s A
ng
el
es
Ta
m
pa
/S
t.
Pe
te
rs
bu
rg
M
ia
m
i
Pr
ov
id
en
ce
Ho
us
to
n
Ph
ila
de
lp
hi
a
Ne
w
Yo
rk
C
ity
Notes: “Skills gap” is the difference between percentage of job openings projected to require some college and percentage of population with some college.
Estimates are for year-end 2012.
Source: Brookings Institution.
8 Emerging Trends in Real Estate® 2015
What’s the emerging trend? Look for a change in the terms of
debate from “defend our borders” to “send us workers” in the
coming years.
Is this some radical reaction to U.S. Homeland Security
excesses? Not really. Of all groups, the Conference Board—
no one’s idea of a fringe organization—is the one sounding
the alarm about the potential for 15 years of labor scarcity
ahead. Its report, From a Buyers’ to a Sellers’ Market: Declining
Unemployment and Evolving Labor Shortages in the U.S.,
released in May 2014, makes the following points.
●
● Many of the millions of long-term unemployed are now
permanently out of the labor market, either because of skill
erosion, age, or being effectively retired. Though these fac-
tors weigh on society in many ways, their impact on labor
force participation is likely to persist. How many people are
we talking about? The most recent Bureau of Labor Statistics
figures say that 3.5 million people looking for work have
been out of a job for six months or more, in an economy that
has been growing by more than 200,000 per month in 2014.
●
● Data suggest that this is not just a shortage of high-tech or
knowledge workers. Truck drivers and health services jobs
are seeking qualified applicants. National data in the manu-
facturing sector show more job openings than new hires
since January 2012.
●
● The voluntary quit rate and employers’ reports of skills mis-
matches are on the rise. We have not yet seen upward wage
trends to compensate for the emerging labor shortage.
Productivity growth is not making up the difference, either.
Since a profit multiplier is built into labor costs, if firms are
to grow their bottom line they will need to bid for labor more
aggressively in short order.
What does this mean for real estate? Well, most industry
veterans would confirm that job growth is the key factor for
filling office buildings and new housing, as well as the driver
for improving sales at shopping centers and spending at
hotels and resorts. Can real estate prosper during times of low
unemployment? Of course! But constraining labor force growth
by restrictive immigration policy is counterproductive, notes the
Conference Board. The Real Estate Roundtable has joined in
with support of a reformed E-5 visa program, while arguing that
a cap of 15,000 on lower-wage “W” laborers hobbles the indus-
try’s construction recovery.
While those looking at the rearview mirror continue to belabor
the claim that the official unemployment rate understates slack-
ness in the job market, the emerging trends are moving in the
opposite direction.
Exhibit 1-8 Importance of Issues for Real Estate in 2015
Slower growth and financial
instability in China
State and local budget problems
Federal fiscal deficits/imbalances
Energy prices
New federal financial regulations
European financial conditions
Inflation
Global economic growth
Interest rates
Income and wage growth
Job growth
Social equity/inequality
Rising cost of education
Immigration
Lack of qualified workers
Federal government actions
Political gridlock
Terrorism/war
Economic/financial issues
Social/political issues
Real estate/development issues
1
No
importance
3
Moderate
importance
4
Considerable
importance
5
importance
4.59
4.11
4.01
3.51
3.49
3.44
3.26
3.19
3.13
3.08
2.94
4.05
3.90
3.76
3.72
3.55
3.47
3.24
3.20
3.15
3.13
3.02
2.74
2.67
2.51
3.53
3.37
3.35
3.31
3.14
2.97
2.75
Risks from extreme weather
Green buildings
Wellness/health features in buildings
Deleveraging
Affordable/workforce housing
NIMBYism
CMBS market recovery
Future home prices
Transportation funding
Refinancing
Infrastructure funding/development
Vacancy rates
Land costs
Construction costs
1
2
3
4
5
Great
Source: Emerging Trends in Real Estate 2015 surveys.
Note: Based on U.S. respondents only.
9
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
4. Real Estate’s Love/Hate Relationship
with Technology Intensifies
Not a single form of real estate is exempt from the exponential
expansion of technology. In an age of digital maturity, interview-
ees see tech as providing new business tools and environments,
opening new business paths, and cycling forward as a source
of user demand in an era when more traditional industries may
be sluggish. Technology, disruptive and incremental, 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 are mainstream.
Investors use the presence of tech firms and science, technol-
ogy, engineering, and math (STEM) workers in a metro area as
a screen for acquisition strategies. As we go through a period
when financial firms no longer drive office demand, brokers are
concentrating on the technology and media industries as a key
source of leasing. Retailers look to the internet both as a source
of competition and as a way to drive consumers into stores.
Warehousing looks different in a world where inventory control
reduces store sizes, but demand for same-day fulfillment makes
“the last mile” in the supplier-to-consumer chain all the more
critical. And so it goes.
As a major Manhattan developer put it, “Demand for office
facilities in NYC is strong. The finance sector may be down, but
technology and media companies are filling the gap nicely.” In
consonance with millennial preferences, the tech sector, which
was once mostly suburban—Westchester and Dutchess coun-
ties in New York; Route 128 in Boston; Silicon Valley; Redmond,
Washington; the cadre of firms in Raleigh-Durham’s Research
Triangle Park—is now more urban. Think of the impact that tech
companies are having in Manhattan and Chicago, as well as in
the Bay Area.
One pension fund fiduciary believes that “downsizing of office
and retail will continue as technology enhances workability,
shopping, and overall living.” Still, some think it inadvisable to
assume we know the end results of current changes. In the
words of one insurance company executive, “We observe the
impact of technology on all sectors, but we don’t know how
much space will be needed over time for office, warehouse,
[and] retail. The consequences probably won’t be as dramatic
as some might fear.”
The rise of the sharing economy, finding success with the
millennial generation, which is very comfortable sharing rather
than owning, is already having a disruptive effect on the taxi
and hotel industries. The office property type, particularly
the segment serving smaller tenants, could be turned upside
down by the advent of landlords offering collaborative and
shared-office locations, as well as lessees renting out unused
conference rooms by the hour or a day of office space. This,
in fact, is already a fairly familiar business model both in office
incubators and in the business suites business. The question
is, “Will this go viral?” Tenants have the ability to adjust their
space to meet their current economic needs. For example, if a
firm is in product development and has 15 employees, it might
need 2,500 to 3,000 square feet of office space; then, when
the product is ready for market, they are using ten marketing
employees who are in the office only part-time. Their space
needs decline to 1,000 to 1,500 square feet. No need to sign a
lease locking you into 3,000 square feet—the firm can adjust
its needs based on what it needs. In addition, the firm has the
freedom to offer its excess space to another firm. This type of
leasing model could have a significant impact on how smaller
office spaces are leased.
Visionaries in the industry think that we’ll see trends developing
whereby accelerated obsolescence will be routinely factored
into property decisions. A chief executive officer (CEO) of a
Southeast real estate services firm believes that “amortization of
improvements will assume greater importance.” He goes on to
ask, “What does a world of driverless cars and drone deliveries
mean for the acres of parking lots surrounding shopping malls?
What happens to real estate brokerage in a world of big data?”
Overall, the fear factor about technological disruption is easing,
with only a very moderate 2.7 score on the “issues impact-
ing your business decisions” survey question. E-commerce,
for example, is being viewed as an adaptation challenge, as
retailers become “omnichannel distributors” and e-tailers begin
to open brick-and-mortar stores. The trend? Anticipation and
evolution, and only the adaptive survive. The initial winners?
Logistics firms at the intersection of wholesale and retail trade.
5. Event Risk Is Here to Stay
There is nothing new in seeing investors along the continuum
from “core” to “opportunistic.” That’s now classic. But the trend
will be that such distinctions are heightened over time, and 2015
looks to be a year when this will be especially evident. But why?
Because we see concern about “event risk” troubling the minds
of more and more interviewees. Geopolitical risks multiplied in
number and intensity in 2014 and threaten to cascade further,
and that has pushed the “flight to safety” in global capital to the
fore. If you think U.S. Treasury rates are low, in early September
two-year yields on European sovereign debt turned negative.
In effect, investors were paying banks to hold their money for
10 Emerging Trends in Real Estate® 2015
them. That’s “risk off” to an extreme. Little wonder, then, that
international investors are considered to be the best prospect
for increasing investment volume in 2015, according to the
Emerging Trends survey.
The propensity for offshore wealth to find a home—literally—in
the United States is a condition of long standing. Latin American
families have flocked to the Miami area for many years. Luxury
units in the New York area have long been a part of that city’s
cosmopolitan flavor. But now, sovereign wealth funds, old family
money, and high-net-worth individuals enjoying initial public
offering (IPO) proceeds are all converging on the United States
for investment opportunities. Real estate in all its forms has great
appeal as a durable, proven asset class in a risky world.
Today’s offshore capital inflow is different in kind, as well as in
degree. International investment in U.S. real estate is spread
across dozens of markets, and all income-producing property
types. In the 12 months ending July 31, 2014, $50.3 billion
in globally sourced capital acquired U.S. real property. The
Canadians represented the lion’s share, at $15.1 billion. But a
veritable “spanning the world” lineup each put between $2 bil-
lion and $4 billion to work: Norway, China, Japan, Hong Kong,
Germany, Israel, and Australia all were in that league. And that’s
the most obvious of the flows. Many international investors use
commingled funds or invest through tax havens like Bermuda.
By and large, foreign capital remains concentrated on the usual
suspects: the gateway cities. The Sunbelt is making something
of a comeback, attracting offshore capital to Phoenix ($700
million) and the Texas markets (Houston, $1.1 billion, and Dallas,
$1 billion) for apartments, and Hawaii ($2 billion) and south
Florida ($1.1 billion) for hotels. Development capital, especially
from China, is making an impact in Los Angeles, Las Vegas,
and Miami, as well as in New York’s burgeoning outer-borough
market, Brooklyn. In a sense, the recent propensity of offshore
investors to expand their roster of investment preferences is
another sign of risk management—spreading their interests
across a wider geography is a way to limit downside volatility
in any one place.
Yield-oriented investors aren’t ceding the field. Value-add and
opportunistic investments are considered to have the best pros-
pects for 2015 returns, according survey respondents, although
they think good, high-quality deals are difficult to find. But the
best indicator that both conservative and aggressive investors
will do well in 2015’s environment is the expectation that National
Council of Real Estate Investment Fiduciaries (NCREIF) and
National Association of Real Estate Investment Trusts (NAREIT)
returns will rise 60 to 90 basis points by 2020. Increasing returns
over time portend increasing capital flows, a trend that is good
across the board for the industry.
Bottom line: America’s diversity—heterogeneity, to use academ-
ics’ current buzzword—is a strength and a shield. It is a strength
because in a world of dire risk, it gives both domestic and inter-
national capital a chance not only to park money, but also to find
markets and real estate opportunities that match a whole range
of preferences. It is a shield because the dense web of the U.S.
economy makes for greater resilience when shocks occur.
This year, Emerging Trends interviewees were sensitive to
potential “black swan” developments. “It isn’t what you see,
it is what you don’t see,” as one economic forecaster put it.
Accommodating the potential for a downturn almost defines the
Exhibit 1-9 World Regions Targeted, by Investor Location
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Asia-based investors
Europe-based investors
North America–based investors
Global
Asia
Europe
North America
P
er
ce
nt
ag
e
ta
rg
et
in
g
ar
ea
o
ve
r n
ex
t 1
2
m
on
th
s
Source: Prequin.
11
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
essence of responsible management. While hunkering down for
an apocalypse is not a widespread strategy, and certainly not
a trend, a concern for capital conservation is clearly abroad in
the marketplace. That is most likely a trend that will have legs as
long as the world remains unduly exposed to the black swan of
event risk.
6. A Darwinian Market Keeps the Squeeze
on Companies
Competition is unrelenting, and the need to have a clear “brand
identity” is important as firms seek to navigate in the swift stream
of capital. For those in the public markets, dependent upon the
understanding of Wall Street analysts, the more “pure play” the
better. Hence, the recent spin-off activities in the retail, office,
and hospitality real estate investment trust (REIT) sectors sound
a theme that will echo as a trend in 2015. One analyst notes
that while “industry metrics are good, it is hard to be accre-
tive merely through acquisitions. Companies need to sharpen
their focus.” Some see this as a necessary discipline, a sign
of maturity for the industry, and a harbinger of greater stability
ahead. The drive for efficiency and effectiveness in both service
delivery and cost will filter from investor expectations down to
the service providers.
That applies on the institutional investment side as well, leading
one public pension plan sponsor to say that “replacing under-
performing investment managers” should be expected going
forward. Pension funds are looking to go more direct or “hands-
on.” The largest investors seek more control. This reduces the
number of new managers you might have seen at this point
in the real estate cycle, according to an industry association
officer. A few niche managers are offering funds. Capital raising
is difficult for mid-tier managers.
One upshot: fees (again) are going to be squeezed as the
capital sources want more services for less money. After a long
period in which outsourcing was the fundamental approach
(staying “lean and mean”), there is some indication that bring-
ing real estate talent in-house is not only an improvement in
accountability, but also more cost-effective. Though this is going
on in just a slice of the industry, consolidation could accelerate
as this trend gathers momentum.
Meanwhile, capital raising in Europe has gotten more dif-
ficult with the Alternative Investment Fund Managers Directive
(AIFMD). New regulations vastly increase reporting and
compliance requirements. Some managers will just not be
able to afford operating under AIFMD, reducing the number of
private equity firms and hedge funds sourcing capital from the
European Union, in the view of one such investor.
As more and more capital has become available, more and
more players naturally have been looking to tap the cash. That
leads to overpopulation in the field. Look for a winnowing-out
process as the next step. The brokerage industry, it might be
noted, is already well advanced in this process. Other business
lines will be moving down that path.
Exhibit 1-10 Investment Prospects by Asset Class
Abysmal
Fair
Excellent
Good
Poor
1
2
3
4
5
20
15
20
14
20
13
20
12
20
11
20
15
20
14
20
13
20
12
20
11
20
15
20
14
20
13
20
12
20
11
20
15
20
14
20
13
20
12
20
11
20
15
20
14
20
13
20
12
20
11
20
15
20
14
20
13
20
12
20
11
Investment-grade
corporate bonds
Commercial
mortgage–backed
securities
Publicly listed
non–real estate
securities
Publicly listed
homebuilders
Publicly listed
property companies
or REITs
Private direct
real estate
investments
Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
12 Emerging Trends in Real Estate® 2015
7. A New 900-Pound Gorilla Swings
into View
Emerging Trends 2014 alerted readers to the establishment of
the Defined Contribution Real Estate Council, formed “to help
plan sponsors and their participants achieve better investment
outcomes through the use of institutional quality real estate.”
U.S. retirement assets hit $23 trillion in 2014, and more than half
of that was in defined contribution (DC) or individual retirement
account (IRA) funds. As one interviewee put it, “We will be see-
ing retirees become their own chief investment officers.”
How deep is this pool of funds? According to the Investment
Company Institute, there are $6.6 trillion in IRAs and $6.0 trillion
in DC 401(k) plans as of the first quarter of 2014. Compare this
with the remaining $3.0 trillion in corporate defined-benefit pen-
sion plans and the $5.4 trillion in public sector pension funds.
An institutional-like allocation of 5 percent to real estate would
represent $300 billion of DC 401(k) funds alone.
Exhibit 1-11 401(k) Asset Allocation by Participant Age
0%
5%
10%
15%
20%
25%
30%
35%
Participants in their 60s
Participants in their 20s
Company stock
GICs and other
stable value funds
Other funds
Money funds
Bond funds
Non–target date
balanced funds
Target date
funds
Equity funds
P
er
ce
nt
ag
e
al
lo
ca
te
d
32.2%
34.2%
12.5% 11.7%
6.9%
6.4%
15.2%
1.9%
5.6%
6.4% 5.5%
3.1%
15.3%
5.5%
6.7%
30.7%
Note: Average asset allocation of 401(k) account balances, year-end 2012. Funds include mutual funds, bank collective trusts, life insurance separate accounts,
and any pooled investment product primarily invested in the security indicated. Percentages are dollar-weighted averages. Components do not add up to
100 percent because of rounding.
Source: Investment Company Institute.
Exhibit 1-12 U.S. Retirement Assets
$0
$5
$10
$15
$20
$25
Annuity reserves
Government plans
Private defined-benefit plans
Defined contribution plans
IRAs
2013
Q1
2013
2012
2010
2008
2007
U
S
$
tr
ill
io
ns
Source: Investment Company Institute, Research and Statistics Report, June 25, 2014.
13
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
Who can doubt that new products directed specifically to this
capital source will be emerging over the coming years? As one
interviewee put it, the real estate industry is challenged “to cre-
ate a better option for this generation.” This may mean needing
to educate the army of certified financial analysts (CFAs) about
commercial property.
Even at a modest allocation level, we are talking about hundreds
of billions of dollars of potential real estate capital. It has implica-
tions for pricing, certainly, but also should prompt a round of
serious thinking about fiduciary responsibility in managing this
money. Retirees are absolutely “capital conservation” oriented,
and the immediate time horizon for asset-liability duration
is far different from the long-term hold consideration of the
established defined-benefit managers. Liquidity is especially
important, and this may favor REITs as a vehicle over direct
investments. CFAs, versed in stocks and bonds, may like the
REITs as an entry point into the commercial property arena.
Whether in securitized or direct property investment, though,
there will be a learning curve that will include (at some point)
the painful lesson that real estate can go down as well as up.
But with a combined $12.6 trillion in capital, IRAs and DC
funds absolutely will be identifying and taking advantage of
the benefits of having high-quality commercial property in a
mixed-asset portfolio.
Watch this trend. It could be huge.
8. Infrastructure: Time for the United States
to Get Serious?
If you were to play a word association game, what word would
you pair with the term infrastructure? Aging, crumbling, decrepit,
failing? Now well into the 21st century, we rely upon roads,
bridges, transit, water systems, an electric grid, and a commu-
nications network put in place 50, 75, even 100 or more years
ago. It is largely hidden and taken for granted—until it stops
working. Then you can’t get to work, power up your computer, or
even take a shower.
As more and more Americans travel abroad, they wonder why
we can’t have roads like the Autobahn, trains like the Eurostar
TVG, or cellphone reception as clear as that available on the
Great Wall of China. The American Society of Civil Engineers
(ASCE) gives U.S. infrastructure a grade of D+ on its most
recent report card.
For all our vaunted technological innovations, the foundation of
our commerce is eroding around us. Sadly, it is not just bridges,
roads, and the like (as important as they are). 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. As a nation, the United States is not investing
in the physical facilities needed to compete into the future. The
trend here is not good, and it is going to be painful for real estate
if problems are left to worsen.
An investor with deep experience in logistics believes that con-
gestion is not just a goods-movement problem. “Infrastructure
constraints causing congestion hobble the improvements tech-
nology can provide. The millennial generation is intolerant of con-
gestion and delay—on highways and in transit.” If the pursuit of
the millennials is central to your city’s economic development
or your firm’s business strategy, that’s alarming. A top New York
broker laments, “Real estate depends upon ease of commuta-
tion. Businesses are paying close attention to commutation
patterns of employees, realizing that the people you most want
are also the most ‘footloose’ as employees. Fundamentally, all
businesses need talent [and customers], and you ‘solve back’
to the real estate from that.”
The chief investment officer of a public retirement fund wants to
invest in growth markets. But he expects “less growth in areas
not investing in infrastructure.” A private equity firm with holdings
concentrated in the Boston–Washington corridor comments,
“Infill is the key to opportunity in strong markets, but it is a chal-
lenge when transportation and utility infrastructure is old and
seriously underfunded.”
Out West—beyond the 100th meridian particularly—the future
depends desperately on water. The 14-year drought in the
Colorado River basin has brought Lake Mead to its lowest
Exhibit 1-13 Total Public Construction Spending
100,000
150,000
200,000
250,000
300,000
350,000
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
S
ea
so
na
lly
a
dj
us
te
d
U
S
$
m
ill
io
ns
Source: U.S. Federal Reserve.
14 Emerging Trends in Real Estate® 2015
level since the Hoover Dam was constructed during the Great
Depression. The level of the lake has dropped 100 feet during
this drought, and 150 feet from its high water mark in 1983. This
has cities like Denver, Phoenix, Las Vegas, and Los Angeles
scrambling, and has the federal government initiating a pilot pro-
gram to pay cash as an incentive to reduce water use. Needless
to say, if these cities were to face serious growth constraints on
population gains because of water deficiency, that would alter
America’s real estate map considerably. A valuation specialist
with a national practice had this to say: “How do we get what
we need where we need it?” Droughts have been coming more
frequently and are longer lasting. Can we figure out the trans-
portation of water? Pipelines, easements, pricing?
Some light at the end of the tunnel may come from the increas
ing tendency of public agencies to turn to public/private part-
nerships (PPPs) as the vehicle for addressing the infrastructure
crisis. The daunting price tag of needed improvements, coupled
with the straitjackets constraining public budgets, has prompted
a wider degree of cooperation. The PPP approach is not a pana-
cea, of course. The private sector needs to earn a return, and
public agencies face political pressure if the return is derived
from increased user fees (with tax increases not even on the
table in most places). It is a conundrum.
On this subject, we are behind the curve already. ASCE esti-
mates that the needed repair programs for existing, identified
infrastructure needs will cost $2.2 trillion over the next five years.
Yet, a funding proposal for $50 billion to $75 billion and the
enabling legislation to create a national infrastructure bank are
mired in Washington politics. Unfortunately, the trend of infra-
structure quality and reliability is negative, both in the immediate
and in the mid-range future. It may take a catastrophe to move
us off this particular dime.
9. Housing Steps Off the Roller Coaster
There were numerous reasons to be aghast at the housing
fiasco and the vast amount of collateral damage that was
inflicted on the economy and the financial system. Prior to the
bubble, housing itself was thought to be “too big to fail.” Not only
was the value total for residential real estate huge—in excess of
$20 trillion—but it was so granular that few economists believed
it vulnerable to systemic collapse. But collapse it did, leading
the nation—and the world—on an epic, stomach-churning
roller-coaster ride.
Remarkably, housing seems to be putting the excesses of the
bubble and the ensuing collapse behind it. The trend in residen-
tial real estate looks to be returning to the classic principles of
supply and demand, with great sensitivity to any deviation from
equilibrium quickly reflected in transaction volume and pric-
ing. As this major segment of the economy—still the principal
repository of wealth for tens of millions of households—returns
to textbook fundamentals, we should see increasing confidence
emerge in the residential sector. There could hardly be a more
positive trend for the economy as a whole.
What undergirds such a hopeful outlook? Even as the housing
market became severely dislocated, the growth in the number
of U.S. households continued at a steady pace. Rental housing
benefited while single-family-home construction plummeted.
Exhibit 1-14 Existing Homes for Sale and Months’ Supply
0
2
4
6
8
10
12
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Existing homes for sale (thousands)
2014
Q3
2014
Q2
2014
Q1
2013
Q4
2013
Q3
2013
Q2
2013
Q1
2012
Q4
2012
Q3
2012
Q2
2012
Q1
2011
Q4
2011
Q3
2011
Q2
2011
Q1
2010
Q4
2010
Q3
2010
Q2
2010
Q1
S
ea
so
na
l a
dj
us
te
d
an
nu
al
r
at
e
(t
ho
us
an
ds
)
Months’ supply
Source: National Association of Realtors.
15
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
The result, over a period of years, has been an enormous
shortfall in the supply of new for-sale units. That shortfall now
amounts to 9 million homes.
The production shortfall, in turn, has enabled the “months of sup-
ply” figure calculated by the National Association of Realtors (NAR)
to hover around five months since late 2012, with existing-home
sales averaging 2.1 million over the same period. There seems to
be a point of balance for single-family residential, and it has stayed
steady around that point for two years now. That’s a good thing.
Meanwhile, though, disposable income growth for American
households has been lagging seriously. Homebuilders—and
their lenders—clearly recognize that the recent price recovery in
housing has outstripped incomes. And this time there is no funny
money being generated in shady mortgage deals. So prices are
not reinflating to bubble levels. In other words, discipline looks to
be governing the market. Thanks to low interest rates, the NAR’s
Affordability Index is still relatively high at 165, so the market
should enjoy decent liquidity even if rates bump up.
A healthy story is shaping up, whereby housing should anticipate
moderate price increases, solidly based on buyers’ ability to
pay, fluctuating in a fairly narrow band along with minor ups and
downs in the NAR’s existing-home sales figures. It is a healthy—if
boring—story. But after the thrill ride of the past decade in hous-
ing, boring is a very, very good trend to report.
10. Keeping an Eye on the Bubble—
Emerging Concerns
The generally positive outlook flowing from this year’s Emerging
Trends interviews and survey does have a dark side. Upcycles
breed optimism, but excessive optimism can promote reckless-
ness. Some interviewees asked, with good reason, whether
real estate will soon forget the hard-learned lessons of the
recent past. Such prophets of caution are worth listening to,
if the respondents to our survey are right. Equity underwriting
will be less rigorous in 2015 than in 2014, say 40 percent of the
responses across all sources of equity. Easing of standards
on the debt side will be even greater, with 42.1 percent seeing
lenders loosening next year. And this is happening at a moment
when mortgage spreads are already tight, and Treasury rates
will inevitably rise.
Exhibit 1-15 Change in Disposable Income, Median Home Sales Price, and Affordability
0
50
100
150
200
250
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
2014
Q3
2014
Q2
2014
Q1
2013
Q4
2013
Q3
2013
Q2
2013
Q1
2012
Q4
2012
Q3
2012
Q2
2012
Q1
2011
Q4
2011
Q3
2011
Q2
2011
Q1
2010
Q4
2010
Q3
2010
Q2
2010
Q1
Affordability index
Y
ea
r-
ov
er
-y
ea
r c
ha
ng
e
A
ff
or
da
bi
lit
y
in
de
x
Disposable income growth
Median sales price
Sources: U.S. Bureau of Economic Analysis; S&P Dow Jones Indices; National Association of Realtors.
Exhibit 1-16 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
7.8%
36.6%
39.3%
16.3%
Source: Emerging Trends in Real Estate 2015 surveys.
Note: Based on U.S. respondents only.
16 Emerging Trends in Real Estate® 2015
One institutional investor is watching “the little warning signs” of
assets priced above replacement cost and the enthusiasm for
“Texas markets that are notorious” for boom/bust cycles. A REIT
executive calls capital “disciplined for now, but it could become
unbridled.” A wary West Coast investor urges avoiding the temp-
tation to be “a fly-in investor.” Right now, he thinks, acquisitions
require “deep market knowledge.” Ask the question, “If the local
guys won’t buy, why should you?”
The sense that recently disciplined capital may be on the verge
of becoming too aggressive should give us pause. Emergent
trends are vitally important, but carry the danger of being
extrapolated into the future. As you read through the body of this
year’s Emerging Trends in Real Estate report, remember that
only those who grasp that every trend is of limited duration can
stay on the right side of this cyclical industry.
The very gradual nature of the economic recovery carries the risk
of lulling the market into some sense of complacency. There has
been no big “rebound year” that would typically bring signs of
overheating. But our interviewees detected that pricing, under-
writing standards, and deal economics have gotten ahead of
market fundamentals. The macroeconomics for 2015 are looking
favorable, and fundamentals may catch up. Or may not.
“Cyclical risk needs to be watched. This recovery, at five years,
is getting too long for comfort. When have we ever had a ten-
year upcycle in real estate?” asks a private equity manager. An
even more skeptical investment manager worries, “When does
the experiment in central banking come to an end? Then we
face a major asset bubble event.” He sees risk mitigation as the
primary challenge right now, and is mitigating risk by stabilizing
all assets in the short run, and deliberately staggering lease and
financing terms.
It is healthy to keep such concerns in the conversation. In a
period of rising optimism, those warning of potential trouble
ahead are sometimes labeled “Cassandras.” Here’s the thing:
those who remember Homer’s Odyssey recognize Cassandra
as the one who warned the Trojans about bringing the Greeks’
gift horse into the city. Turns out she was right.
The takeaway emerging trend? For 2015, real estate still benefits
from “once-burned, twice-shy” experience. In most cycles, we
would have seen overbuilding and excess leverage gathering
steam by now. To the degree that hasn’t happened, the industry
Exhibit 1-17 Sales of Large Commercial Properties in the United States
$0
$100
$200
$300
$400
$500
$600
Entity
Portfolio
Individual
2014
H1
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
$
bi
lli
on
s
Source: Real Capital Analytics.
Note: Based on independent reports of properties and portfolios valued at $2.5 million and greater. Before 2005, RCA primarily captured sales valued at $5 million
and above.
Exhibit 1-18 Average Length of Economic Cycles,
Trough to Trough
0
20
40
60
80
100
120
1854–2009 (33 cycles)
1854–1919 (16 cycles)
1919–1945 (6 cycles)
1945–2009 (11 cycles)
1990–2014 (3 cycles)
Current 62 months
and counting
Months
Source: National Bureau of Economic Research.
17
Emerging Trends in Real Estate® 2015
Chapter 1: Sustaining Momentum but Taking Nothing for Granted
looks likes it has learned some lessons in self-regulation and
self-correction. The balancing of risk and reward is extremely
difficult. Celebrate those who are vigilant about overexuberance,
but keep an ear out for those warning signs of frothiness. The
time to be concerned about bubbles is before they burst.
Expected Best Bets for 2015
The following investment and development sentiments from
Emerging Trends interviewees and survey respondents deserve
particular attention in 2015.
1. A Great Time to Be “Seeking Alpha”
Last year, we indicated that active management could “bring
success and profits . . . to those with real estate operating and
management skills.” Market evolution over the last 12 months
has elevated that trend to “best bet” level for 2015. Asset selec-
tion and market timing may be regarded skeptically by efficient
market portfolio theorists. But they are the raison d’être for those
who make their reputations—and their profits—by outperform-
ing market benchmarks.
Value-add propositions play to real estate’s strengths in a rising
market cycle, which is the basic playing field for property in
2015. The Blue Chip Economists’ consensus forecast calls for
above-trend gross domestic product (GDP) growth in late 2014
and throughout 2015. Unemployment is projected to drop to 5.5
percent, and Consumer Price Index (CPI) inflation is predicted to
be just above 2 percent. Factor in still-low levels of new commer-
cial construction, and bets on the future look solid.
Class C+ to B properties that can be purchased at cap rates
100 to 200 basis points below the premier assets, and proper-
ties upgraded to B+ quality benefit from both improved cash
flow as occupancy and rents trend upward, but will enjoy a
value bump from cap rates as well. The Grade A properties
have been scooped up in the past few years, but the volume of
capital in play needs placement. That money will understand
and respond to a well-conceived, well-documented value-add
story. Not every property will qualify, but those that do are worth
a “best bet” call. Look to submarkets near gateway city central
business districts (CBDs), mid- to high-rise apartments in transit-
served suburbs, and turnaround retail in midsized but growing
Sunbelt markets. Deep market knowledge and hands-on skills
will be rewarded.
2. Exploit Technology as an Ally of Real Estate,
Not Its Enemy
Let’s face it—we face an increasingly technological future, and
there is no percentage in betting on King Canute trying to hold
back the tide by royal edict. Millennials think of social media as
an indispensable tool and want nothing more than the apps that
make life easier, more productive, and more fun. That’s the tra-
jectory ahead, and real estate companies that can harness the
power of social media to manage and market property will gain
enormous advantage over laggards in this arena.
Although the technology is “virtual,” those using it are very
much flesh-and-blood. The densest social networking mar-
kets are also the densest physical markets for real estate. That
shouldn’t be surprising, but it is to many people who have
bought the “death of distance” story, the concept that location
doesn’t matter as much in an electronically connected world.
That idea is, in a word, debunked. Entrepreneurship studies,
venture capital placement, biotech patents, and real estate
values themselves have all now produced impressive evidence
that place still matters.
Within those places, though, the ability to communicate swiftly
and effectively does not come automatically. Some will invest
in the tools and invest in those who know how to use them.
Others will be halfhearted in such investment, to their regret.
One interesting sign emerging from our interviews: CEOs who
are promoting “reverse mentoring,” using millennial savvy to
educate top managers on just how to get the message out to the
millennials. Youth, as they say, must be served.
3. Refinance Now for the Longest Possible Term
The re-fi window has been open for a while now; and with
the volume of capital available, it will continue to be open to
borrowers. Debt issuance—new lending plus refinancing—is
running at a good but not spectacular pace: about $69 billion
in commercial mortgage–backed securi