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Top 10 emerging trends shaping real estate in 2017

Affordability, labor scarcity, and the forces shaping the coming year in real estate

For months, the real estate market—and markets in general—have suffered a lack of security. From the Brexit aftermath to the U.S. election, political wildcards as well as structural market shifts have made prognostication and predictions difficult.

But there are still fundamental changes at play and, amid the ups-and-downs, the United States has emerged as a safe haven and investment opportunity. According to the Urban Land Institute’s annual Emerging Trends in Real Estate Report, which was just released this morning at their annual meeting in Dallas, real estate in the United States shows a more favorable outlook than much of the rest of the world. Of course, this attention carries plenty of risks and challenges.

Here's a breakdown of the big topics that analysts at the Urban Land Institute and PriceWaterhouseCoopers, as well as hundreds of industry experts, believe will shape the real estate landscape for the years to come.

A kinder, gentler real estate market?

After cataclysmic economic disruption triggered by the foreclosure crisis, it seems the real estate market has entered a prolonged period of calm. According to the report, this current business cycle—which at 85 months has been much longer than average—has entered a “mature” phase. It’s been smooth waters for a while, and seems poised to stay level.

Real GDP growth has hit an unremarkable but steady 2 percent per year and the Federal Reserve doesn’t want to “take away the punchbowl” and raise interest rates. But, there are signs of a development slowdown, due to difficulties securing construction financing, and the amount of capital looking to pick up core properties means pricing has dramatically risen. Overall, investors are looking to avoid risk, even more than normal. While this has led to calmer seas, one investor quoted in the report said they’re at the “white knuckle phase” of the cycle.

Optionality is in

With the market flocking to safe bets, it makes sense that developers and investors are seeking flexible, multi-use projects. Buildings that can be adjusted to satisfy multiple tenants and changing neighborhoods lets owners maximize rent and seek the highest and best use.

The report cited a Fortune 500 company that entered into a flexible lease akin to coworking to house many of its staff. The owner now gets solid cash flow, and can backfill space when the opportunity arises. It’s an example of the coworking trend writ large, and the potential of those type of arrangements to turn aging buildings into productive office space is incredibly tempting.

Keeping open to the shifting winds of the market, as well as the societal changes wrought by the sharing economy seems like sound investment, especially in the residential sector. As one investor said: “Jobs are no longer careers, and millennials are not yet looking for the commitment of owning a home. They are footloose in the job market, and footloose as to roots in the community.”

Transformation through location choice

In pursuit of a “triple bottom line” of financial, social, and environmental success, some developers have seen the benefits of doing good for the community (as long as, of course, there’s a chance it does well for them as well).

A current wave of downtown redevelopment, which feeds the current urban revival across the country, not only helps catalyze urban cores, but also create live/work/play locations that show impressive growth possibilities. Planting a seed and positioning a project as something that can help bring back a city has both a positive PR spin as well as great potential for growth, since walkable urban centers have been a sure bet in recent years.

Examples exist nationwide, from Cleveland and Oakland to San Diego and Raleigh. The report points to downtown Las Vegas, where investment in City Hall, the Downtown Container Park, Airstream Village, as well as startups, has turned a moribund part of town into a vital part of the city. The report suggests that investing in vacant urban land, creating land trusts, and working with local government can spur similarly beneficial developments in other cities.

Recognizing the role of the small entrepreneurial developer

The amount of risk-averse capital, noted earlier in this article, suggests tough times for smaller to mid-size developers. And while numerous challenges exist, ULI researchers and industry sources believe now is an ideal time for experimentation and growth for these firms. Without the profit expectations of big cities or starchitect-led developments, these firms can zero-in on growth opportunities in urban infill and smaller markets, and take advantage of “contextual zoning” outside of core CBDs to try out new ideas.

Labor scarcity in construction costs

Bigger shifts in workforce participation and the job market have put pressure on the labor force and the construction industry, and a growing shortage of laborers is impacting development and real estate. As of April 2016, there were over 200,000 unfilled job openings in building construction, according to the Bureau of Labor Statistics Job Openings and Labor Turnover Survey (JOLTS).

Many of the sources consulted for the ULI report have felt the impact, with labor availability and labor shortages seen as a fact of life for the foreseeable future. Development time has been growing due to worker demand, and delays are deluding returns. As costs increase, it also puts pressure on developers to go high-end to try and recoup some of their lost time and money.

What’s causing the shortage? Many issues are at play: clampdown on Mexican immigration, retirement of skilled craftsman, a dearth of project managers, and a boom in the oil and gas sectors, which has siphoned away talent. Proposed solutions, such as immigration reform, infrastructure spending that develops entry-level skills, and more support for vocational and technical education, could help staff up our construction sites.

Atlantic Yard Housing
The Pacific Park megaproject in Brooklyn, which will have 363 apartments total, 181 units allocated to low and middle-income residents.
Max Touhey

Housing affordability: Local governments step up

In addition to affordability concerns for low-income renters and buyers, markets across the country are seeing more and more middle-income households become “housing stressed.” Home prices are rising at a 5 percent annual rate, double the rise in income, and homebuilders just aren’t responding with new, mid-priced options: An August 2016 report from the National Association of Home Builders (NAHB) noted that just 62 percent of all new and existing homes sold in the second quarter were “affordable”

Cities aren’t waiting for developers to act, pushing more and more inclusionary zoning policies, as well as rent control measures and development impact fees. New York City’s plan may get the biggest headlines, but similar proposals and policies are being discussed in Atlanta, Washington, D.C., Nashville, Portland, and Los Angeles. Renovation projects are also being asked to hit certain affordability targets.

Expanding the pool of affordable housing may make for a more long-term investment strategy: growing the market and community and reaping incremental profits, rather than going for high-priced residential projects with larger initial windfalls. Population growth, rising land and building costs, and wage stagnation suggests this issue isn’t going away anytime soon.

Gaining entry beyond the velvet rope

The popularity of urban development and walkable neighborhoods has created great income inequality in cities, a source of considerable tension in many areas. As the report suggests, “exclusionary forces are equally alive in suburbs and cities.” Urban redevelopment has gentrified neighborhoods, harmed affordability, and pushed out long-time residents, and the cycle is continuing in the suburbs.

As more millennials move outside the city, they still demand density, walkability, and transit accessibility, which puts pressure on select parcels of land. The report notes that opposition to this so-called “velvet rope” of development is showing up in local government meetings and social media.

Cities are also experiencing issues with new development, as established residents and tenants push back against affordable developments and zoning changes (the traditional NIMBY debate). As President Obama’s recent release of a housing toolkit meant to spur development of affordable units suggests, wealthy neighborhoods have “pulled up the ladder of opportunity” from lower-income residents.

New building design can either ignore history and context, or reflect it while meeting the changes in the city’s makeup. Inclusivity is replacing exclusivity as a selling point, according to the ULI report, and zoning and development needs to keep pace.

The connectedness of cities

The boom in smart city technology and the Internet of Things has important implications for real estate. First, a new network of sensors can play a huge role in increasing energy efficiency and building control operations, and also help connect residents to the city, in the form of networked transportation systems and online parking availability.

Second, and perhaps just as impactful, cities that master these new technologies, and invest in research, education, and implementation, become hotbeds for startups and jobs, making them much more attractive for investors. Cities need to be on the right side of the digital divide to succeed, and these kind of metrics should figure into any future planning.

Ready for augmented reality?

Call it the Pokémon effect. While brokers have been talking up the impact of virtual reality on sales and showings for quite some time, the impact of augmented reality may be just as large. The residential and commercial real estate worlds may discover this technological lure makes site visits much more powerful, and retail, motivated by the potential of “bricks-and-clicks” virtual sales and gamification in commerce, may find it to be a key part of promotions and marketing.

AR could also become a key part of the construction and design industry, leading to closer, high-tech collaborations that reduce errors. These changes may seem far-fetched, but industry analysts believe they’re coming fast: experts expect $2.6 billion in real estate applications by the year 2025

Blockchain for 21st-Century real estate

This is, admittedly, more of a long-term technological development, but one that developers working on large-scale projects should keep an eye on. Blockchain, the encrypted digital data technology behind Bitcoin, the virtual currency, is on the radar of major banks and exchanges. Sine it offers a high degree of security and encryption, many think this may become part of the future of high-end real estate transactions. The report’s writers suggest developers keep an eye on the development of this technology, in case it begins to become more mainstream.