September 21-October 4, 2016 —
COLORADO REAL ESTATE JOURNAL
— Page 41
Steve Letman of
Consultus Asset Valuation,
Inc. in Englewood,
recently
shared insights about the
most crucial issues impact-
ing U.S. commercial and
residential real estate. Steve
Letman is a member of The
Counselors of Real Estate®,
the global professional associ-
ation that annually announc-
es
The Top Ten Issues
Affecting Real Estate,
an
analysis of the most signifi-
cant business trends and con-
ditions that identify and rank
real estate opportunities and
risks. Members of CRE are
highly experienced property
experts who provide special-
ized and objective advisory
services to clients; member-
ship is by invitation. Only
1,100 people in the world
hold the CRE credential.
Letman
said uncertainty
within the global economy,
tightening commercial and
residential real estate credit,
and the large numbers of
both aging Baby Boomers and
young Millennial simultane-
ously in the marketplace will
have the greatest impact on
real estate over the next 12
months.
Other important factors
include increasing densifica-
tion within cities; the cur-
rent political environment;
credit constraints and the
lack of affordable housing;
the disappearing middle class;
an unstable energy market,
behavioral and purchasing
changes sparked by “the
sharing economy”; and the
growing evolution of retail
centers and shopping malls
into “experiential” destina-
tions. Additional explanation
is shown below and in the
Issues and Trends section
The Counselors of Real
Estate organization is known
for thought leadership, objec-
tive insights and extraordi-
nary professional reach, with
more than 50 real estate
specialties represented among
its member experts. Members
contribute to development of
the Top 10 Issues Affecting
Real Estate by participating
in one of 14 sectors of the
CRE External Affairs (Issues
and Trends) initiative.
Steve
Letman has been a CRE
member since 1997.
The CRE 2016-17 Top 10
issues Affecting Real
Estate
1. The Changing Global
Economy
The IMF has revised GDP
growth downward for much
of the globe in 2016-17, as
economic uncertainties con-
tinue and intensify. Currency
issues, declining exports, and
soft energy prices add to vola-
tility (as reflected in the stock
markets in early 2016 and
Moody’s recent downgrade of
Saudi Arabia). Political issues
and conflict undermine stabil-
ity as well.
Implications:
There is
potential for global economic
deceleration. Weakened
exports could lead to slower/
smaller port and infrastruc-
ture investment, in particu-
lar, and broader softening of
investment in real estate and
other asset classes. The U.S.
remains attractive to global
capital and inflows are still
strong, although they may be
under pressure at their ori-
gin (China, Middle East and
Europe). A surge in Chinese
buying of both residential
and commercial real estate
last year took their five-year
investment total to more than
$110 billion, according to a
study from the Asia Society
and Rosen Consulting Group.
2. Debt Capital Market
Retrenchment
Debt markets for commer-
cial real estate are slowing
sharply. Regulators are telling
bank lenders to curtail CRE
lending (that’s 50% of the
debt market), and the CMBS
markets are slowing down,
with no legislative fixes to
retention rules that were due
to go into effect this summer.
Many insurance companies
that traditionally invest in
real estate are approaching
their real estate allocation
limits.
Implications:
The search
for permanent CRE debt
capital will become more
intense and competition for
capital will become an issue
in 2016 and 2017. The lend-
ing environment is likely to
become more restrictive. This
could present opportunities
for some other, less regulated,
lenders to enter the market.
3. Demographic Shifts
Millennials (generally con-
sidered to be people ages
18-35) have overtaken the
Baby Boomers (people of ages
51-69) in sheer numbers, but
both groups remain substan-
tial real estate consumers.
While the Boomers are retir-
ing at a rate of approximately
10,000 per day, America's
population of persons aged
90-and-older has almost
tripled since 1980, and it is
expected to increase to more
than 7.6 million over the next
40 years, according to the
U.S. Census Bureau. Older
households and younger
households are competing for
housing in many of the same
places. In terms of income,
younger (Millennial) house-
holds are falling behind with
many sons and daughters liv-
ing at home with parents.
Implications:
Multifamily
development is still strong,
with evolving amenities.
There are opportunities in
housing options for both
groups. In the retail sector,
more “experiential” shopping/
dining/entertainment destina-
tions will emerge, but buying
power is lower due to income
stagnation. Although Baby
Boomers continue to prefer
to age in place, there will
be opportunities in services
including medical, assisted
living and memory care facili-
ties. Look for a rise in renting
over homeownership.
4. Densification/
Urbanization
Transportation options,
walkability and extensive
work/live/play options con-
tinue to draw people of all
ages into the urban core and
to close-in “urbanized” areas.
The move to higher-density
areas continues, as job
growth and dynamic urban
centers attract new residents
and businesses.
Implications:
There is a
growing trend toward the
development of high-density,
mixed-use centers such as
The Domain in Austin and
the West Loop in Chicago
that offer luxury living spac-
es, retail, work and entertain-
ment spaces, parks, and gath-
ering spaces. The emergence
of “innovation centers” and
“education centers,” which
represent dynamic economies
and cultural environments
continues. There is pressure
on suburbs to become more
“urban.”
5. The Political
Environment
The political environment
has become acrimonious at all
levels – global, national, state,
local – and affects investment
decisions (including business
and household location deci-
sions) with issues ranging
from the perceived ability
of governments to function
to taxation to social issues.
Social media makes it very
easy to track the political
and economic climate of any
locale – and debate any politi-
cal issue publicly.
Implications:
The politi-
cal and tax environment of
every locale is now visible and
information is immediate,
creating heightened aware-
ness that can influence where
people choose to live, where
businesses locate or expand
and where tourists visit and
spend. Locales that demon-
strate political stability and
investment in infrastructure,
transit, schools, etc., may
attract residents, visitors and
businesses; those communi-
ties that project a negative
environment will likely lose
economic vitality over time.
6. Housing Affordability
and Credit Constraints
New issues are beginning
to emerge in the housing
market, as affordability and
credit constraints are chal-
lenging both the rental and
home ownership markets.
Stringent credit requirements
prevent many households
from entering the home own-
ership market, increasing
demand for rental property.
Limited available for-sale
inventory and income stag-
nation are affecting afford-
ability. Multifamily develop-
ment continues but rents are
outstripping incomes in many
communities. With declining
affordability, questions arise
about where newly formed
households will live, where
the workforce will reside and
whether affordable services
will be available for aging
Baby Boomers.
Implications:
There will
be continued strong demand
for rental housing, but with
a likely slowdown in rent
growth. Micro apartments are
helping to provide affordable
alternatives for Millennials.
Single-family-owner mar-
kets have room to improve,
and builders are beginning
to target “starter homes.”
Competition for land in some
areas is a supply constraint.
7. The Disappearing
Middle Class
The wealth and income
gap continues, with a num-
ber of measures showing
stagnant or declining wages
and wealth. A recent Pew
Research study shows that
the median income for mid-
dle-class households fell by
nearly five percent between
2000 and 2014. Their median
wealth (assets minus debt)
declined by 28 percent after
the housing market crisis and
the subsequent recession.
Costs have risen dramatically
for many large-dollar items
that affect middle-class fami-
lies, including college tuition
and out-of-pocket costs under
employer health care plans.
Confidence in a comfortable
retirement is wobbly, with
concerns over rising costs
and declining benefits in
corporate retirement plans.
To cover increasing costs
and eroding asset wealth,
an increasing percentage of
households has moved from
one income to two incomes.
In 1960, 72 percent of two-
parent families with children
under 18 had a single earner
(typically the father). That
figure fell to 37 percent by
2010, while the number of
two-earner families rose to
60 percent. At the same time,
the Millennial generation is
falling behind in assets and
income (and many young peo-
ple are coping with student
loan debt).
Implications:
Middle-
market retailers (i.e., Sears,
Macy’s) have weakened and
closed some retail outlets.
The purchasing power divide
drives new opportunities to
serve diverse markets (i.e.,
Wal-Mart and Dollar General
at the low end of the spec-
trum and luxury retailers
such as Neiman Marcus and
Tiffany at the other end).
Stagnant or declining pur-
chasing power affects where
people can live as their hous-
ing choices diminish. There
are opportunities in high-den-
sity multifamily and afford-
able housing. Luxury devel-
opment continues to do well
(malls, office, hotels, retail).
But there is less opportunity
in the middle. There will be
a shift from homeownership
to renting over time. A lack
of home and business owner-
ship – and such investment in
communities – can easily lead
to or contribute to growing
social unrest.
8. Energy
Whenever a key commod-
ity encounters instability, it
can threaten global economic
security. Energy markets
are currently unstable. This
year’s crash in oil prices has
threatened the global econ-
omy – capital markets have
responded. Saudi Arabian
debt has been downgraded by
Moody’s and, in some mar-
kets (such as Houston and
North Dakota), lenders are
restricting commercial real
estate debt.
Implications:
There has
been a drastic change in U.S.
oil production – rig counts
in the U.S. are at their low-
est level in 50 years. This
affects regional employment
and economies. Investors are
reassessing plans. Alternative
energy may become more
attractive over time. High
energy demand in China
could change dynamics, but
energy remains a highly vola-
tile market.
9. The Sharing/Virtual
Economy
As the effects of the reces-
sion only slowly fade, we are
seeing the emergence of a
“shadow economy” or “shar-
ing economy.” New enter-
prises spring from economic
uncertainties, such as Airbnb,
Uber and bicycle sharing
companies (i.e., Divvy). These
have become alternatives to
traditional lodging and trans-
portation offerings – often
operating outside of tradi-
tional regulations. They offer
alternatives for employment
as well. Crowdfunding has
become an addition to tradi-
tional sources of capital for
new enterprises and invest-
ment, including real estate.
Implications:
Efforts to
regulate some of these opera-
tors have seen mixed results,
and the enterprises will
likely continue to change the
economic landscape while
challenging the viability of
some of their more traditional
counterparts. New competi-
tors and shifting demand will
likely push weaker players
out of the market (consider
the falling prices of taxi
medallions). Shared office
spaces are rapidly becoming
more widespread; “virtual”
offices offer office amenities
(receptionists, mailboxes,
short term desk space) to
small businesses. As is often
the case in periods of dynamic
change, many will become
more widely accepted ele-
ments in the general econo-
my.
10. The Rise of
“Experiential” Retail
Traditional retail is reacting
to change by adapting, with
major retailers shuttering
stores and downsizing their
footprints, moving more to
online options. As retailers
retrench and rethink their
retail models, large online
retailers thrive. Amazon has
replaced Wal-Mart as the
biggest retailer in terms of
dollars. This creates not only
challenges but also opportuni-
ties.
Implications:
“Destination” retail develop-
ment is emerging. Malls are
