Colorado Real Estate Journal -
The Counselors of Real Estate annually publishes a list of the top 10 issues impacting real estate investment, as viewed by the members. The list for 2015-16 is presented here. Demographic shifts. Two key groups – large numbers of retiring baby boomers (born between 1946 and 1964) and the next large population wave, the millennials (born between 1980 and 2000) – will have the greatest impact on real estate through the lifestyles they choose in coming years. This casts a spotlight on housing in all its forms: For boomers, the homes in which they choose to age in place, downsized homes, senior communities or assisted living are key; for millennials, affordability and preference for amenitized, urban locations are driving factors. Excess capital supply. Funds continue to flow from outside the U.S. to purchase U.S. real estate. The supply is driven by sovereign economies that have high savings rates, a shortage of mature financial markets and few safe assets. The investment rate is approaching record highs, putting upward pressure on asset pricing. While major cities are preferred by foreign capital, some nongateway cities also are experiencing higher levels of investment. Rising interest rates. Interest rates have been at near-historic lows – and the general view is that they will stay that way for a while longer. But savvy investors and homebuyers alike are preparing for rising rates. When rates rise, cap rates and discount rates also will rise, thereby devaluing assets. An interest rate rise also could slow home sales. Rising rates will cause higher mortgage payments, thereby decreasing homebuyers’ choices. Global instability and currency devaluation. The U.S. dollar remains strong but intentional currency devaluation in many other countries makes U.S. exports less competitive. Investment from non-U.S. sources helps fuel the U.S. real estate market, but event risk should be considered – “hot spots” of conflict are continually in the news as is cyber security – and the global economy is psychologically linked. Urbanization. Urban population growth is a global phenomenon. In the U.S., an increasing desire to reside in transit-served, “walkable” communities is not limited to young professionals; older generations also are drawn to such locations. Aging suburbs and revitalized urban cores result in a shift of economic vitality to areas once thought obsolete. The past few years also have seen a rise in corporate relocations to cities from the suburbs as a strategy to attract younger, urban professionals. Energy. The oil price decline has negatively impacted large and small U.S. producers. Workforce reductions and the associated decrease in residents’ buying power – while primarily occurring among workers in oil exploration and production – impacts the greater community, from retail to housing to professional services. Many “boom towns” are now slowing; the duration of this decline is unclear. The gap between rich and poor. The stubborn phenomenon of under-employment and wage stagnation in the U.S. deserves a close look relative to real estate. On the commercial side, it drives new opportunities to serve diverse markets with discounted retail offerings. There also are development opportunities in high-density multifamily and affordable housing, and in “place making,” which can transform a vacant lot or an undesirable neighborhood into an appealing urban “destination” to serve diverse populations. Infrastructure. The condition of U.S. infrastructure is a broad concern with no near-term solution in sight. Inadequate and aging roads, bridges and power/gas/water lines no longer meet the needs of today’s communities and businesses, let alone future demand growth. Government at all levels does not have the available capital to invest in infrastructure. Development can be limited because existing streets and bridges cannot accommodate increased traffic flow if denser housing or mixed-use developments are built. Public-private partnerships are increasingly viewed as a viable financing mechanism. Real estate technology and crowdfunding. Real estate is one of the most fertile sectors for technology innovation and disruption. While venture capital has poured into real estate technology startups, crowdfunding could increase opportunity for smaller investors as well. Diverse audiences, including investors and lenders, benefit from new technology, as it speeds information gathering and expedites transactions. Technology also has dramatically changed the way real estate professionals do business. The changing retail model. The retail sector faces continuing challenges. A 1985 best location may be today’s abandoned property as demographic shift and new store formats speed obsolescence. On the bright side, despite steady increases in online shopping, there is still a role for physical presence. Retailers that incorporate e-commerce elements, including fast delivery options, are well positioned, at least in the short term. Store sizes are shrinking, but many of the attractive amenities of urban shopping districts are now being incorporated into suburban shopping areas. A comment about the Denver area. Affordability and proximity to transit options (preferably rail) are the hottest issues of the day here. Pressure on rents and values has made Denver real estate less competitive than it has been historically. Tenants suffer but property owners don’t mind a bit. Job losses in the energy sector are a looming concern.