Manikka Bowman
PwC and the Urban Land Institute have published their 2017 outlook on national real estate investment and development trends. This 38th edition of “Emerging Trends in Real Estate” reflects the views of more than 1,500 investors, developers and lenders from around the country who were interviewed or completed surveys as a part of the research process. Their insights will guide real estate forecasting for the next year.
Economic, social, political and technological factors all influence real estate investment, and the Trends report examines the fundamentals of property types and capital markets to offer insight into the complex web of conditions that influence the marketplace. According to the report, no single investment can be considered in isolation; it’s important to see patterns that link several trends as they evolve interactively.
Some view this current real estate cycle as kinder as and gentler than what we have seen in the recent past. Real estate transaction volumes have rebounded since the lows of the Great Recession, but development has remained below historical norms for most property types on year-over year bases. Experts say this is unusual and represents a clear indication that real estate professionals have learned painful but valuable lessons from the last downturn. The current cycle is a mature 85 months, which far exceeds the typical 58 month upturn we have seen since World War II. And, according to U.S. macroeconomic data, there is little to suggest an overheated market.
According to the Trends report, capital markets have followed a similar pattern. Before the downturn, American markets witnessed a significant influx of investment that drove prices to unsustainable levels. Transaction volume rose 26 percent in 2015 from the year earlier, to $545 billion. This prompted many to fear an over-inflated market bubble ready to burst. But in 2016, the U.S. commercial real estate market responded with a 10 percent drop in transaction volume, according to Real Capital Analytics. One institutional investor with significant experience called this level of caution “unprecedented in my lifetime,” and an indication that the community learned significant lessons from the painful global financial crisis. Today’s consensus among respondents is that we will see “healthy, if moderate, growth in real estate capital investment in 2017 and beyond.” One can argue a more cautious approach to the market is contributing to the elongated business cycle.
Keep An Eye On Boston
Yet even with this theme of caution for the 2017 Emerging Trends, one forecast was clear: Boston is a market to watch. It is no secret that Greater Boston is a hub of global intellectual capital stocked with vibrant health care, life science, finance and technology companies that are creating high-wage jobs in the knowledge-based economy.
These market fundamentals will continue to influence investment in multifamily housing and industrial properties. We should expect to see more investment in for-rent housing geared to Greater Boston’s workforce of high-earning Millennials who are wary of buying property. And the growth of e-commerce – especially companies offering of same-day delivery – will drive the need for new distribution facilities located closer to density cores.
While these fundamentals are promising, there are certain externalities of which Boston investors need to take note. Participants in the Trends survey cited housing affordability as a “considerably important” issue. Of new and existing homes sold in the second quarter, 62 percent were classified as affordable to those households earning the median U.S. income, $56,516. ULI’s own study, “Building for the Middle: Housing Greater Boston’s Workforce,” found just 22 percent of single-family homes and 39 percent of condos were affordable to middle-income households. Boston also faces the additional challenges of a shallow labor pool, resulting from a high proportion of young residents attending college or graduate school, a small cohort of Generation X workers and a Baby Boomer population that is leaving the workforce.
Even with this web of complexity, opportunities in a tempered real estate market can yield excellent benefits. There are a lot of moving pieces, but a mix of good tactics, skills and well-informed strategies can spell success for seasoned professionals as well as beginners entering the marketplace.
Manikka Bowman is manager of policy for ULI Boston/New England.
