The U.S. real estate industry is poised for a successful 2015, based on research, data and interviews with over 1,400 influentials from across the nation. And once again this year, Boston remains a top-10 market for real estate investment, according to the 2015 “Emerging Trends in Real Estate” report compiled by PwC and the Urban Land Institute.
The optimism demonstrates that real estate market participants feel the fundamental improvements of last year will continue through this year. The top 10 trends identified in this year’s report cover a range of themes including: demographics, competition and risk awareness.
“Unlike previous reports and previous cycles, we are seeing sustained growth,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “In the past several years, we reported that real estate market participants’ main fears revolved around the uncertainty with the economy. Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of mega trends impacting society and the global economy. These mega trends include accelerating urbanization, demographic shifts and the impact of disruptive technological advancements.”
Demographics are seen as a key driver for a number of 2015’s trends, and nowhere is that more apparent than in Boston. According to Carlos Febres-Mazzei, senior vice president at CBRE and co-chair of this year’s ULI Boston’s Trends in Real Estate forum, Boston has some of the best fundamentals in the country as a result of a broad-based economy highlighted by life sciences, health care, financial services and higher education. The region’s colleges and universities are seen as an engine driving growth in innovation and technology.
The U.S. Census Bureau says the Baby Boom and Millennial generations are the two largest population cohorts in the U.S. and have been influencing the real estate market for years, and Boston, which has seen consistent population growth since 2010, is a major draw for Millennials.
“The innovation and young population combined are really bringing a lot of new development to the forefront, from apartments to creative office redevelopment. Furthermore, flight of foreign capital to the Boston market is driving the for-sale housing market, especially condominiums,” Febres-Mazzei said.
A Cohort 80 Million Strong
By 2020, projections show that there could be nearly 80 million people who are either Millennials and Baby Boomers. There are a number of questions surrounding the life decisions these groups may make in the next five years. Among them: Will they form households? Where will they choose to live? Will they remain in the labor force?
These questions could influence how different physical locations and real estate sectors will perform in the next five years, not just in Boston, but across the nation. As one interviewee who participated in the ULI Trends survey commented, “The biggest risk used to be whether the tenant in a building would renew at the end of their lease term; now you have to be confident that your property will be viable at the end of the term.”
Positive expectations for 2015 mean there will be considerable competition from both domestic and international investors for properties in top U.S. real estate markets. In addition, the potential for new sources of capital to enter the market could only serve to increase the competition for attractive investments. But, even in the face of so much optimism, inherent risk remains, including concern over geopolitical events and whether accelerating real estate prices – not seen since the 2007 market peak – are sustainable.
While the majority of those interviewed for the Trends report don’t believe the overall commercial real estate market is in “bubble” territory, there is consensus that the situation bears watching. Certain product types and markets have seen underlying values bounce back to pre-downturn levels, but values and capital flows to much of the country remain well below previous peak levels.
There is an expectation for improvement in most markets for the coming year, particularly in what the report calls “the big six markets” – New York, Boston, Washington, D.C., Chicago, Los Angeles and San Francisco. In Boston, growth is in the air, as cranes dot the landscape from Kendall Square to the Seaport to the Fenway. And, even though most of the product is geared to the upper end of the income scale, Boston is still an attractive place for investors.
“Boston is actually recognized by a lot of investors as a relative value to other markets. Paying $1,000 or $1,200 a square foot for a condominium is viewed as an interesting value proposition compared to some U.S. markets such as New York and San Francisco, and global markets like Hong Kong and London, and the residential sector is not the only opportunity to take advantage of this relative value,” according to Febres-Mazzei.
Investors follow trends, and the good news for Boston is that the trends are supported by solid market fundamentals. Increased density in the urban core spells opportunity for investors and solid economic performance for the city and its region.
Sarah Barnat is the executive director of ULI Boston/New England.
