This column reports the prognostications of real estate and economic experts going into 2020. In the Emerging Trends in Real Estate survey discussed here, the economic experts ranked "epidemics" dead last in importance of issues for 2020. They were wrong. As we go to press, the COVID-19 virus has spread around the world and been declared a pandemic. This Black Swan event has shaken economies as well as life in general. It is too soon to tell the full extent of its effects or how long they will last. We hope the discussion in this edition of Resource Center will provide an interesting perspective on where we were and how dramatically events can change markets. A future Resource Center column will discuss Black Swan events.
A new year and a new decade are underway, and you may be seeing media stories related to the future of real estate. This edition of Resource Center discusses all manner of resources that summarize the state of real estate markets and offer forecasts on the anticipated future of markets.
Even though real estate market supply, demand, and influences are primarily local, analysts and valuers are wise to be familiar with national and regional changes and trends, as well as market cultural changes that impact the realms of economics and finance.
Emerging Trends in Real Estate 2020 (1)
One of the standard resources for a real estate market outlook is Emerging Trends in Real Estate. This report is published annually by PricewaterhouseCoopers (PwC) and the Urban Land Institute (ULI). The 2020 edition is available online with a free download at http://bit.ly /PWCTrends2020. The Emerging Trends outlook report is now in its forty-first year of publication. Its goal is to "provide an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States and Canada." (Page 1)
This widely respected publication reflects the views of 750 experts in their specialties, who were personally interviewed by ULI and PwC researchers, and over 1,500 survey responses. There is no black box or marketing slant involved in this report. The names of the members of the Editorial Leadership Team, authors, contributors, advisers, and contributing researchers are shown on Page ii; the names of interviewees are listed near the end of the report (Page 96). The affiliations of those interviewed and surveyed are characterized as follows:
* Private property owner or commercial real estate developer, 27.6%
* Real estate advisory or service firm, 23.6%
* Homebuilder or residential land developer, 12%
* Private equity real estate investor, 11%
* Bank lenders, 6.5%
* Investment manager/adviser, 6.5%
* Equity REIT or publicly listed real estate property company, 4%
* Private REITs, institutional lenders, mortgage REIT, debt investor, securitized lender, and others, 12.6%
The content of Emerging Trends in Real Estate 2020 is divided into four chapters: "Shifting Focus to the Decade Ahead," "Markets to Watch," "Property Type Outlook," and "Emerging Trends in Canadian Real Estate." In all sections, the narrative offers cogent facts, analysis, and conclusions.
Chapter 1, "Shifting Focus to the Decade Ahead," in essence presents cautious optimism. Even in a long, relatively good economic recovery cycle, there are reasons for concern and carefulness--the very fact that the economy has been expanding, and real estate investment healthy for years may be disquieting to some.
The report confirms that technology will continue to present disruption--rendering both risk and opportunity. The disruption by technology has and will influence demand for various property types, uses, design, and features. Change is ever present, of course, and accelerates, with change occurring faster and increasing in terms of both size and scope. One REIT executive respondent was quoted, "Don't ask me what inning we are in. We are playing cricket!" There is a satisfaction with current real estate performance, which "reinforces the optimism about real estate's ability to withstand a recession."
The experts point out, however, that there are several areas of relative softness in the economy. They suggest,
A defensive strategy might not be such a bad idea right now. For a few years now, commercial property has been "priced to perfection," meaning that there is little in the way of a safety margin for negative surprises ... The "emerging trend" for real estate demand in the decade ahead is ... for dramatically softer demand ... confidence is one thing, complacency is another.... some serious attention should be given to the prospects for an extended downshifting in the economy and its implication for commercial property demand in the decade ahead. (Page 6) Also noted is the environment where capital continues to chase real estate, despite the need for some caution.
The conundrum is real. Investment managers are not paid to sit on cash. And yet there is serious risk in an approach that deploys the capital just because it is there. The mantra encapsulating a reasoning that one or another investment area must be chosen so that money can be put to work goes by the acronym "TINA"--"There Is No Alternative.... There is no doubt about the pressure of capital. The volume of private-equity dry powder is now estimated to exceed $2 trillion, with 5 percent or more allocated to real estate. So much money is looking to be deployed in safe fixed-income investments that $12 trillion is now parked in negative-interest-rate debt instruments in Europe and Asia." (Page 7) This chapter draws attention to the risk of analysis relying solely on measures of central tendency in data:
One underlying lesson is this: most economic reporting and most discussion of real estate markets focus on one statistical feature: central tendency, as measured by averages and medians. That makes for overreliance on a blunt instrument--as well as encouraging herd behavior. Much more important is the distribution of the data--the shape of the data curve, its tails, and where a market falls on that distribution. And, for analytical purposes, it is helpful to take an unconventional look at the way markets that are apparently dissimilar may have surprisingly similar characteristics. (Page 11) The "Shifting Focus" chapter offers a number of...