The Top 10

Issues for Real Estate Right Now

By Suzann D. Silverman on Jun 25, 2013 in News

The Counselors of Real Estate annual list of the top 10 issues to affect real estate, unveiled during the National Association of Real Estate Editors conference in early June, encapsulated some of the most critical issues to emerge in recent months. And while some longer-term concerns emerged on this list, derived from surveys and polls of members of this invitation-only top-executive industry think tank, the fact that they were not included in last year’s version suggests a heightened focus in response to global political and economic conditions.

The organization emphasized the importance of considering both the opportunities and risks inherent in these issues not only on an individual basis but when taken in combination.

The trends as identified are as follows:

1. Low interest and capitalization rate risks.
2. Healthcare
3. Capital markets resurgence
4. Event risks
5. Effects of climate change/weather on coastal properties
6. Echo Boomer housing demand
7. Increased U.S. natural gas mining and reserves
8. Global real estate growth and risk
9. Impact of technology on office space
10. Retail malaise and repositioning

 

In discussing the list in Letterman-style reverse order during his keynote presentation , Counselors of Real Estate chairman Howard Gelbtuch offered some key observations. He dismissed the so-called retail malaise with the response: “What malaise?” While much has been made of the Internet’s increasing attraction of shoppers, he still sees value in the social aspects of mall shopping. And with retail rents healthy, investors and managers can really benefit from purchasing and retenanting spaces currently occupied by what he termed the “dowdiest retailers,” such as Sears/Kmart and JC Penney. Their average contracted rent is $4 per square foot, versus an average market rent of at least $8 if not as much as $11 per square foot, he said. The hottest markets, meanwhile, are sporting rents at astronomical, record-breaking highs: Manhattan’s Fifth Avenue, for instance, is collecting $2,500 to $3,000 per square foot.

Watch a video of Gelbtuch discussing the trends on CPExecutive.com

Younger workers continue to impact office space design, with the emphasis on collaborative spaces and a growing number of workers are independent contractors working from home—with 30 percent in 2013 growing to a projected 50 percent in 2020 and 80 percent in 2030. At the same time, he noted that the hoteling trend has come and gone in the past and could again.

In the global arena, Europe is of course a cause for concern, though it may also offer an opportunity to snap up distressed assets. Cuba has started to regain its real estate market, according to Counselors of Real Estate findings, while Latin America in general is demanding U.S.-style office buildings. And the next round of emerging markets may include Korea, Nigeria, Bangladesh and Vietnam. The U.S. market is still a “safe haven.”

North Dakota is now producing more oil than California, but Gelbtuch does not expect growth in the natural gas business to play a significant role in the shaping of cities in the near term.

Echo Boomers continue to attract attention as space users. While they prefer more urban lifestyles and are driving location-driven residential growth and the rise in micro units, though Gelbtuch (right) did not completely dismiss the suburbs. The suburbs are fighting back, he said, and there are opportunities to build townhouses and other residential properties in them.

With the possibility of climate change resulting in more extreme weather patterns, it may become necessary to install a generator in order to sell your house in certain regions, he speculated—although despite losing power for two weeks during Hurricane Sandy, he himself has not yet opted to install one. He noted flood insurance has become so cost prohibitive he no longer owns a second home on the Jersey Shore. Lower Manhattan’s businesses continue to recover from the hurricane, but the residential market is hotter than it has been in years, Gelbtuch said, and the commercial market will follow behind it.

Many event risks are outside the United States, but regardless, they should be considered as a question of “when,” not “if,” according to the association’s findings.

As the capital markets return, coastal markets are strong and growth is occurring in the Midwest. A new, emerging asset class is single-family homes: As institutions purchase them in bulk, it is giving rise to new single-family REITs.

Healthcare is attracting increasing attention, with the aging of the Baby Boomers causing investors to develop new housing options both in cities and suburbs. Medical facilities are often trading at higher cap rates than office buildings, yet seniors housing as a sector is performing well.

With interest rates sure to risk, the biggest risk is to the real estate markets, Gelbtuch warned. Lock in low interest rates now and evaluate your strategy in preparation. Cap rates will stay depressed in the gateway cities, but other markets are not experiencing the same downward pressure since they are attracting significantly less demand for property.

Last year’s list included the following:

1. Aging population
2. Funding of public employee retirement systems
3. Student debt burdens
4. Infrastructure funding and U.S. competitiveness
5. Changing office, retail and industrial demand
6. Real estate capital markets liquidity
7. Global change and uncertainty
8. Integration of sustainability
9. Low cap rates
10. Civil discord and political gridlock

Suzann D. Silverman is Editorial Director of Commercial Property Executive and a board member of the National Association of Real Estate Editors.