Urbanization – migration away from the suburbs and to the central city – will be the biggest real estate trend in 2015, according to a new report from the Urban Land Institute (ULI) and PricewaterhouseCoopers (PwC).
The Emerging Trends in Real Estate report, in its 36th year of publication, makes projections in commercial and residential real estate for the coming year. It is a widely utilized and respected industry report. The newest report surveyed more than 1,400 people involved in the real-estate market, ranging from real-estate investors to property managers.
According to the report, urbanization in the U.S. will continue to be the most significant issue affecting the industry, as cities across the country mimic the walkability and transit-oriented development making cities like New York, Washington D.C., and San Francisco so successful.
As smaller cities copy the model of these “24-hour cities” (a term PwC coined in a previous report), more affordable versions of these places will be created. The report refers to this as the advent of the “18-hour city,” and uses the term to refer to cities like Houston, Austin, Charlotte, and Nashville. ULI Global Chief Executive Officer Patrick L. Phillips said, “These cities are positioning themselves as highly competitive, in terms of livability, employment offerings, and recreational and cultural amenities.”
Another trend that looks significant in 2015 is that America’s largest population cohort, Millennials, will continue to put off buying a house. One responder was quoted as saying, “Renter-by-choice is still a potent force. Apartments will retain their appeal for a while for Millennials, spooked by what happened to home-owning parents.”
This trend will continue into the 2020s, the report projects. After that, survey respondents disagree over whether this generation will follow in their parents’ footsteps, moving to the suburbs to raise families, or will choose to remain in the urban core. The survey projects that this population cohort will evolve and segment over time, and warns against painting the generation with too broad a brush.
Another issue affecting real estate in the coming year will be America’s failing infrastructure. Most roads, bridges, transit, water systems, the electric grid, and communications networks were installed 50 to 100 years ago, and they are largely taken for granted until they fail. The American Society of Civil Engineers (ASCE) gives U.S. infrastructure a grade of D+ on its most recent report card.
The report’s writers state that the U.S.’s failure to invest in infrastructure impacts not only the health of the real-estate market but also our ability to remain globally competitive. We are behind the curve compared to Europe and Asia. One survey respondent answered, “Infrastructure constraints causing congestion hobble the improvements technology can provide.” With the ASCE estimating that repairs for existing infrastructure will cost $2.2 trillion over the next five years, Congress needs to take action now (raising the gasoline tax for instance) before a catastrophe forces their hands.
Investors are Optimistic
Apart from the specific trends highlighted above, which give some investors trepidation, PwC’s report portrays an overall optimism borne by the recent healthy real-estate “upcycle” and improving economy. Seventy-four percent of the respondents surveyed report a “good to excellent” expectation of real-estate profitability in 2015. This is up from 67.8 percent in 2014. While excessive optimism can promote bad investment patterns, resulting in a real-estate “bubble,” the report’s writers downplay that potential outcome insofar as it has not yet occurred.
Some respondents to the Emerging Markets survey call the urbanization trend “oversubscribed,” and the report concedes that there do exist some edge cities and suburbs with promise. But these places are few and far between. The most successful places are those built using urban-design principles – with density, walkability, and good transit.
Real-estate investors in 2015 need to pay attention to the two main conclusions of PwC’s report: if a property resembles or relies upon sprawl in any way, or doesn’t appeal to Millennials, think before you invest.