Emerging Trends in Real Estate Navigating at Altitude

Transcription

1 Emerging Trends in Real Estate 2018 Navigating at Altitude We are in a long cycle, not in boom/ bust. The key to the next few years is to expand horizons, market by market, property type by property type.

2 Emerging Trends in Real Estate 2018 Emerging Trends is the industry s most predictive forecast 39th annual outlook Based on personal interviews with over 1,000 individuals representing 590 organizations combined with an additional 1,600 online surveys 52 Market Focus Groups Sponsored jointly by PwC and the Urban Land Institute Emerging Trends in Real Estate

3 How do we feel about 2018? Emerging Trends in Real Estate

4 Expected profitability of your business Total Good & Excellent 100.0% 90.0% 80.0% 86.9% 82.2% 79.6% 70.0% 60.0% 60.3% 62.8% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 56.1% 26.2% 19.3% 1.1% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 28.5% 6.4% 32.9% 16.8% Abysmal Poor Fair Good Excellent Good Excellent Emerging Trends in Real Estate

5 What word would you use to describe the 2018 real estate market? Top 5 Biggest Movers from 2017 #1 Competitive 16.7% Treacherous #2 Cautious 23.3% Frenzy #3 Measured 24.1% Troublesome #4 Uncertain 26.5% Neutral #5 Growing 37.5% Sanguine Emerging Trends in Real Estate

6 2018 Emerging Real Estate Trends Slow Glide to Soft Landing Procession of Generations Markets Economic Tax Reform Retail Transforms Demographics Property Types Working Harder and Smarter Housing Tipping Point Emerging Trends in Real Estate

7 Long glide path to a soft landing I hate the what inning are we in question. It makes it seem like cycles have to end after a pre-set time has elapsed. Emerging Trends in Real Estate

8 Current expansion, slow by comparison but is it more sustainable? Source: NBER, Bureau of Economic Analysis, Bureau of Labor Statistics 8

9 Procession of Generations & Don t Forget the Baby Boomers Gen Z Millennial Boomer Gen X Emerging Trends in Real Estate

10 Generation shaping technology Boomers 78.4 million Gen X 78.6 million Millennials 79.6 million Gen Z 65.1 million??? Source: US Census Bureau 10

11 Will Gen Z continue to avoid driving? 75.0% 70.0% 65.0% Licensed drivers 19 and under as a percent of age group 68.7% Last of boomers turn % 55.0% 50.0% 45.0% 48.2% First millennials turn % 35.0% 30.0% % Source: National Highway Statistics 11

12 Pace of growth to the urban core has begun to slow Fewer people are moving into the center of markets, while more are going to the suburbs 700, , ,000 *Sum of 78 ETRE markets Net Migration Suburbs 400, , , ,000 Central City Source: US Census Bureau 12

13 More older workers in the workplace Best Bet! Senior housing gains momentum Labor force ages 65 to % 21.9% labor force participation rate % % 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 Source: Bureau of Labor Statistics 13

14 Working harder and working smarter Real estate facilities are not just overhead, but a way to improve not just employee happiness and engagement, but also productivity. Emerging Trends in Real Estate

15 Not the Gig economy, but the Freelance economy Freelancing in America Report,

16 Office A new way to work Gig employees find growing opportunities Transportation and warehousing Arts, entertainment, and recreation Establishments without employees Real estate and rental and leasing Health care and social assistance Professional, scientific, and technical services Administrative Other services 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000, Source: US Census Bureau 16

17 Improvement over acquisition? Expected Best Bet! Income over Office capital potential expenditures appreciation may need to increase to meet changing tenant demand 2.5% 2.0% 1.5% Office cap ex as a % of market value 4Qtr moving average 30-year average 1.0% 0.5% 0.0% 1990 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 Source: NCREIF 17

18 Housing at a tipping point I ve been hearing talk about how technology will transform the way builders build homes. Now, I look at what s been happening, and for the first time ever, I m thinking it s more than talk Emerging Trends in Real Estate

19 Higher sales prices won t guarantee more new homes Source: US Census Bureau, IHS Insight 19

20 Household formations easily outpacing new housing supply 300, , ,000 - (100,000) (200,000) (300,000) Best Bet! Evolving housing demand 889,303 Potential housing unit shortfall (New Household formation net additions to housing supply) 1,500,000 1,000, ,000 - (500,000) (1,000,000) (1,500,000) (2,000,000) (2,500,000) (3,504,470) (3,000,000) (3,500,000) (4,000,000) Quarterly Cumulative Source: U.S. Census Bureau 20

21 Retail transforms and stores remain E-commerce isn t the real enemy of brick and mortar retail, boredom is! Emerging Trends in Real Estate

22 E-Commerce continues to rise as a % of total retail sales $120.0 E-Commerce retail Sales (Bn$) $100.0 $80.0 $60.0 $40.0 $20.0 $- E-Commerce % of total sales 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: US Retail Census 22

23 2016 retail sales distribution by channel (billions of $) Online fulfilled from store - $62.2 B Electronic & Catalog -$445.0 B Best Bet! Non-boring retail In Store - $4.3 B Source: US Census Retail Trade Sales Annual Report, ICSC Research 23

24 What we want in-store

25 Boring vs non-boring retail Turning this Into this PwC Emerging Trends in Real Estate

26 Retail fundamentals facing continued headwinds (mil sqft) Announced Store Openings (mil sqft) Announced Store Closings (mil sqft) Net Change (mil sqft) Source: CoStar Portfolio Strategy, About.com, Terranomics, SEC Filings 26

27 2016 Shopping center gross leasable area sf per capita Germany 2.34 UK 2.98 France 3.84 Japan 4.38 Australia Cleveland Canada United States Source: ICSC, France data 2014, UK data

28 What does 2.34 square feet look like? Emerging Trends in Real Estate

29 It s different this time Isn t it? The market outlook We are less concerned # 1 Seattle with socalled rankings and more with how we see major themes working together in a market to drive performance. # 3 Salt Lake City # 8 San Jose # 10 Boston # 7 Los Angeles # 4 Raleigh/Durham # 9 Nashville # 5 Dallas/Ft. Worth # 2 Austin Emerging Trends in Real Estate 2018 # 6 Fort Lauderdale 29

30 All green for the Ohio markets #56 Cleveland # 42 Chicago #44 Columbus # 24 Cincinnati Emerging Trends in Real Estate

31 The next big market in the survey may be smaller 60,000 57,112 57,743 55,000 55,303 55,058 52,019 Population (000s) 50,000 45,000 40,000 35,000 47,731 Top ranked market and cumulative population of top 10 markets by year 43,050 38,913 36,291 36,901 30, Emerging Trends in Real Estate

32 Implications of potential tax reform 3 questions to consider: If? When? What? Depreciation and interest expense Mortgage interest deduction Tax rate reduction Taxation of pass-through entities Like-kind exchanges Capital gains & qualified dividends Carried interest PwC Real Estate Tax Alert 32

33 Do taxes influence net migration? *Projected annual net migration San Francisco 3,866 Oakland 6,979 San Jose (1,335) Sacramento 4,986 Dallas/Ft. Worth 86,966 Los Angeles (21,277) Austin 42,238 Inland Empire (19,338) San Antonio 23,711 Orange County (10,979) Houston 66,912 San Diego (1,450) New York City (18,949) Long Island (4,600) Northern New Jersey (10,275) Westchester/Fairfield (3,211) Jacksonville 23,796 Orlando 70,349 Tampa Bay 55,481 West Palm Beach 42,693 Fort Lauderdale 29,053 Miami 29,242 Source: US Census Bureau. Moody s Analytics 33

34 Property type choices skew toward demographics Investment # 1 Fulfillment Centers Development # 1 Fulfillment Centers # 2 Age Restricted Housing #3 Moderate Income Apartments #2 Age Restricted Housing #3 Moderate Income Apartments #4 Affordable Apartments # 4 Medical Office #5 Medical Office #5 Affordable Apartments # 6 Student Housing #6 Student Housing Emerging Trends in Real Estate

35 Thank you, and now our panel! Download your copy of Emerging Trends in Real Estate 2018 uli.org/et18 pwc.com/us/etre Emerging Trends in Real Estate