Emerging Trends in Real Estate 2018 Navigating at Altitude
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.
PwC ULI Outlook on Trends 39th 320/480/1,600 Who? A record total Thank You!
How do we feel about 2018? Emerging Trends in Real Estate 2018 4
? How would you characterize the expected profitability of your real estate business in 2018? A. Good-Excellent B. Fair C. Abysmal-Poor
Expected profitability of your business 100% 90% 80% 86.9% 82.2% 79.6% 70% 60% 56.1% 50% 40% 30% 26.2% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 19.3% 1.1% Abysmal Poor Fair Good Excellent 6
Expected profitability of your business Good & Excellent 70.0% 60.0% 60.3% Good 62.8% 50.0% 40.0% 30.0% 32.9% Excellent 28.5% 20.0% 16.8% 10.0% 0.0% 6.4% 2005 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 7
What word would you use to describe the 2018 real estate market? Top 5 Competitive Cautious Measured Uncertain Growing Emerging Trends in Real Estate 2018 8
Emerging Trends in 2018 Slow Glide to a Soft Landing Working Smarter and Harder Retail Transforms and Stores Remain Procession of Generations: Gen Z Housing at a Technological Tipping Point It s Different This Time Isn t it? Don t Forget the Boomers PwC 9
A Long Glide Path to a Soft Landing PwC 10
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 2018 11
Long glide path to a soft landing 4.5% 4.0% Current expansion, slow by comparison but is it more sustainable? Annual Employment Growth 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 2009 to Current - 101 months 1991-2001 - 121 months 2001-2007 - 74 months 1980-1981 - 13 months 1975-1980 - 59 months 1982-1990 - 93 months 0.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Source: NBER, Bureau of Economic Analysis, Bureau of Labor Statistics Annual Real GDP Growth 12
Long glide path to a soft landing 180 RCA Commercial Property Price Index, by Sector 160 140 120 100 80 Office - CBD Apartments Industrial Office Office- Suburban Retail 60 40 20 0 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 PwC
Long glide path to a soft landing 160 RCA Commercial Property Price Index, by Market Type 140 120 Major Markets (All Property) 100 80 60 Non-Major Markets (All Property) 40 20 0 Dec-00 May-01 Oct-01 Mar-02 Aug-02 Jan-03 Jun-03 Nov-03 Apr-04 Sep-04 Feb-05 Jul-05 Dec-05 May-06 Oct-06 Mar-07 Aug-07 Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Mar-17 Aug-17 PwC
Working Smarter And Harder PwC 15
Working smarter and harder 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 2018 16
Working smarter and harder Productivity growth continues.at a much lower rate 1991-2010 2.4% Average annual growth 2011-2016 0.6% Average annual growth Emerging Trends in Real Estate 2018 17
Working smarter and harder Change in Worker Output v Employment Growth by Sector: 2009-2017 Exhibit 1-18 18
Working smarter and harder Get It s all about ROI and it s human capital smart about the workplace.today it sthat all about the smart well as thereally smartpays building counts theexperience...as most, where investment off Emerging Trends in Real Estate 2018 19
Working smarter and harder 30.00% Percent of Office Inventory by Decade Constructed 25.00% 24.0% 20.00% 15.00% 15.2% 12.9% 12.7% 15.0% 10.00% 7.6% 8.6% 5.00% 4.0% 0.00% Source: U.S. Energy Information Administration, CoStar 1940's 1950's 1960's 1970's 1980's 1990's 2000's 2010's 20
Working smarter and harder In 2018, investing Office in what capital you expenditures already have may will need be more to increase important to meet than what changing you tenant may acquire demand Improvement over acquisition? 2.5% 4Qtr moving average 2.0% Office cap ex as a % of market value 1.5% 30-year average Best Bet! Income over potential appreciation 1.0% 0.5% 0.0% 1990 Q4 1991 Q4 1992 Q4 1993 Q4 1994 Q4 1995 Q4 1996 Q4 1997 Q4 1998 Q4 1999 Q4 2000 Q4 2001 Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 Q4 2016 Q4 Source: NCREIF 21
Procession of Generations Gen Z PwC 22
Procession of Generations.Gen Z Generations Boomers -78.4 mil Gen X 78.6 mil Millennials 79.6 mil Gen Z 65.1 mil Emerging Trends in Real Estate 2018 23
Procession of Generations.Gen Z It isn t what you don t know that you should be worried about; it s what you think you know..thought we knew.what actually HAPPENED Boomers Retire early & to mild climates Not so fast Gen X Bigger suburban houses Hit by Global Financial Crisis Millennials Urban forever Majority in suburbs already 24
Procession of Generations.Gen Z It isn t what you don t know that you should be worried about; it s what you think you know. PwC 25
And Don t Forget the Boomers PwC 26
And don t forget the boomers Boomers plan to stay in the workforce longer 35.0% Planned Retirement Age 32.0% 30.0% 25.0% 26.0% 27.0% 20.0% 17.0% 15.0% 10.0% Age 65-69 Age 70+ Age 65-69 Age 70+ 5.0% 0.0% 2011 2017 Source: Insured Retirement Institute, "Boomer Expectations for Retirement 2017" 27
And don t forget the boomers More older workers in the workplace 1994 Ages 65-74: Labor force participation rate 17.2% Best Bet! Senior housing gains momentum 2004 21.9% 2014 26.2% 2024 29.9% 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 Source: Bureau of Labor Statistics 28
Housing at a Technological Tipping Point? PwC 29
Housing at a technological tipping point I ve been hearing talk about how technology will transform the way builders build homes for 25 years. 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 2018 30
Housing at a technological tipping point Higher sales prices won t guarantee more new homes 80.0% % change in housing units (2000-2018 f) 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Atlanta Austin Raleigh/Durham Dallas/Fort Worth Nashville Salt Lake City Seattle Minneapolis/St. Paul Miami San Jose Boston Fort Lauderdale Los Angeles 0.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% % change in housing price index (2000 2018f) Source: US Census Bureau, IHS Insight 31
Housing at a technological tipping point Not much relief in sight for home construction costs 130.0 120.0 110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 New Home Price Index (2005 = 100) Best Bet! Evolving housing demand & technologies 107.0 125.4 The Wall Street Journal America's continued construction labor crisis CNN Money The dire need to recruit the next Soaring lumber prices a problem for generation of skilled workers home builders and buyers The price of lumber is soaring, and home builders are worried. Real estate CEO: Record-low housing inventory is 'freaking us out' CNBC Housing inventory continues to drop amid tight credit and a growing tendency toward becoming a Source: US Census Bureau 32
Retail transforms and stores remain PwC 33
Retail transforms and stores remain Retail isn t dead, it s just changing. Give it some time to adjust Emerging Trends in Real Estate 2018 34
Retail transforms and stores remain E-Commerce continues to rise as a % of total retail sale but.. $120.0 E-Commerce retail Sales (Bn$) $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 35
Retail transforms and stores remain 2016 retail sales distribution by channel (billions of $) Best Bet! Non-boring retail Online Sales Fulfilled from Store, $62.2 Electronic Shopping & Mail Order, $445.0 In-Store, $4,278.0 Source: US Census Retail Trade Sales Annual Report, ICSC Research 36
Retail transforms and stores remain 2016 Shopping center gross leasable area sf per capita Germany 2.34 UK 2.98 France 3.84 Japan 4.38 Australia 11.19 Canada 16.77 United States 23.59 0.0 5.0 10.0 15.0 20.0 25.0 Source: ICSC, France data 2014, UK data 2015 37
It s different this time the market outlook PwC 38
It s different this time.the market outlook Why deal with the uncertainty of # 1 Seattle a global market when there are opportunities in Salt Lake City and San Antonio? # 10 Boston # 8 San Jose # 3 Salt Lake City # 7 Los Angeles # 4 Raleigh/Durham # 9 Nashville # 5 Dallas/Ft. Worth # 2 Austin Emerging Trends in Real Estate 2018 # 6 Fort Lauderdale 39
It s different this time.the market outlook The next big market in the survey may be smaller 60,000 55,000 Population (000s) 50,000 45,000 40,000 35,000 30,000 Top ranked market and cumulative population of top 10 markets by year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Emerging Trends in Real Estate 2018 40
It s different this time.the market outlook Top Destination Markets for Migration from Primary Markets, 2011-2015 Inland Empire Philadelphia Miami/Fort Lauderdale/West Palm Beach Baltimore San Diego San Jose Phoenix Dallas/Ft. Worth Atlanta Houston Sacramento Seattle/Tacoma Norfolk/Virginia Beach Tampa-St. Petersburg-Clearwater, FL Metro Area Orlando Raleigh/Durham Denver Charlotte Portland Austin Nashville PwC 0 10000 20000 30000 40000 50000 60000 70000 80000 90000 100000 Total In-Migration
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 2018 42
2018 Local Outlook: Nashville 5 +16% 4 3 2 1 0 Local Economy Investor Demand Capital Availability Development Redevelopment Opportunities Public Private Investment Average National Average
2018 Sector Outlook: Nashville 5 Nashville National 4 3 2 1 0 Housing Office Industrial Hotel Retail Multifamily
2018 South: Local Economy 5 4 3 2 1 0
Benchmarking Nashville Population Millennial Growth over 5 years 5 yr annual employment change Cost of Doing Business Nashville 1.94 11.1% 108% 98% Austin 2.18 20.3 137 104 Raleigh 2.65 15.4 110.8 88 Charlotte 2.59 15.3 115.7 89 Tampa 3.14 10 106.2 101
Thank you, and now our panel! Download your copy of Emerging Trends in Real Estate 2018 uli.org/et18 Emerging Trends in Real Estate 2018 47