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.
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 2018 2
How do we feel about 2018? Emerging Trends in Real Estate 2018 3
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 2018 4
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 2018 5
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 2018 6
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 7
Current expansion, slow by comparison but is it more sustainable? Source: NBER, Bureau of Economic Analysis, Bureau of Labor Statistics 8
Procession of Generations & Don t Forget the Baby Boomers Gen Z Millennial Boomer Gen X Emerging Trends in Real Estate 2018 9
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
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 16 60.0% 55.0% 50.0% 45.0% 48.2% First millennials turn 16 40.0% 35.0% 30.0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 40.7% Source: National Highway Statistics 11
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 700,000 600,000 500,000 *Sum of 78 ETRE markets Net Migration Suburbs 400,000 300,000 200,000 100,000 Central City - 2010 2011 2012 2013 2014 2015 2016 Source: US Census Bureau 12
More older workers in the workplace Best Bet! Senior housing gains momentum Labor force ages 65 to 74 1994 2004 17.2% 21.9% labor force participation rate 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 13
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 2018 14
Not the Gig economy, but the Freelance economy Freelancing in America Report, 2017 15
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 4,000,000 2005 2015 Source: US Census Bureau 16
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 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 17
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 2018 18
Higher sales prices won t guarantee more new homes Source: US Census Bureau, IHS Insight 19
Household formations easily outpacing new housing supply 300,000 200,000 100,000 - (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 - (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
Retail transforms and stores remain E-commerce isn t the real enemy of brick and mortar retail, boredom is! Emerging Trends in Real Estate 2018 21
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
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
What we want in-store
Boring vs non-boring retail Turning this Into this PwC Emerging Trends in Real Estate 2018 25
Retail fundamentals facing continued headwinds 125.0 100.0 75.0 50.0 (mil sqft) 25.0 0.0-25.0-50.0-75.0-100.0 2010 2011 2012 2013 2014 2015 2016 2017 Announced Store Openings (mil sqft) Announced Store Closings (mil sqft) Net Change (mil sqft) Source: CoStar Portfolio Strategy, About.com, Terranomics, SEC Filings 26
2016 Shopping center gross leasable area sf per capita Germany 2.34 UK 2.98 France 3.84 Japan 4.38 Australia 11.19 Cleveland 12.22 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 27
What does 2.34 square feet look like? Emerging Trends in Real Estate 2018 28
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
All green for the Ohio markets #56 Cleveland # 42 Chicago #44 Columbus # 24 Cincinnati Emerging Trends in Real Estate 2018 30
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 30,000 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Emerging Trends in Real Estate 2018 31
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
Do taxes influence net migration? *Projected annual net migration 2017-2022 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
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 34
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 2018 35