AUSTIN – (Realty News Report) – The biggest issues affecting the nation’s real estate industry were revealed by the Counselors of Real Estate on the first day of the National Association of Real Estate Editors 2019 conference in Austin. Over 1,100 real estate experts representing 50 different disciplines within the industry voted on the Top 10 most impactful issues for the coming year. Here are the Top 10 in reverse order:
10) Public/Private Indebtedness
There is approximately three dollars of debt for every dollar of equity in the U.S. investment property sector, according to the Counselors of Real Estate. The availability of cheap capital is cause for concern; when borrowing rates eventually go up, and they always eventually do, experts expect a negative effect on property values exacerbated by the debt burden on US individuals and households, which rose 3.1% to $4.052 trillion in March.
9) Volatility and Confidence
Market confidence can be hard to understand and even harder to quantify. Consumer confidence as monitored by the University of Michigan Survey and The Conference Board Index typically reach high points just prior to recessions, suggesting that the data is a rear-view mirror rather than a windshield view, according to the Counselors. Both the University of Michigan Survey and the Conference Board Index have bounced back to near all-time highs, raising concerns that the next recession may be sooner than we think.
8) Population Migration
Since the very first census, the American population has migrated across the continent, moving the nation’s population center further west and south throughout the years. That trend continues to this day. The map of population change in the 2010-2018 period shows broad swaths of demographic gains in the major coastal cities. Like people, capital is gravitating to major markets as well. The ten top MSAs tallied $266 billion (46.4%) of real estate investment in 2018, though they had just 33% of the US population, according to the Counselors.
7) Capital Market Risk
With indebtedness and market confidence both major issues, it follows that capital market risk is also a major concern the Counselor’s have their eye on. Since low interest rates continue to persist, investors looking for yield are moving down in credit, despite broad macro concerns of where we are in the cycle, according to the Counselors. The outstanding commercial real estate debt stands today at a record high of almost $3.5 trillion dollars, up almost one trillion dollars from the 2011-2012 trough after the financial crisis, according to data from MBA and Morgan Stanley
6) Political Division
While the Counselors of Real Estate is not a political organization, the political division exacerbating several major issues in real estate has caused the division itself to become a concern. Dealing with climate change, population migration, infrastructure, and housing issues have all come to a screeching halt now that ‘comprise’ has become a dirty word. Infrastructure is the best example; a mere three weeks after the White House met with Democratic House leadership about moving forward on a $2 trillion initiative, the plan was dead and the President took the issue off the table.
5) End Of Cycle Economics
Talk of the end of the economic cycle is beginning to permeate nearly every conversation. While the economy continues to bang on all cylinders, forward thinkers can’t help but be sucsipus that the record setting current cycle may be running out of runway. Signs of fragility emerged during the recent government shutdown, when some of the nearly 800,000 Federal employees were forced to resort to food banks once a couple of paychecks were missed.
Technology continues to radically shift the business world. Operational technology controlling a buildings’ HVAC, elevators, lighting, and parking are becoming much more common. Building technology and back-office operations in real estate firms are now beset by new technology leveraging the Internet of Things (IoT), big data, analytics, digital twin, artificial intelligence and blockchain, according to the Counselors. The biggest issue is that technology is moving faster than the industry can assimilate it, resulting in a variety of solution types, adoption rates, vendors and results that’s hard for graduates of MIT to understand, much less real estate brokers.
Climate Change has begun affecting investment decisions. Risks from climate change include hurricanes, flooding, wildfires, landslides, and extreme snowfall, but also chronic risks from sea level rise, drought, heat waves, water scarcity, and food security, according to the Counselors. Landlords and developers are adapting by strengthening emergency preparedness plans and strategies, moving mechanical systems to higher floors, installing backup generators, sea walls and berms, and calculating the ROI of on-site renewables and battery storage. Since 2008, the volume of property and causality premiums written increased over 33%. The 2018 insurance losses for California topped $12 billion following the deadliest and most destructive wildfires in a century, according to the Counselors.
2) Housing In America
Housing issues aren’t just limited to the severe lack of affordable options in nearly all of the nation’s largest cities. Demographics like the homeless, low-income, Millennials, Gen Z and Baby Boomers are all facing their own housing issues. The 2008 mortgage crisis is still being felt. When the bubble burst, the residential construction industry took a serious hit. When it started back up again in earnest, the mix of units shifted toward more affluent buyers and renters, where it was more feasible to produce houses and apartments profitably. Making matters worse, income growth has been almost exclusively seen in the upper quintile of earners, meaning that increasing housing costs for the remaining 80 percent of the population must be funded by real incomes that have diminished over the past two decades. Housing is also closely tied to other concerns from the counselors. Population migration, political division, infrastructure and market confidence are all tied to the health of the housing market while also affecting it, making the issue a nasty cocktail of concern.
The nation’s crumbling infrastructure can no longer be ignored. The roads, bridges, tunnels, railways, airports, power grids, and stormwater systems that hold the country together are failing with greater frequency. According to the American Society of Civil Engineers, there’s roughly a $1 trillion funding gap needed to overcome the deteriorating infrastructure.
“Inadequate infrastructure creates a hard ceiling to economic development, and real estate values are tied to sustainable growth,” said Julie Melander, CRE, 2019 chair of The Counselors of Real Estate. “The U.S. must invest in infrastructure to compete globally, but right now it is lagging other nations on infrastructure investment.”
Since President Trump’s election, improving the nation’s infrastructure has been a hot button issue, but to date efforts have been tabled amid rampant political division. What’s even more concerning is the country may be losing its opportunity to solve the problem. The recent economic expansion has allowed the United States to secure low rates on long-term borrowing, but with the end of the cycle nearing, that may no longer be possible.
June 26, 2019 Realty News Report Copyright 2019
Read The New Book by Ralph Bivins, Editor of Realty News Report
Houston 2020: America’s Boom Town – An Extreme Close Up
Available on Amazon http://tiny.cc/4a2g6y