Improving fundamentals and robust domestic and foreign investor appetite will continue to sustain the U.S. commercial real estate industry's strong performance in 2015, according to a new report.
The 36th annual Emerging Trends in Real Estate, co-published by PwC US and the Urban Land Institute, provides outlooks for the real estate and land use industry based on interviews and survey responses from more than 1,000 real estate investors, fund managers, developers, property companies, lenders, brokers, advisors and consultants.
"Unlike previous reports and previous cycles, we are seeing sustained growth," said Mitch Roschelle, PwC U.S. real estate advisory practice leader, in a statement. "In the past several years, we reported that real estate market participants' main fears revolved around the uncertainty with the economy.
"Now, the trepidation in their eyes has more to do with the ability of the growing real estate markets to adapt to a series of megatrends impacting society and the global economy. These mega trends include accelerating urbanization, demographic shifts and the impact of distributive technological advancements."
This year's Emerging Trends marked the continued rise of markets other than the largest coastal cities as top choices for overall real estate prospects.
"Investors are looking closely at opportunities beyond the core markets," ULI Global's chief executive Patrick Phillips said in the statement. "These cities are positioning themselves as highly competitive in terms of livability, employment offerings and recreational and cultural amenities."
Survey respondents ranked these cities the top five markets:
- Houston ranked first in both investment and development expectations for next year, and its housing market expectations ranked No. 2.
- Austin was the top choice for both the office sector and the single-family housing sector and the second-ranked market for retail.
- San Francisco was the No. 1 choice for hotel investment in 2015, and its office market ranked third and the retail market fourth.
- Denver's retail ranked fifth and office sixth.
- Dallas/Fort Worth's single-family housing was the highest ranked property sector, and its industrial sector was No. 4 — highest among the top five markets in this year's survey.
Following are PwC and ULI's top trends in real estate for 2015:
1. The 18-hour city comes of age
America's urbanization has greatly increased the number of cities that thrive around the clock and on weekends. Downtown transformations have combined housing, retail, dining and walking-distance offices to generate urban cores, spurring investment and development and raising the quality of life for a roster of cities.
2. The changing age game
The real estate industry must plan for a nation with less household formation, fewer new consumers and a meager number of work force entrants in the coming decade. Millennials' tendency to postpone homeownership and rent longer could change in the 2020s, and the emergence of a smaller Generation Z will result in further industry changes. Moreover, baby boomers will continue to significantly influence real estate development and investment for at least two more decades.
3. Labor markets are heading for a tipping point
Forward-looking businesses realize that while the "jobless recovery" is a current concern, longer-term labor market trends are moving in the opposite direction. Retirements will accelerate even as the peak of millennial labor force entrants has already passed. Within a few years, the talk will be about labor shortages, not surpluses. Survey respondents see job growth as the most important issue for real estate, closely followed by the related concerns of wage and income growth.
4. Real estate's love-hate relationship with technology
Technology is pushing change in space use, locations and demand levels at an accelerated pace. It is now the norm to anticipate, strategize and respond to new technologies before they become mainstream. Overall, the fear factor about technological disruption is easing. Surveyed respondents viewed e-commerce and crowdfunding, for example, as an adaptation challenge, as retailers become "omnichannel distributors" and e-tailers begin to open brick-and-mortar stores.
