Top Ten Issues Affecting Real Estate

The Changing Global Economy, Debt Capital Market Retrenchment, and Demographic Shifts Lead the New List of The CRE 2016-17 Top Ten Issues Affecting Real Estate

The Changing Global Economy

The IMF has revised GDP growth downward for much of the globe in 2016-17, as economic uncertainties continue and intensify. Currency issues, declining exports, and soft energy prices add to volatility (as reflected in the stock markets in early 2016 and Moody’s recent downgrade of Saudi Arabia). Political issues and conflict undermine stability as well

2. Debt Capital Market Retrenchment

Debt markets for commercial real estate are slowing sharply. Regulators are telling bank lenders to curtail CRE lending (that’s 50% of the debt market), and the CMBS markets are slowing down, with no legislative fixes to retention rules that are due to go into effect in the summer of 2016. Many insurance companies that traditionally invest in real estate are approaching their real estate allocation limits.

3. Demographic Shifts

Millennials (generally considered to be people ages 18-35) have overtaken the Baby Boomers (people of ages 51-69) in sheer numbers, but both groups remain substantial real estate consumers. While the Boomers are retiring at a rate of approximately 10,000 per day, America’s population of persons aged 90-and-older has almost tripled since 1980, and is expected to increase to more than 7.6 million over the next 40 years, according to the U.S. Census Bureau. Older households and younger households are competing for housing in many of the same places. In terms of income, younger (Millennial) households are falling behind with many sons and daughters living at home with parents.

4. Densification/Urbanization

Transportation options, walkability, extensive work/live/play options continue to draw people of all ages into the urban core and to close-in “urbanized” areas. The move to higher density areas continues, as job growth and dynamic urban centers attract new residents and businesses.

5. The Political Environment

The political environment has become acrimonious at all levels – global, national, state, local – and affects investment decisions (including business and household location decisions) with issues ranging from the perceived ability of governments to function to taxation to social issues. Social media makes it very easy to track the political and economic climate of any locale – and debate any political issue publicly.

6. Housing Affordability and Credit Constraints

New issues are beginning to emerge in the housing market, as affordability and credit constraints are challenging both the rental and home ownership markets. Stringent credit requirements prevent many households from entering the home ownership market, increasing demand for rental property. Limited available for-sale inventory and income stagnation are affecting affordability. Multifamily development continues but rents are outstripping incomes in many communities. With declining affordability, questions arise about where newly formed households will live, where the workforce will reside and whether affordable services will be available for aging Baby Boomers.

7. The Disappearing Middle Class

The wealth and income gap continues, with a number of measures showing stagnant or declining wages and wealth. A recent Pew Research study shows that the median income for middle-class households fell by nearly five percent between 2000 and 2014. Their median wealth (assets minus debt) declined by 28 percent after the housing market crisis and the subsequent recession. Costs have risen dramatically for many large-dollar items that affect middle class families, including college tuition and out-of-pocket costs under employer healthcare plans. Confidence in a comfortable retirement is wobbly, with concerns over rising costs and declining benefits in corporate retirement plans. 

8. Energy

Whenever a key commodity encounters instability, it can threaten global economic security. Energy markets are currently unstable. This year’s crash in oil prices has threatened the global economy–capital markets have responded–Saudi Arabian debt has been downgraded by Moody’s and, in some markets (such as Houston and North Dakota) lenders are restricting commercial real estate debt.

9. The Sharing/Virtual Economy

As the effects of the recession only slowly fade, we are seeing the emergence of a “shadow economy” or “sharing economy.” New enterprises spring from economic uncertainties, such as Airbnb, Uber and bicycle sharing companies (e.g., Divvy). These have become alternatives to traditional lodging and transportation offerings – often operating outside of traditional regulations. They offer alternatives for employment as well. Crowdfunding has become an addition to traditional sources of capital for new enterprises and investment, including real estate.

10. The Rise of “Experiential” Retail

Traditional retail is reacting to change by adapting, with major retailers shuttering stores and downsizing their footprints, moving more to online options. As retailers retrench and rethink their retail models, large online retailers thrive. Amazon has replaced Wal-Mart as the biggest retailer in terms of dollars. This creates not only challenges but also opportunities.