In this inaugural issue of the Counselors External Affairs Alert (EAC Alert) publication, we summarize a handful of the broader structural issues that will define the real estate industry in the next 10-30 years. (Many of the issues have strong interrelationships.)
The issues below were collected at the Chicago Meeting of the External Affairs Committee. Going forward, EAC Alerts will be circulated monthly, and more frequently as issues of importance to Counselors and the industry emerge.
Top Ten Issues Defining the Future of the Real Estate Industry
- Aging Population: The aging of the population will broadly and dramatically affect the real estate markets from housing, retail sales, health care, and the myriad of factors that define the success of different geographic areas. Aging will most directly affect the demand for real estate, but will have scores of less direct impacts such as potential capital impacts as the pensioners by the scores of millions move from being net contributors to net users of capital.
- Funding of Public Employee Retirement Systems: Underfunding of State and Local Retirement Systems in the trillions of dollars provides extreme challenges to the provision of basic local and state services critical to real estate properties and markets. Real winners and losers to emerge.
- Student Debt Burdens: Student college debt averages more than $20,000 per student with a total that exceeds consumer debt for the first time. How will such burdens change the patterns of spending, household formation, and growth of this generation of graduates?
- Infrastructure Funding and US Competitiveness: Local and state governments, and creative public-private partnerships are needed to fund the next generation of needed infrastructure improvements and cover the trillions of dollars of deferred maintenance of existing assets. (See issue 2 for insight on budget limitations.)
- Changing Office and Retail Demand: Radical reductions in office space usage by larger occupants due to increased use of technology and acceptance of alternative work systems and similar changes in retail as Internet buying changes the role and purpose of physical retail space will define winners and losers going forward. How long until such trends reach smaller properties and markets?
- Real Estate Capital Markets Liquidity: Capital limitations on banks as a result of Dodd Frank legislation and existing overallocations to real estate, concerns about the scale of the return of the CMBS market, hundreds of billions of dollars of real estate loans that must be refinanced in the next 3-7 years, as well as growing capital demands by other sectors of the economy will create continuing uncertainty over access to capital. Smaller properties; properties in secondary or tertiary markets; and properties with weak borrowers, substantial vacancy, high rollover of tenants in early years, or other risk factors are already experiencing a severe capital shortage.
- Global Change and Uncertainty: The political gridlock and budget crisis in the US, the European financial crisis, the pending (now underway) slowdown of China’s economy, uncertainty and slow growth in the Middle-East and continuing expansion of global interconnections make uncertainty about the future a certainty-what does this mean for real estate investment in the US and abroad?
- Integration of Sustainability: Sustainability has moved beyond a gimmick and become part of corporate governance, management and reporting systems, supply chains, and the basic functioning of many companies-increasing the value of sustainable property investment. How must real estate businesses adapt to keep up?
- Low Cap Rates: Cap rates for core properties are back to troubling 2007 levels. What happens if interest rates increase and cap rates decompress? Has the industry set itself up for another disastrous value decline?
- Civil Discord and Political Gridlock: The runaway winner as the most important external affairs issue was Civil Discord and Political Gridlock. This is easy to understand because the solutions to many of the key issues and problems identified above require us to come together as a society, make difficult choices, and work together to execute solutions upon which we agree (or at least decide) upon.
The External Affairs Committee welcomes feedback on these issues as well as identification of issues you think are critical to real estate and/or of interest to Counselors and the broader industry.