2020 Commercial Real Estate Outlook
The real estate industry is increasingly influenced by rapid technological advances and significant demographic shifts, including increasing urbanization, Baby Boomers ‘longevity, and Millennials’ distinct lifestyle patterns. Furthermore, macroeconomic and regulatory developments continue to impact profitability. How can companies gain a competitive advantage and drive top and bottom line growth? Here are some trends to watch out for in 2017.
Economic outlook: moderate growth due to higher interest rates?
Gross domestic product growth will likely increase 2.5 percent in 2017, according to Deloitte’s third quarter 2016 US Economic Forecast. The modest economic improvement could moderate the pace of commercial real estate transaction activity (CRE).
Volatile global markets have led to continued low interest rates. Deloitte’s economics team anticipates that the Federal Reserve will likely raise interest rates in the short to medium term. Higher interest rates are likely to increase mortgage costs and may deter property investments to some degree.
A better employment scenario and higher labor participation are expected to result in an unemployment rate of less than 5 percent. The employment-to-population ratio is projected to peak in 2018 as Baby Boomers retirement may reduce the proportion of employees. Improving labor markets and household wealth is likely to increase consumer confidence.
Regulatory perspective: higher compliance costs on the horizon
The new accounting standards for lease accounting and revenue recognition are likely to increase compliance and administration costs for real estate investment trusts (REITs) and engineering and construction companies (E&C).
While increasing exemptions under the Foreign Real Estate Investment Tax Act of 1980 (FIRPTA) will increase foreign investments in CRE, the risk retention rules will likely reduce the issuance of securities backed by commercial mortgages ( CMBS) and will reduce the availability of capital in secondary and tertiary markets.
Additionally, the Americans Against Tax Increases Protection (PATH) Act of 2015 will not only make REIT tax provisions and research and development (R&D) tax credits easier for E&C companies, but will also increase the Flexibility to invest in new companies for R&D experimentation. At the same time, corporate tax reforms will reduce flexibility for corporations to spin off real estate assets in REIT structures.
Disruptive trends: shaking the CRE market
Collaborative economy. Startups based on the shared or collaborative economy, such as Airbnb or WeWork, are altering the way organizations lease and use CRE. Businesses face challenges from new competitors that provide dynamically configurable spaces and flexible leases. Landlords must rethink their approach to space design, lease administration, and lease length.
Disintermediation of brokerage and leasing. Technological advances are making CRE data more ubiquitous and transparent. These changes allow for online leasing profitably and in real time and threaten the traditional brokerage model. Traditional brokers should consider diversifying their core business focus to include consulting opportunities, investing in data and technology, and collaborating with startups to advance the game.
Competition for talent. The shortage of candidates with strong skills in science, technology, engineering and mathematics (STEM); increasing urbanization; and Millennials’ preference for an open and flexible work culture is changing the job market and will generate significant competition for talent. There is likely to be an increased demand for mixed-use developments as consumers prefer to “live, work and play” in the vicinity; The use of office space will be redefined and even streamlined. Companies must choose locations in areas that have concentrations of STEM talent and modernize design and development teams to meet changing consumer preferences.
Last Mille. Online retailing, on-demand manufacturing, and innovations in speed and mode of delivery (such as same-day delivery and electronic lockers) are impacting the retail and industrial markets.
The demand for large commercial and industrial spaces will contract, and there will be a blurred line between these two types of properties. For example, commercial properties could function as distribution centers. While retail owners can try different store formats and improve the end customer experience, industrialists should potentially focus on smaller, more flexible spaces within cities to allow for faster delivery.
Future of mobility: The emergence of “pay-as-you-go” is beginning to challenge the personal property vehicle model. Along with this, the arrival of autonomous vehicles will potentially transform the entire mobility ecosystem. This has the potential to change the dynamics of supply and demand, free up large parking spaces in privileged areas that may have different uses, and change the demographics of tenants. Companies need to be more strategic when analyzing the impact of mobility patterns and options on their income and long-term profitability, exploring design changes in existing spaces, and reviewing tenant strategies.
Home builders: mismatch of supply and demand may offset growing confidence
Home builders’ confidence is on the rise due to improved jobs, household incomes and strong demand from Millennials. However, a mismatch between supply and demand may continue due to labor shortages and delays in issuing permits. Home starts increased 0.9 percent year-on-year in August 2016, even though housing permits fell 1.2 percent year-on-year in August. Deloitte’s third quarter 2016 US economic forecast suggests that housing starts are likely to reach 1.5 million in 2017 compared to the estimated 1.3 million in 2016. In contrast, in the first half of 2016, Builder orders grew an average of 29 percent compared to the second half of 2015, but homebuilder deliveries decreased an average of 14 percent. As a result, the average order book has risen to 36 percent, mainly due to labor shortages and delays in issuing permits.
Home prices are likely to rise, albeit at a slower rate, due to limited inventory and supply. According to the Zillow® Quarterly Home Price Expectations Survey, the Midwest region may witness increased demand due to job growth and relatively lower prices compared to coastal markets.
In 2016, total home sales are expected to grow approximately 3.6 percent annually. The slower growth is likely to be driven by supply constraints, potentially higher interest rates, and rising prices. New home sales are expected to grow 21.3 percent year-over-year to 609,000 homes. In contrast, existing home sales are expected to grow at a slower rate, approximately 1.9 percent year-over-year, to 5.3 million homes. This is in line with Deloitte’s economic team forecast for the third quarter of 2016.
Home mortgage origins and delinquency rates improved in 2015, but could be affected by an impending rise in interest rates, despite banks gradually loosening standards for residential mortgages.
Home builders are building more units to rent, as rental demand and rental values have been strong and home builders are looking to grow and diversify. This strategy is likely to influence the business models of home builders and blur the lines with multi-family owners.
A time of reinvention and change.
Real estate companies will need to reinvent their strategies in 2017 to prepare for and respond to changes in the macroeconomic and built environment. Specifically, companies will need:
• Consider the influence of festival condos vaughan real estate advancements, urbanization, changing consumer preferences, security, climate change, and concern about resource scarcity in real estate decisions.
• Take advantage of technologies such as the Internet of Things, cloud computing, mobility, 3D printing and advanced analytics to be innovative in locating future developments.
• Solve integration problems with legacy systems while adopting new technologies.
• Adopt a multi-faceted, targeted cybersecurity strategy that is safe, vigilant and res
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