emerging trends in real estate 2018 - microsoft · recession bbb bond yield real estate cap rate...

Emerging Trends in Real Estate 2018

Navigating at Altitude

“We are in a long cycle, not in boom/bust. The key to the next few years is to expand horizons, market by market, property type by property type.”


• Emerging Trends is the industry’s “most predictive forecast”

• 39th annual outlook• Based on personal interviews with over 1,000

individuals representing 590 organizations combined with an additional 1,600 online surveys

• 52 Market Focus Groups• Sponsored jointly by PwC and the Urban Land

Institute


How do we feel about 2018?


How would you characterize the expected profitability of your real estate business in 2018?

A. Good-ExcellentB. FairC. Abysmal-Poor


Profitability Outlook

21.6%

60.6%

17.7%

2010Abysmal to Poor

Fair

Good to Excellent



1.1%

24.9%

74.0%

2015

Abysmal–poorFairGood–excellent


1.9%

16.8%

81.3%

2017Abysmal -poorFair

Good -Excellent





1.1%

19.3%

79.6%

2018Abysmal–poorFairGood–excellent

Buy, Hold, Sell

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

good

Sell

Buy

9

excellent

fair

poor

abysmal

Hold


What word would you use to describe the 2018 real estate market?


#1

Top 5

#2

#3

#4

#5 Growing

Uncertain

Measured

Cautious

Competitive

Biggest Movers from 2017

16.7%

23.3%

24.1%

26.5%

37.5% Sanguine

Neutral

Troublesome

Frenzy

Treacherous


PwC

Emerging Trends in 2017

12

Slow Glide to a

Soft Landing

Working Smarter and

Harder

Retail Transforms and Stores Remain

Procession of Generations: Gen Z

Don’t Forget the BoomersIt’s Different This Time…Isn’t it?

Housing at aTechnological Tipping Point

Long glide path to a soft landing


“I hate ‘the what inning are we in’ question. It makes it seem like cycles have to end after a pre-set time has elapsed.”

Current expansion, slow by comparison but is it more sustainable?

1975 - 1980 - 59 months

1980 - 1981 - 13 months

1982 - 1990 - 93 months

1991 - 2001 - 121 months

2001 - 2007 - 74 months

2009 to Current - 101 months…

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Annu

al E

mpl

oym

ent G

row

th

Annual Real GDP Growth

GDP and employment growth during past recoveries and expansions

Source: NBER, Bureau of Economic Analysis, Bureau of Labor Statistics14

Size of bubble corresponds to length of expansion

Investment returns converging

3.5%

4.9%4.5%

4.1%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1996 Q4

1997 Q4

1998 Q4

1999 Q4

2000 Q4

2001 Q4

2002 Q4

2003 Q4

2004 Q4

2005 Q4

2006 Q4

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

2014 Q4

2015 Q4

2016 Q4

Recession BBB Bond Yield Real Estate Cap Rate S&P 500 Earnings Yield

Real Estate Cap Rate

S&P 500 Dividend Yield

Where is the risk premium?

Source: Standard & Poors, Bank of America, NCREIF15

BBB Bond Yield

Working harder and working smarter


“…Real estate facilities are not just overhead, but a way to improve not just employee happiness and engagement, but also productivity.”

Not the “Gig” economy, but the “Freelance” economy

Freelancing in America Report, 2017 17

Efficiency of US office stock

15.2%

7.6%8.6%

12.9%

24.0%

12.7%15.0%

4.0%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s

Percent of Office Inventory by Decade ConstructedWhich makes what we said two years ago more relevant

Source: U.S. Energy Information Administration, CoStar18

Improvement over acquisition?

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1990

Q4

1991

Q4

1992

Q4

1993

Q4

1994

Q4

1995

Q4

1996

Q4

1997

Q4

1998

Q4

1999

Q4

2000

Q4

2001

Q4

2002

Q4

2003

Q4

2004

Q4

2005

Q4

2006

Q4

2007

Q4

2008

Q4

2009

Q4

2010

Q4

2011

Q4

2012

Q4

2013

Q4

2014

Q4

2015

Q4

2016

Q4

Office cap ex as a % of market valueOffice capital expenditures may need to increase to meet changing tenant demand

Source: NCREIF 19

4Qtr moving average

30-year average

Best Bet!Income over

potential appreciation

Procession of Generations & Don’t Forget the Baby Boomers


Gen Z Millennial

Gen XBoomer

21

….THOUGHT we knew

BoomersRetire early & to mild climates

Gen XBigger suburban houses

MillenialsUrban forever

“It isn’t what you don’t know that you should be worried about; it’s what you think you know.”

….NEED to know

Not so fast

Hit by GFC

Majority in suburbs already

Procession of Generations….Gen Z


Boomers plan to stay in the workforce longer

26.0% 26.0% 26.0%

35.0%

28.0%

33.0% 32.0%

17.0%

23.0%26.0%

28.0% 28.0%26.0% 27.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

2011 2012 2013 2014 2015 2016 2017

Planned Retirement Age

Age 65 to 69 Age 70 or older

Source: Insured Retirement Institute, "Boomer Expectations for Retirement 2017"22

More older workers in the workplace…

0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000

2024

2014

2004

1994

Labor force ages 65 to 74

labor force participation rate

Source: Bureau of Labor Statistics23

17.2%

21.9%

26.2%

29.9%

Best Bet!Senior housing

gains momentum

The Next Trend: Gen Z

Ø Born 1995 to Present Ø 0 to 22 years oldØ 25.9% of America’s Population Ø Boomers are 23.6%Ø Millennials are 24.5%ØGrowing up in a post 9/11 WorldØ+ 50% increase in the multiracial youth

population since 2000ØLive in Multigenerational householdsØ80% know about human impact on the

planet/76% are concerned about the impact

Ø17 Jobs and 15 homes in a life time


Housing at a tipping point


“I’ve been hearing talk about how technology will transform the way builders build homes. Now, I look at what’s been happening, and for the first time ever, I’m thinking it’s more than talk”

Higher sales prices won’t guarantee more new homes

Seattle

Austin

Salt Lake City

Raleigh/DurhamDallas/Fort Worth

Fort LauderdaleLos Angeles

San Jose

Nashville

Boston

MiamiMinneapolis/St. Paul

Atlanta

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0%

% c

hang

e in

hou

sing

uni

ts (2

000-

2018

f)

% change in housing price index (2000 – 2018f)

Source: US Census Bureau, IHS Insight26

Not much relief in sight for home construction costs

107.0

125.4

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

New Home Price Index (2005 = 100)

Source: US Census Bureau27

America's continued construction labor crisis

The dire need to recruit the next generation of skilled workers

The Wall Street Journal

Soaring lumber prices a problem for home builders and buyers

The price of lumber is soaring, and home builders are worried.

CNN Money

CNBC

Real estate CEO: Record-low housing inventory is 'freaking us out'

Housing inventory continues to drop amid tight credit and a growing tendency toward becoming a

Best Bet!Evolving housing demand

Retail transforms and stores remain


“Retail isn’t dead, it’s just changing.Give it some time to adjust”

E-Commerce continues to rise as a % of total retail sales

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

$-

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0 E-Commerce retail Sales (Bn$)

E-Commerce % of total sales

Source: US Retail Census29

2016 retail sales distribution by channel (billions of $)

Electronic Shopping & Mail Order, $445.0

In-Store, $4,278.0

Online Sales Fulfilled from Store, $62.2

Source: US Census Retail Trade Sales Annual Report, ICSC Research30

Best Bet!Experiential

retail

The Top 10

2017 2018 Market4 1 Seattle1 2 Austin

18 3 Salt Lake City7 4 Raleigh/Durham2 5 Dallas/Fort Worth

35 6 Fort Lauderdale5 7 Los Angeles17 8 San Jose

6 9 Nashville

12 10 Boston

Markets to Watch



Markets to Watch

2018 – Others to Note

2017 2018

San Francisco #10 #27

Orange County #8 #21

Portland #3 #13

It’s different this time…Isn’t it? The market outlook


# 1 Seattle

# 2 Austin

# 3 Salt Lake City

# 5 Dallas/Ft. Worth

# 4 Raleigh/Durham

# 6 Fort Lauderdale

# 7 Los Angeles

# 8 San Jose

# 9 Nashville

# 10 Boston

“Why deal with the uncertainty of a global market when there are opportunities in Salt Lake City

and San Antonio?”

The next big market in the survey may be smaller

Seattle

Washington D.C.

Washington D.C.

Washington D.C.

San Francisco

Houston

Houston

Dallas/Ft. Worth

Austin

Seattle

30,000

35,000

40,000

45,000

50,000

55,000

60,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Popu

latio

n (0

00s)

Top ranked market and cumulative population of top 10 markets by year


2018 South: Local Economy


0

1

2

3

4

5

2018 South: Investor Demand


0

1

2

3

4

5

2018 Sector Outlook: Raleigh/Durham


0

1

2

3

4

5

Housing Office Multifamily Hotel Retail Industrial

Raleigh/Durham National

2018 Local Outlook: Raleigh/Durham


+14%+10.8%

3

4

5

Local Economy Investor Demand Capital Availability Public Private Investment

Development Redevelopment Opportunities

Average National Average

Thank you, and now our panel!

Download your copy ofEmerging Trends in

Real Estate 2018

uli.org/et18pwc.com/us/etre

Emerging Trends in Real Estate 2018 39

2018 Real Estate TrendsNovember 8, 2017

emerging trends in real estate 2018 - microsoft · recession bbb bond yield real estate cap rate...

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