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Emerging Trends in Real Estate 2019A New Era Demands New Thinking
Emerging Trends in Real Estate 2019
40th annual outlook
Based on insights from over 2,400 personal interviews and online survey responses
Sponsored jointly by PwC and the Urban Land Institute
Emerging Trends is the industry’s “most predictive forecast”
3
40 years and counting
“Real estate as an asset class has matured. Market participants need to realize this and make the appropriate adjustments.”
40 years of Emerging Trends in Real Estate
4
Global Financial Crisis
Technology
Information Availability
Asset Class Acceptance
Urbanization
REITs
Low Interest Rates
Capital Availability
Securitization
Space Utilization Changes
Over the course of your real estate career, what do you feel has been the most significant event or change to the industry?
Emerging Trends in Real Estate 2019 Online Survey
40 years of Emerging Trends in Real Estate
5
What do you feel could have the most significant impact on the real estate industry over the next 40 years?
Emerging Trends in Real Estate 2019 Online Survey
Technology Implementation
Autonomous Vehicles
Space Utilization Changes
Demographic Shifts
Artificial Intelligence
Data Analytics
Retail Transformation
Smoother Economic Cycles
Climate Change
Rising Interest Rates
6
Market sentiment
“Sure it feels like the activity level will moderate, but more like a plateau and not a sharp downhill slide.”
What word would you use to describe the 2019 real estate market?
Emerging Trends in Real Estate 2019 7
#1
Top 5
#2
#3
#4
#5 Overheated
Evolving
Cautious
Competitive
Plateau
Market Outlook
8Source: BEA, BLS, NBER as of October 2018
1975 - 1980 - 59 months, 3.50%
1980 - 1981 - 13 months, 1.60%
1982 - 1990 - 93 months, 2.80%
1991 - 2001 - 121 months, 2.00%
2001 - 2007 - 74 months, 0.90%
2009 - Current - 112 months, 1.50%
Last Year
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%
Avg
. Ann
ual E
mp.
Gro
wth
Annual Real GDP Growth
Market Outlook
9Source: OECD
1961 - 1970 - 5.1% Avg - 106
Since 2009 - 2.3% Avg - 114
1991 - 2001 - 3.8% Avg - 120
1991 - 2008 - 2.7% Avg - 204
1981 - 2003 - 2.9% Avg - 228
1986 - 2007 - Ireland 5.9% Avg - 234
Since 1998 - 4.4% Avg - 240
Since 1991 - 3.2% Avg - 324
0 50 100 150 200 250 300 350
US
US
US
Canada
Netherlands
Ireland
South Korea
Australia
Long economic
expansions aren’t that uncommon
40 years of Emerging Trends in Real Estate
10Emerging Trends in Real Estate 2019 Online Survey
Poor, 1.1%
Fair, 19.3%
Good, 62.8%
Excellent, 16.8%
Abysmal Poor Fair Good Excellent
2018Poor, 0.8%
Fair, 20.4%
Good, 61.8%
Excellent, 17.0%
Abysmal Poor Fair Good Excellent
2019
11
A changing industry
Intensifying transformation
Easing into the future
“Demographic growth is slowing and you can’t deny it will have an impact on the real estate industry. Making the right choices will be key.”
Intensifying Transformation
12Source: BEA, IHS Markit
Slower GDP growth
projected to be the norm, but contribution
by component remains stable
4.4
3.43.3 3.3
1.8
2.32.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1960s 1970s 1980s 1990s 2000s 2010 to2018
2018 to2028
Ave
rage
Ann
ual G
DP
Gro
wth
%
Con
trib
utio
n by
Com
pone
nt %
Fixed Investment: Residential Fixed Investment: Nonresidential Consumption Total
Intensifying Transformation
13Source: BLS, IHS Markit
Total employment
growth slows, but not for all
industries
17,065
19,62618,382
21,823
-1,208
19,480
8,726
59.2
61.5
64.8
66.766.0
63.1
61.1
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
1960s 1970s 1980s 1990s 2000s 2010 to2018
2018 to2028
Em
ploy
men
t Cha
nge
by I
ndus
try
(000
s)
Office Using Manufacturing Construction Total Participation Rate
Easing into the Future
14Source: Census Bureau, IHS Markit
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
2041
2043
2045
(000
s)
Forecast
Deaths
Natural Change
Births
Natural population
change
Easing into the Future
15Source: Census Bureau
64.1%
60.4% 60.1%
25.0%
34.5%36.1%38.9
41.8
39.739.4
39.7
37.0
37.5
38.0
38.5
39.0
39.5
40.0
40.5
41.0
41.5
42.0
42.5
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
Ave
rage
age
Perc
ent o
f tot
al p
opul
atio
n
Ages 16 - 64
Ages 65 and over
Working age
Traditional working age is decreasing as a % of total
population
Total
16
Dealing with disruption
The impact of technology
Retail transforms to a new equilibrium
The myth of free delivery
Amenities gone wild
“Someday, the most valuable component of an office building may be the data it generates.”
Accelerating Digital Transformation
41%Annual increase
in global real estate tech
investment over the past 4 years
Source: CB Insights 17
$1.3
$2.5$2.9
$3.4
$5.2
208
454
0
50
100
150
200
250
300
350
400
450
500
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
2014 2015 2016 2017 2018*
Real Estate Tech Financing
Disclosed funding ($Billion USD) Deals
Get Smart: AI + PI
18
• Tax preparation software• Watson for legal and medical uses• IoT warehousing programs
Intellectualtasks
• Online shopping agents• Restaurant ordering kiosks• IVR call centers
Customerservice
• Grocery store scanners• ATMs• Automated parking garages
Physical tasks
Odds are much greater that AI will replace tasks you currently do rather than replace you!
The promise is that AI will enhance PI by freeing workers to focus on more value add tasks
Why Do We Care About Technology?
70%The percent of survey respondents who felt technology would have no impact on the demand for retail space.
Emerging Trends in Real Estate 2004 Online Survey 19
Retail Transforming to a new Equilibrium
20Source: REIS, Inc
Retail sector responds quickly to slowing demand
206,136,223
29,218,268
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Shopping center GLA (Sq.Ft) added by year
25-Year Average, 112,000,000 (Sq.Ft.)
Retail Transforming to a new Equilibrium
21Source: REIS, Inc
It isn’t because consumers stopped shopping in stores
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
Dec
-00
May
-01
Oct
-01
Mar
-02
Aug
-02
Jan-
03Ju
n-03
Nov
-03
Apr
-04
Sep-
04Fe
b-05
Jul-
05D
ec-0
5M
ay-0
6O
ct-0
6M
ar-0
7A
ug-0
7Ja
n-08
Jun-
08N
ov-0
8A
pr-0
9Se
p-09
Feb-
10Ju
l-10
Dec
-10
May
-11
Oct
-11
Mar
-12
Aug
-12
Jan-
13Ju
n-13
Nov
-13
Apr
-14
Sep-
14Fe
b-15
Jul-
15D
ec-1
5M
ay-1
6O
ct-1
6M
ar-1
7A
ug-1
7Ja
n-18
Jun-
18
Retailer Sales (mil$)
Recession
Retail Transforming to a new Equilibrium
22Source: REIS, Inc
Transformation to less square feet per capita continues
0.00 0.50 1.00 1.50 2.00 2.50 3.00
US Metro TotalHouston
CharlotteDallas
Fort WorthSuburban Maryland
NashvilleOklahoma City
Raleigh-DurhamTampa-St. Petersburg
AustinCharleston
AtlantaPhoenix
Palm BeachOrlando
Suburban VirginiaFort Lauderdale
Las VegasJacksonville
Denver
Decrease in retail Sq.Ft. per
The Myth of “Free Delivery”
23Source: PwC, The Retail Revolution
Percent of consumers who
would be willing to pay for
delivery within a specific
timeframe
24% 23%
41%
23%
11%8%
3% 2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Specific 1-2hour time ofmy choosing
Less than 3hours
Same day Next day 2 days 3-5 businessdays
1 week More than 1week
An average of 30% of online
purchases will be returned
The Myth of “Free Delivery”
24Source: CSCMP
Estimated last mile cost per package in a urban, high-
density, e-commerce
route
An average of 30% of online
purchases will be returned
$2.10
$0.20 $0.20 $0.40
$2.90
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
Average value of an online
purchase $82
Amenities Gone Wild
81%Of employers feel
that the proper amenities are one of the top 3 things
they can offer their employees
Source: CBRE, 2018 Occupier Survey 25
19%
23%
25%
31%
31%
32%
36%
39%
63%
66%
71%
74%
Wellness Services
Healthy Snacks
Hospitality Services
Game Room
Fitness Classes
Dry Cleaning
On-Site Health Care
Green Space
Custom Coffee
Fitness Facilities
Showers
Full-Service Cafeteria
Amenities Provided
26
Social Issues
We’re all in this together: ESG Investing
Unlocking capacity: The need for affordable housing“You can say that it feels good
to follow responsible practices, but we are seeing more examples of it also enhancing returns.”
ESG Investment Criteria
27
Environmental
How a firms carbon intensity, a measure of the greenhouse gases emitted in relation to revenue
Sourcing of raw materials, waste produced by operations and disposal
Positive contributions such as the use of clean technology or construction of green buildings
Social
Deployment of human capital
Labor management practices
Impact of a companies products and services on the final consumer
Governance
How well a company manages itself
Executive compensation compared to specific industry
Support of business ethics and past performance
The rights and protection for shareholders
We Are All in This Together
28
The number of U.S. money managers, asset owners and other investment related organizations that have signed onto the Principles for Responsible Investment
Institutional assets invested under environmental, social and governance principles in the U.S. as of 2016*
* (most current available data)
Source of Invested Assets
Other…
Labor Funds1%
Foundations2%
Educational institutions
6%
Corporations32%
Public funds58%374 $4.73
trillionSource: Pensions & Investments
We Are All in This Together
29Source: Union of Concerned Scientists
HIHI
AKAK FLFL
MIMI
MEME
NYNY
PAPA
VAVAWVWV
OHOHININILIL
WIWI
NCNCTNTN
ARAR
MOMO
GAGASCSC
KYKY
ALAL
LALAMSMS
IAIA
MNMN
OKOK
TXTX
NMNM
KSKS
NENE
SDSD
NDND
WYWY
MTMT
COCO
IDID
UTUT
AZAZ
NVNV
OROR
WAWA
CACA
HI
AK FL
MI
ME
NY
PA
VAWV
OHINIL
WI
NCTN
AR
MO
GASC
KY
AL
LAMS
IA
MN
OK
TX
NM
KS
NE
SD
ND
WY
MT
CO
ID
UT
AZ
NV
OR
WA
CA
$1T +
$100B - $250B
$250B - $1T
$50B - $100B
To $50B
Property value at risk to consistent flooding through 2030 by state
Unlocking Capacity
30
Affordable Housing: A Real Estate Puzzle
Agree on what the problem really is
Can’t be solved by just getting one side right
Pieces have to be moved in coordination
Watch out for unintended consequences
Unlocking Capacity
31
Waiting for Opportunity zones to come into focus
Sleeper component of the 2017 Tax Act
Potentially stabilize and revitalize targeted neighborhoods via tax incentives
8,700 census tracts have been identified by each state’s governor
Capital gains taxes can be deferred until 2026 if they are invested in new construction or major rehabilitation of projects in economically depressed areas
If invested via designated opportunity fund capital gains taxes can be reduced by 10% to 100% based on holding period
32
Markets to watch
18-hour city 3.0
“The competition for talent makes being in the right market of vital importance.”
Markets to Watch
33Emerging Trends in Real Estate 2019 Online Survey
Overall Real Estate Prospects
#1 Dallas/Ft. Worth#2 Brooklyn#3 Raleigh/Durham#4 Orlando#5 Nashville#6 Austin#7 Boston#8 Denver#9 Charlotte#10 Tampa/St. Petersburg
#8
#1
#6 #4#10
#5 #3#9
#7#2
18-Hour Cities 3.0
34Source: Census Bureau
5,028,431
4,600,000
4,650,000
4,700,000
4,750,000
4,800,000
4,850,000
4,900,000
4,950,000
5,000,000
5,050,000
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Projected population turning 30 by year, joining the 35 million already there
Millennials turning 30 may be more likely to move to the suburbs
18-Hour Cities 3.0
35Source: Census Bureau
35% of interregional millennial migration is to the south region compared to:
West – 27.2%Midwest - 20.3%Northeast – 17.5%
35% of interregional millennial migration is to the south region compared to:
West – 27.2%Midwest - 20.3%Northeast – 17.5%
18-Hour Cities 3.0
36Source: BLS, Tax Foundation
Top cities exhibiting
higher growth and lower volatility
Orange CountyAtlanta
Austin
Boston
CharlotteD/FW
DenverFort Lauderdale
Indianapolis
Los Angeles
Miami
Nashville
Brooklyn
OrlandoSalt Lake City
San Antonio
Seattle
Tampa/St. Petersburg
Washington D.C.
Raleigh/Durham
US
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
- 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
Hig
her
Gro
wth
More Stable
Color indicates state tax burden
High
Medium
Low
18-Hour Cities 3.0
37Source: Real Capital Analytics
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
% of Total Office Transaction Dollars
Major Non-Major
Interest in non-major markets has been on the rise since 2014
18-Hour Cities 3.0
38Source: Real Capital Analytics
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Year/Year CPPI Change
Major Non-Major
Non-major market returns
for all properties is trending up
Markets to Watch
39Emerging Trends in Real Estate 2019 Online Survey
#1
#6#3
#10
#8#7
#5#2
#4
#1 Nashville#2 Tampa/St. Petersburg#3 Austin#4 Charleston#5 Orlando#6 Dallas/Ft. Worth#7 Raleigh/Durham#8 Charlotte#9 Jacksonville#10 Denver
Homebuilding Prospects
#9
40
Property type outlook
“The pace of change faced by all property types is making the future viability of each asset increasingly important.”
Property Type Outlook
41Emerging Trends in Real Estate 2019 Online Survey
2017
2017
2017
2017
2017
2017
2018
2018
2018
2018
2018
2018
2019
2019
2019
2019
2019
2019
Retail
Hotels
Office
SF housing
MF housing
Industrial
Poor Fair Good Excellent
Investment
2017
2017
2017
2017
2017
2017
2018
2018
2018
2018
2018
2018
2019
2019
2019
2019
2019
2019
Retail
Office
Hotels
MF housing
SF housing
Industrial
Poor Fair Good Excellent
Development
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Byron CarlockPartner, National Real Estate [email protected]
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