On Wednesday, January 22nd, ULI New York hosted its annual Real Estate Outlook event. Opening the day’s events, was the presentation of Emerging Trends in Real Estate. Andrew Warren, Director of Real Estate Research at PwC started the session with a presentation of the annual survey conducted by the firm in coordination with ULI.
A few high-level themes emerged and– for the most part – they would have been very familiar to attendees of past ULI annual outlook events. Survey respondents’ favored asset classes included fulfillment centers, workforce housing, senior housing, data centers, and medical offices – all assets that generally correspond with well-recognized growth sectors in the economy or demographic shifts. In contrast, luxury apartments, hotels, and high-street retail were generally perceived as overpriced. “Community as an amenity” came up as a trend penetrating all asset categories from housing to office to retail, echoing the discussion in past ULI events such as last June’s “Hotelification of Real Estate” panel. Survey respondents also spoke to the continuing urbanization of traditionally suburban areas, especially near major population centers. On the question of the year’s outlook, more broadly, an equal percentage of respondents expected their firms’ performance to improve as expected it to diminish in the coming year. What differed between those groups was their rationale. Pessimists worried about macro-economic factors while optimists focused instead on their own actions and strategies.
Following PwC’s presentation, Warren moderated a discussion between Lauren Hochfelder Silverman, Head of Americas at Morgan Stanley Real Estate Investing and Brad Griewe, Co-Founder and Managing Partner of Fifth Wall. Whereas Silverman brought the perspective of a highly-institutional regional core and global opportunistic investor, Griewe provided the complimentary viewpoint of an innovative prop-tech venture investment firm.
Speaking to the industry’s trajectory writ large, Silverman noted that while asset appreciation is unlikely to be further driven by the tides of capital markets, which have poured investment capital into the real estate sector over the past decade, it might not be over-valued either.
“By any traditional metric, real estate feels fully priced – but the same is true of equities and every other asset class,” she remarked.
That being said, Silverman added that high valuations inherently increase volatility, even in a less-volatile world. And while the industry benefits from healthy underlying fundamentals, serious exogenous risks – political, environmental, and social – exist.
If not on the back of a rising tide from capital infusions, the industry might see growth fomented by a marked increase in research and development for, Griewe opined, pointing out that $36 billion invested in prop-tech in 2019. In contrast to the less-than-1% of revenues invested in R&D in real estate, most industries invest 3-8% he added.
Amidst this environment, the two panelists cautioned the audience about the operational challenges real estate owners must tackle. For one thing, operators must be careful not to enter asset classes without a detailed understanding of that sector’s dynamics.
“Real estate [value] is just a derivative of its underlying users,” Griewe observed. “We as real estate professionals need to clearly understand the dynamics of the industries and customers we serve.”
Riffing on the survey results shared earlier, the would-be industrial and fulfillment investor – for instance – should be wary, Griewe cautioned.
“Real estate is nothing but space, and space can be articulated in all types of ways,” Griewe remarked, pointing out that companies like Amazon were now using delivery trucks as de facto warehousing space, enabled by the company’s scale and extensive data analytics.
Not only is disruptive change occurring within established asset classes, but also between the traditional and innovative segments of certain asset classes. Non-traditional short-term rentals are challenging traditional hospitality product, Griewe added, leading to a situation where operators are seeing record occupancy and yet flat ADRs. In both cases, the fundamental question that should be asked is “what constitutes supply?” And yet it also remains true that the barriers to entry remain especially high in certain segments – like housing – which has led to the desperate under supply of low-cost housing. Technology is an important tool for realizing market dis-locations, Griewe pointed out, and while the path of technological evolution may be unpredictable, those who fail to develop technology capabilities risk being left behind.
Given the environment’s high valuations and uncertain growth, both speakers saw increasing numbers of investors chasing yield to secondary and tertiary markets. The panelists concurred that this was often a risky proposition, but that in cases where investors were responding to secular shifts in tax policy, demographics, and employment growth, it sometimes made sense. Moreover, many secondary cities benefit from superior infrastructure to that of gateway cities, paving the way for accelerated future growth.
As the session wound down, attendees may have noted something paradoxical in the set of factors covered. The conversation encompassed two general sets of forces that seemed to govern the industry’s trajectory: continuing trends that most industry practitioners knew well and unpredictable developments which no one could claim an ability to reliably anticipate.