Top Ten Issues Affecting Real Estate


CHICAGO – Global uncertainty and political polarization lead the list of current and emerging issues that are expected to have the most significant impact on real estate in 2017 and 2018, according to The Counselors of Real Estate®, which released its annual list of the Top Ten Issues Affecting Real Estate.

The 2017-2018 CRE Top Ten list was announced during the keynote address of the National Association of Real Estate Editors annual conference in Denver by Scott Muldavin, CRE, 2017 chair of The Counselors of Real Estate. CRE is the invitation-only professional association for the industry’s leading real estate advisors. Mr. Muldavin is president of The Muldavin Company, a real estate advisory firm in San Rafael, Calif.

Under the direction of research executive and author Peter C. Burley, CRE, Chicago, and Victor Calanog, Ph.D., CRE, chief economist and senior vice president, Reis, New York City, the Counselors’ 1,100 members around the world undertook an extensive collaborative dialogue on current issues and trends to identify the final list.

The other issues earning a position on this year’s list are Technology, Generational Disruptions, Retail Disruptions, Infrastructure Investment, Housing: The Big Mismatch, Lost Decades of the Middle Class, Real Estate’s Emerging Role in Health Care, Immigration and Climate Change.

Mr. Muldavin emphasized that many of the issues are interconnected and reflective of both global uncertainty and seemingly relentless disruption in the economy and multiple real estate sectors. Despite this unsettling environment, opportunity remains embedded in every issue on the list.

The Counselors of Real Estate is known for thought leadership, extraordinary professional reach (more than 50 real estate specialties are represented by its member experts) and objective identification of the issues and trends most likely to impact real estate now and in the future. The issues in the annual CRE Top Ten Issues Affecting Real Estate are an unbiased assessment of the most critical factors impacting real property.

The CRE® 2017-18 Top Ten Issues Affecting Real Estate

  1. Political Polarization and Global Uncertainty

Political Polarization and Global Uncertainty are impacting decision-making at every level of government and throughout the business community.  On an international level, recent elections in the U.S., France, Austria, the U.K. and other countries point to resurging nationalism, testing existing diplomatic and trade relationships around the globe as exemplified by Brexit and NATO.  Potentially devastating military conflicts seem more likely in Asia and existing conflicts in the Middle East are more volatile.

Even at the local level, there is continuing and intensifying polarization between and within political parties, making it virtually impossible for representatives to find the common ground needed to resolve differences and move ahead. Decisions cannot be made when compromise is viewed as weakness and people with differing points of view have difficulty being in the same room. If people struggle to express  and hear divergent opinions, it will be nearly impossible to address existing and emerging problems going forward.

Negative implications on real estate are immediate. Uncertainty about changes to trade, travel and immigration policy threaten cross-border investing, hospitality properties, retail, and manufacturing supply chains, among other effects.  Rising interest rates and retail inflation will make middle-class homeownership that much more difficult.  Longer-term implications could be much more severe, as polarization prevents long-term fixes to issues such as infrastructure, affordable housing, local and state pension liabilities, and education. And so, one or both of these trends affects virtually every issue on this year’s list and a host of others that didn’t make the cut.

  1. The Technology Boom

The tech start-up boom is revolutionizing real estate operations across the board.  One of the biggest changes this year is not a killer app, but an unprecedented wave of commercial real estate technology innovations that are expected to change the way real estate is bought, sold, and managed.  Commercial real estate tech start-ups were impressive in 2011, with $186 million invested. This has grown exponentially. In 2016, investment reached $2.7 billion. MIT’s real estate innovation lab has identified 1,600 real estate tech start-ups worldwide.

Robotic learning, a research field testing robots that can acquire new skills and adapt to their environment, has accelerated automation of the workplace. This year, robots showed that they can work as teams, learn from videos, and rely less on specialized human programmers. Thirty percent of banking jobs are expected to disappear in the next decade, and fully robotic lettuce farming is expected to open in Japan this year. A major study of automation by McKinnsey & Company suggests that up to 47% of today’s jobs could be replaced by automation.

Big Data has come to real estate planning, and space planning decisions are now informed by real-time information.  Autonomous vehicles, especially trucks, are projected to go mainstream.  Automated cars could knock 85 percent off taxi and ride-share costs, competing favorably with car ownership.  When autonomous vehicles cost less than cars, we’ll need to find something else to do with our garages, parking lots, and much of our streetscape. Reliable, fast, complete information also drives the sharing economy, as tech savvy users drop ownership in favor of dependable access.

In retail, the question has shifted from “Do you shop online?” to “How many deliveries did you have today?” Online retail continues to drive warehouse demand – but each foot of new warehouse space leased by online retailers translates into eight feet of vacant retail. Smart lenders and investors are already insisting that new construction reflect future demand patterns, not those with which we are currently familiar.

Get ready to change uses – you won’t need as much parking or retail, and anything that can be shared will be. Financing commercial construction will require this kind of foresight.  Homes with features that take advantage of these trends (secure package drop-off and access to bandwidth) will also draw more attention in the marketplace.

  1. Generational Disruption

Boomers’ and Millennials’ divergent views of where they live, work, and play increasingly impact the property markets.  The Baby Boom generation of approximately 74.0 million (born between 1946 and 1964) is now smaller than the Millennial Generation of some 75.4 million (born roughly between 1980 and 1997).   A significant number of today’s real estate decisions, as well as those connected to the workplace and consumer spending, are made by people under the age of 40.  Yet Boomers, too, remain engaged, continuing as productive members of  the workforce in increasing numbers far beyond the traditional retirement age of 65. Millennials are moving into management positions and looking to raise children and own homes at the same time that Boomers seek to downsize or age in place.  The generations are crossing paths everywhere:  in the workplace, in housing and at the local bar and grill, intersecting and sharing spaces, despite their often disparate priorities when it comes to the built environment.

Studies project that Millennials will ultimately behave in a fashion similar to Boomers – but do so ten years later.  This generation is characterized by:

  • Leading a more transient, “experience-oriented” lifestyle in their 20s.
  • Marrying, having children, and buying homes in their 30s as opposed to their 20s.
  • Living in the city before moving to the suburbs (or rapidly emerging “urban burbs”) in search of the larger, more affordable home and better school.

Boomers, on the other hand, are exhibiting behaviors often associated with Millennials:

  • Transitioning to a more transient, “experience oriented” lifestyle in their 60s.
  • Selling their homes and renting (in the same buildings as younger generations).
  • Abandoning the suburbs for city living (or choosing urban like locations a bit further out).

Real estate developers, investors, owners, and builders will need to understand not only the location preferences of each group, but the design and amenity features of housing units, whether rental or owner occupied.   One size will not fit all and supply will need to match rapidly changing demand.  In coming years, Boomers will be looking for aging options and amenities while Millennials, with an ingrained reliance on social media, will prioritize “networks” offering product knowledge and immediate, online access to goods and services.

At work, Boomers tend to favor the traditional office design of earlier generations, an onsite work environment, and structured schedule.  Millennials, now entering the work force in large numbers, prefer “collaborative” office designs and flexibility in where and when they work.  Particularly interesting is the new dynamic which places these diverse interests side by side.  While employed Baby Boomers tend to be the decision makers in their workplace, a shift is underway, as Millennials literally climb the ladder – no longer to the corner suite – but to the standing desk in the middle of an open office arena with a private “wellness room” and exposed kitchens and snack bars.  The challenge for builders, landlords, owners, and tenants alike will be in finding an acceptable design balance that appeals to the contrasting audiences they serve – now and in the future.

  1. Retail Disruption

The trend toward transforming retail into “experiences” continues to develop, and is offsetting shrinkage in the physical “bricks and mortar” consumer goods platform.  “Experiential” retail drives customer traffic to a more diverse and highly participatory environment targeted to a variety of age groups and interests.   This sector has transitioned into a kind of “Omni Channel”– encompassing e-commerce, reduced or repurposed physical elements, and a host of previously unforeseen spaces, both physical and virtual – with a current emphasis evolved from bricks and mortar shopping to the timely, efficient transfer of goods from source to inventory to consumer.  Many traditional retailers are adopting an “Amazon-like” approach, creating new warehouses, new distribution methods, and new fulfillment models (same-day deliveries, easy return methods, etc.). An irony of this is the recent embrace by  “disruptive retailers” such as Amazon of the traditional retail model characterized by the opening of physical stores, which allow consumers to “see, feel, and return” what they purchase.

It is no secret that the U.S. has been “over-retailed” for decades.  In a recent study by Cowan and Company, the United States boasts 40% more shopping space per capita than Canada, five times more than the U.K. and ten times more than Germany.  Retailers unable to profitably transition into the multi-faceted new format have been forced to shutter physical stores, migrate into virtual space, or discontinue operations entirely.   Such stalwarts as Sears, Macy’s, and J.C. Penney join countless other retailers in being forced to close multiple stores throughout the country, leaving malls anchored by these legacy retailers scrambling to reposition huge empty spaces or go out of business altogether.

Despite this massive repositioning, we are not by any stretch of the imagination facing a “Retail Apocalypse.” Restaurants have boomed in recent years and service-oriented outlets  take up ever more space.  Grocery-anchored malls remain steady – at least for now, although change is afoot as grocery models join the fray and prepare to reinvent themselves.  Retailers who cater to a fresh or appealing niche in the marketplace are thriving, exemplified by “fast fashion” venues such as H&M and Zara which turn out, at highly affordable prices,  versions of high fashion designs within weeks of their appearance on the runway.  As retailers refine their inventories, distribution methods, and fulfillment models, the retail market will survive and even prosper – but will do so in fresh, new ways.

  1. Infrastructure Investment

While both major U.S. political parties appear to support substantial investment in infrastructure, it remains unclear when and if the United States Government will be in a position to move major initiatives forward any time soon. However, initial conceptual plans released by the Trump administration indicate a relatively limited Federal Government investment, placing heavy reliance on local and state governments and public-private enterprises.  Politics aside, this approach presents important opportunities for the private sector which is directing significant funds to infrastructure projects, recognizing the need for – and longer-term rewards of – investment in roads, bridges, tunnels, ports, and airports.  Blackstone plans to create a $40 billion infrastructure fund this year.  They are not alone. Prequin, a leading source of data and intelligence for the alternative assets industry, reports that investors now oversee $376 billion in U.S. infrastructure dollars.

While political winds continue to blow in many different directions, it is clear that the need for infrastructure investment is critical.  The movement of goods, which involves everything from ports to airports to warehouses to roads, highways and railroads, is further straining an aging and highly vulnerable interior framework.  Add to this the need for pipelines, electricity transmission, and water distribution, and the immediacy of infrastructure needs becomes even more pronounced.

Major changes in global transportation routes are also driving infrastructure development. This is exemplified by the Panama Canal, the undisputed catalyst for port development in such cities as Houston, Savannah, Charleston, and other ports along the Eastern seaboard. How the infrastructure challenge is met — or not met as the case may be – will have major real estate implications.  Reliance on public-private investment means projects must have strong revenue-generating capacity to be funded — something most rural projects and many water, electricity, and road undertakings cannot achieve,  particularly in struggling communities.

Public transit, which has emerged as one of the most critical investment criteria of institutional investors, cannot meet revenue requirements of public-private funds. Initial federal budgets have zeroed out public transit investment, a dramatic problem for many communities and real estate investments.  The sheer volume of need is also a concern, as state and local financial resources are severely limited due to pension liabilities and limited ability to raise additional revenue.

  1. Housing: The Big Mismatch

Safe, decent, affordable housing has been shown to have a stabilizing effect on urban economies, crime, and public health.  A current lack  of inventory has  generated a spike in home prices and, as a result, declining affordability for many home buyers, particularly those in lower income sectors.   A critical disparity exists between housing needs and housing supply. Although improving home prices, economic growth, mortgage accessibility and rental development have improved housing access and affordability in many areas, a confounding series of supply-demand mismatches continues to severely impact markets worldwide.  While the United States increasingly wrestles with the issue, a recent study of 300 metropolitan areas around the world ranked North America as a market with far fewer affordability problems than most.

An especially serious issue is the growing affordability gap and limited availability of housing in locations with significant job growth, particularly in major metropolitan areas and coastal regions.  Those working in technology, finance and other highly paid fields have monopolized new, resale, and rental product, raising prices on once affordable rental and for sale housing and creating a crisis for lower paid workers and those who are unemployed.   Younger workers seeking employment opportunities, many carrying substantial student debt, remain priced out of the owner market.  Developers have only begun to address the potential for starter home construction (as was done in the 1940s and 50s) as land and construction costs (as well as regulatory constraints) have created price points that are simply too high to interest those  who might otherwise build or invest in entry-level housing.

In other markets, Baby Boomers seek transitional rental housing, but the lack of multifamily rentals with sufficient space and of buyers for the large homes in distant suburbs they wish to vacate have made this shift in lifestyle a true challenge for an older generation wishing to remain active and engaged.  Insufficient  investment in public transportation,  government limitations on “mother-in-law” and micro units, and creative solutions to what could become an affordability crisis exacerbate the problem – widening the gap, real or perceived, between the “Haves” and “Have Nots” and potentially creating even greater problems long term.

  1. Lost Decades of the Middle Class

After successive post-recession years of insignificant gains, median household incomes in the U.S. rose in 2015 by 5.2% to $56,516. Still, despite this welcome increase, middle class incomes have yet to recover their pre-recession highs ($57,403 in 2007), and are actually hovering below inflation-adjusted levels from almost two decades ago ($57,909).  Battered by automation and outsourcing, middle class jobs are still under pressure as the U.S. economy transitions from manufacturing to services.  Middle class disenchantment has been linked to the current rise of populist candidates in many countries; global economic and political uncertainty are intimately tied to a large proportion of the voter base disappointed with what government leaders and the business elite have delivered so far.

Retail properties serving primarily middle class customers are bearing the brunt of store closures. Malls with tenants serving high income buyers are faring relatively better.  Rising costs of living and student debt levels suggest that home purchase decisions will be postponed by the young.  Rentals will not necessarily benefit in the most expensive, desirable urban locations; supply growth in multifamily housing counterbalances demand, and stagnant income levels constrain rent growth.

  1. Real Estate’s Emerging Role in Health Care

The U.S. spends over $3 trillion each year on health care, or nearly $10,000 per person. That’s double the average for developed countries worldwide, but U.S. health outcomes and efficiency are poorly ranked in comparison to the rest of the industrialized world.  While political polarization is making it difficult to address quality and access problems, the real estate industry has emerged as a major player to cost-effectively improve people’s health.  Medical services are increasingly being delivered in clinics, urgent care facilities, and ambulatory surgery centers, reducing costly hospital visits.  Virtual care – bundling  digital and wireless (video conferencing, email, photos, etc.) and home and mobile monitoring of patients – is expanding rapidly as security and access problems are resolved.  Applied data analytics also help in this “everywhere care” model.

Building occupants are increasingly demanding that the space they inhabit be designed, constructed, and operated in ways that advance positive health outcomes. It makes intuitive sense that buildings could help or hurt health in that people spend 90% of their time indoors. Research from the Mayo Clinic also concludes that only 20% of health comes from health care, with environmental and behavioral factors accounting for 40%.

Evidence of the importance of this trend is that most major real estate professional groups have recently ramped up their focus on healthy buildings.  Designing buildings to specifically address health behaviors has become the most transformative and rapidly growing subtrend of the “Health and Well Being” macro-trend.

Dramatic growth in business interest is a key factor driving this trend. According to Fidelity’s annual national survey of corporations, over 90% of companies have some form of health management or wellness program with approximately 80% also utilizing incentives.  Powerful recent research on the impacts of carbon dioxide on white collar worker cognition (increase by 61% to 101%) and how adjustable desks affect worker productivity (46% increase) also provide a partial explanation. New and cheaper technologies have also helped.

However, it was not until the emergence in late 2014 of the WELL Building Standard, with over 102 building interventions tied to scientific and medical research, that occupants became more actively involved in the healthy buildings movement. The International WELL Building Institute has registered or certified over 450 projects in 28 countries to become WELL Certified.  With adoption by many leading corporations like Wells Fargo, TD Bank, Deloitte, EY, Microsoft, Genentech, McKesson and investors including Oxford, Cadillac Fairview, Kilroy Realty, Hines, Lendlease, Grosvenor, and AXA, future growth prospects are strong.

  1. Immigration

The Trump administration has attempted to enact more restrictive immigration laws, emphasizing concerns about security and terrorism while appealing to a voter base concerned about jobs lost to illegal immigrants. In the meantime, companies ranging from tech firms to real estate finance companies bemoan the lack of qualified workers. Development projects in high supply growth MSAs such as Denver stall because of labor shortages. Demographers point to immigrant groups as the source of household formation and favorable trends in population growth that will benefit the U.S. relative to geographies with aging populations like the EU and Japan.

New immigrants tend to rent, boosting demand for multifamily housing, especially in gateway cities.  Recent surveys suggest that immigrant populations aspire to own homes and to move relatively freely from cities to suburbs and back in the search for employment. Labor mobility and homeownership rates will be constrained by limiting immigration. Industries like tech that demand highly skilled workers may be forced to innovate and substitute capital for labor if they cannot fill vacancies by recruiting foreign workers – constraining job growth. Longer term, if the entry of immigrant populations that tend to have larger households is curtailed, there will be a limit on the so-called demographic dividend for economic growth, with less of a labor force to support an aging population.

  1. Climate Change

In January 2017, the National Oceanic and Atmospheric Administration (NOAA) released a new report based on the most up to date scientific evidence on sea level rise that more than doubles the 2013 forecasts of potential sea level rise by 2100 from 2.2 to 4 feet to 6.6 to 8.6 feet.  Sea level rise is caused by both the thermal expansion of the oceans—as water warms up, it expands—and the melting of glaciers and ice sheets.  These dramatic rises were due largely to new research on the role of the Antarctic in sea rises as well as improved forecast models.  The Atlantic (Virginia Coast North) and western Gulf of Mexico Coasts’ sea rise is projected to be greater than the global average by .3 to .5 meters by 2100.  Alaska and the Pacific Northwest are projected to be 0.1 to 1 meter lower.

While a potential rise of sea level by 6.6 to 8.6 feet by 2100 may seem far in the future, NOAA also estimates that annual frequencies of disruptive and damaging flooding would increase 25-fold with only a 14-inch increase in local sea level rise.  Major cities such as Miami, New York, New Orleans, Tampa and Boston are projected to have the most costly problems, with South Florida and most coastal areas all exposed to differing levels of sea rise risk and cost.

The implications of potential sea level rise and related flooding on real estate values is positioned to explode due to dramatic increases in the volume and accessibility of information on the consequences of sea rise. Employers and commercial real estate investors, thanks to hurricanes Katrina and Sandy, can now access municipal and state reports that detail potential risks of sea rise and efforts to mitigate such risks.  Residential and commercial buyers, sellers, brokers, and appraisers can now freely access flood maps and sea rise forecasts that provide detailed assessments of the population, buildings, infrastructure and land that are threatened by rising sea levels.    Websites such as Surging Seas Risk Finder even enable individuals to map potential sea rise and flooding risks of their properties and communities at different points in time and under different sea level assumptions.

Value implications extend well beyond those properties that might be directly affected by flooding.  For example, what if you live or work on a hill, but the access roads and key services you require flood?  Values of all properties will be affected if airports, transportation infrastructure, and other community amenities are negatively impacted.   Commercial properties and local economies in coastal regions will suffer if tenants concerned about community resilience or related tax consequences go elsewhere.

Residential properties are particularly vulnerable to even the potential for value declines due to increased flooding risk because they represent a significant proportion of the retirement nest eggs of many Americans.  Insurance to address such risk is either too expensive or not available in most cases.  For people who are counting on the equity from their home for retirement when they sell in 20 years, few will be willing to roll the dice that sea level rise will not impact value—and many are likely to sell before value declines are fully realized.

On the Watch List:

The Counselors of Real Estate have placed on its “CRE Watch List” several additional issues, all in varying stages of flux, potentially representing longer-term disruptive scenarios for real estate.

These include:

  • Tax Reform and Monetary Policy
    • Various Other Policy Matters
    • Cannabis

The Counselors of Real Estate®, established in 1953, is an international group of high profile professionals including members of prominent real estate, financial, legal and accounting firms as well as leaders of government and academia who provide expert, objective advice on complex real property situations and land-related matters. Membership is selective, extended by invitation only. The organization’s CRE® (Counselor of Real Estate) credential is granted to all members in recognition of superior problem solving ability in various areas of real estate counseling. Only 1,100 people in the world hold the CRE credential.