Emerging Trends in Real Estate 2019

A New Era Demands New Thinking

Summit Reimagined 2019: The Future of Memphis is Now

2

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

3

➢ 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

4

Market sentiment

“Sure it feels like the activity level will moderate, but more like a plateau and not a sharp downhill slide.”

2019 Expected Profitability

5Emerging 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

2019 Expected Profitability

6Emerging Trends in Real Estate 2019 Online Survey

Poor, 0.8%

Fair, 20.4%

Good, 61.8%

Excellent, 17.0%

Abysmal Poor Fair Good Excellent

MemphisTotal Market

Poor, 3.0%

Fair, 18.2%

Good, 66.7%

Excellent, 12.1%

Abysmal Poor Fair Good Excellent

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

2019 Market Opinion of Current Pricing

8

Does current pricing

indicate a market peak?

Emerging Trends in Real Estate 2019 Online Survey

11.3%

29.1%

33.8%

41.6%

37.8%

36.1%

43.9%

38.8%

88.7%

64.7%

60.6%

48.8%

58.6%

57.9%

51.2%

50.8%

6.3%

5.6%

9.6%

3.6%

6.0%

4.9%

10.4%

Memphis

Industrial

Memphis

Retail

Memphis

Multifamily

Memphis

Office

Over Priced Fairly Priced Under Priced

What inning are we in?

9

25 innings Longest major league game in baseball history. On May 8, 1984 the Chicago White Sox defeated the Milwaukee Brewers, 7 – 6 over the course of 8 hours and 6 minutes.

26 innings Boston Braves and Brooklyn

Dodgers played to a 1-1 tie on May 1, 1920. The game was called

because of darkness after playing only 3 hours and 50 minutes

10

Social Issues

❑We’re all in this together: ESG Investing

❑ Unlocking capacity: Opportunity Zones

“You can say that it feels good to follow responsible practices, but we are seeing more examples of it also enhancing returns.”

We Are All in This Together – ESG Investing

11

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

Source of Invested Assets

Other…

Labor Funds1%

Foundations2%

Educational institutions

6%

Corporations32%

Public funds58%374 $12

trillionSource: Pensions & Investments

Unlocking Capacity

12

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

13

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.”

A changing industry

4.4

3.4 3.3 3.3

1.8

2.3

2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1960s 1970s 1980s 1990s 2000s 2010 to2018

2018 to2028

Intensifying Transformation

Annual GDP Growth by Decade (%)

14

1.3

1.0

0.9

1.2

0.9

0.70.7

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1960s 1970s 1980s 1990s 2010s 2010 -2018

2018 -2028

Easing into the Future

Annual Population Growth by Decade (%)

Source: Bureau of Labor Statistics, US Census Bureau, IHS Markit

Who is getting hired?

(1,007)

515 414 374 483 811 546 1,246

406 1,058

137

995 1,110 1,787

482

1,265 1,168 545 899

1,418

(6,000)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Annual Employment Growth (000s)

20 to 24 25 to 34 35 to 44 45 to 54 55 Plus

15Source: Bureau of Labor Statistics

Easing into the Future

16Source: BLS

Starting with a very tight

labor market

6,294

7,335

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

# of job openings

Recession

# of unemployed

(000s SA)

17

Markets to watch

❑ 18-hour city 3.0

“The competition for talent makes being in the right market of vital importance.”

Markets to Watch

18Emerging 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

2019 Market Outlook Scoring

19

Memphis, TN

Knoxville, TN

Nashville, TN

= Mean Score

-1 Stdev =Trend toward less differentiation between markets continues

57 markets within +/- 1 Stdev of the meanSource: Emerging Trends in Real Estate 2019 Online Survey

Affordability a key consideration in 2019

91.4

100.0 102.5 103.9

119.6

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Memphis US Top 20Markets

All Markets GatewayCities

Cost of doing Business Index

180.1

151.7 143.2

134.69

84.39

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Memphis US All Markets Top 20Markets

GatewayCities

Housing Affordability

20Source: Moody's Analytics, NAR

Higher = more affordable

18-Hour Cities 3.0

21Source: 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

22Source: Census Bureau

35% of interregional

millennial migration is to

the south region compared to:

West – 27.2%Midwest - 20.3%

Northeast – 17.5%

23

Dealing with disruption

❑ Digital Transformation❑ Retail Transforms to a new Equilibrium❑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 Insights24

$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

Unlocking the power of Proptech

Emerging Trends in Real Estate 2019 25

Fintech

Real Estate

FintechProptech

Contech Smart Real

Estate

Collaborative Economy

Get Smart: Artificial Intelligence + Personal Intelligence

26

• 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

Real Estate Transforming to a new Equilibrium

•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 Survey27

What does disruption look like ?

Emerging Trends in Real Estate 2019 28

Their Biggest issues – people didn’t rewind these

Emerging Trends in Real Estate 2019 29

Taking their eye off the ball

Emerging Trends in Real Estate 2019 30

The Myth of “Free Delivery”

31Source: 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

The Myth of “Free Delivery”

32

More shoppers opting for in store pick up

Retail format Intentions

Physical stores 88%

Online from retailers with stores 57%

Ship to home/office 42%

Pick up in store 40%

Pure online retailers 60%

Amazon 58%

All others 16%

Other sources 17%

Source: ICSC 33

86% of “click-and-collect” shoppers made additional purchases when picking up their order

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 Survey34

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

35

Takeaways

• Market could be hitting a plateau

• Slower growth increasesimportance of decisions

• Technology will have a bigger impact going forward

“Real estate as an asset class has matured. Market participants need to realize this and make the appropriate adjustments.”

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Contact us

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Andy WarrenDirector, Real Estate Research515 314 4264andrew.warren@pwc.com

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