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ULI Atlanta Trends in Real Estate 2020 October 30, 2019 Emerging Trends in Real Estate 2020
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Page 1: Emerging Trends in Real Estate 2020 - Microsoft...Emerging Trends in Real Estate 2020 2 Emerging Trends in Real Estate 2020 Predictive Industry publication now in it’s 41styear Sponsored

ULI Atlanta Trends in Real Estate 2020October 30, 2019

Emerging Trends inReal Estate 2020

Page 2: Emerging Trends in Real Estate 2020 - Microsoft...Emerging Trends in Real Estate 2020 2 Emerging Trends in Real Estate 2020 Predictive Industry publication now in it’s 41styear Sponsored

PwC

Emerging Trends in Real Estate 2020

2Emerging Trends in Real Estate 2020

Predictive Industry publication now in it’s 41st year

Sponsored jointly by ULI and PwC

Input from over 2,200 industry leaders

/ ULI

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PwC

Market Sentiment; Still positive, but are we seeing some diversity in opinion?

Emerging Trends in Real Estate 20203/ ULI

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PwC

Is this what an extended expansion looks like?• Abysmal to poor is up slightly, but

still a very small percent of the total

• Some moderation is expected as those expecting a fair outcome in 2020 rises to 22.6%

• Outlook still shows some confidence as those expecting good rises each year

• Since 2016 the excellent outlook has been cut in half

2020 Expected Profitability

Emerging Trends in Real Estate 20204

15.6% 16.8% 19.3% 20.4% 22.6%

57.2%61.5%

62.8% 61.8%63.6%

25.7%19.8% 16.8% 17.0% 12.6%

2016 2017 2018 2019 2020

Abysmal Poor Fair Good Excellent

/ ULI

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PwC

23% 23%

What is behind the change of heart?

1. Economy – 36%2. Fundamentals – 29%3. Government – 14%4. Capital markets – 11%5. Strategy shift – 5%

1. Strategy shift – 28%2. Fundamentals – 28%3. Internal changes – 22%4. Economy – 16%5. Capital markets – 6%

Emerging Trends in Real Estate 20205

Reasons given for change in expectations from 2019

/ ULI

Lower Higher

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PwC

We’ve always done it this way’ doesn’t cut it in real estate anymore. We need to find the best way to do it.

Emerging Trends in Real Estate 20206

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PwC

Let’s not talk ourselves into a recession, but we do need to keep an eye on the possibility

Emerging Trends in Real Estate 20207/ ULI

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8

GDP growth is projected to downshift to a more sustainable — but slower — paceBaseline expectations are for a “lower for longer” soft landing, but there are significant downside risks.

Source: IHS Markit

US real GDP growthYear-over-year % change

Post WWII: 3.2%

Current: 2.2%

The largest benefits from tax cuts and an expanded federal budget are behind us

The slowdown in China and the rest of the world, which the US trade war has exacerbated, is weighing heavily on US manufacturing

The Fed rate cut means less risk of a policy mistake...but there is still not much policy runway

An aging population and weak productivity growth will prevent sustained growth over 2%

Decades of public and private sector underinvestment will continue to restrain growth

Emerging Trends in Real Estate 2020PwC / ULI

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PwC

Personal consumption expenditures• Goods

• Durable• Non durable

• Services

Private domestic Investment• Fixed investment

• Non residential• Residential

• Change in private inventories

Net exports of goods and services• Exports• Imports

Government consumption expenditures and gross investment• Federal

• National defense• Nondefense

• State and local

The danger in relying on averages…

9Emerging Trends in Real Estate 2020

/ ULI

Page 10: Emerging Trends in Real Estate 2020 - Microsoft...Emerging Trends in Real Estate 2020 2 Emerging Trends in Real Estate 2020 Predictive Industry publication now in it’s 41styear Sponsored

PwC

Danger of relying on averages

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023

10

Real GDP growth average of all metros and Atlanta

Emerging Trends in Real Estate 2020

Atlanta 20 year average 2.4%

All market 20 year average 1.8%

Growth in Atlanta may slow going forward, but no reason to believe that Atlanta won’t continue to easily outpace national average

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PwC

72.9%Average percent of survey respondents that recommend either buying or holding in 2020 39.3%

40.7%

47.8%

52.1%

56.8%

MEDICAL OFFICE

DATA CENTER

SENIOR HOUSING

WORKFORCE HOUSING

FULFILLMENT CENTERS

Top “Buy” recommendations

What property types do survey respondents think will be winners in 2020?

11Emerging Trends in Real Estate 2020

/ ULI

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PwC

The flow of capital into real estate is both a blessing and a curse

Emerging Trends in Real Estate 202012/ ULI

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PwC

Last time we talked about

TINA

PwCEmerging Trends in Real Estate 2020

13

2007

/ ULI

A few assumptions that may have gone wrong

• Unrealistic rent growth assumptions

• Further cap rate compression

• Continued demand

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PwC

Everyone may still be going in, but with an eye toward caution!

PwCEmerging Trends in Real Estate 2020

14

2019

/ ULI

What might be different this time?

• Much higher risk premium in the market

• Realistic underwriting assumptions

• Plenty of capital waiting to enter the market

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PwC

57.5%Average percent of all property types that survey respondents feel are fairly priced

47.5%

50.3%

58.3%

58.3%

68.7%

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

HIGH STREET RETAIL

CBD OFFICE

LUXURY HOTELS

LIMITED-SERVICE HOTELS

LUXURY APARTMENTS

% Considered overpriced by property type

Column1

Despite record high property values, market doesn’t consider them too out of line

15Emerging Trends in Real Estate 2020

/ ULI

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PwC 16Emerging Trends in Real Estate 2020

Top 20 Markets for 2020 Market PriceA rising number of choices appealing to many appetites

Major Capital Magnets SeasonalOld favorites that we keeps us coming back

Stalwarts, Surprises and Determined Competitors Mixed PricingFamiliar choices that may hide a hidden kick

Aligning Expectations Fair PricingChoices that are delivering what they promise

Treasures Ripe for Discovery Mixed PricingAn oyster with a pearl or tomorrow’s favorite today

Potpourri: Thrifty Choices, Boutiques, and Special Situations Ala CarteYou may be pleasantly surprised what you’ll find

Market Menu“ One size doesn’t fit all

/ ULI

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PwC

Top 10 Markets

17Emerging Trends in Real Estate 2020

#1 Austin

#2 Triangle Region, NC#3 Nashville

#7 Orlando

#4 Charlotte

#5 Boston

#6 Dallas/Fort Worth

#8 Atlanta#9 Los Angeles

#10 Seattle

Heavily weighted toward growth and the Southeast

/ ULI

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PwC

Top 20 Markets

18Emerging Trends in Real Estate 2020

#1 Austin

#2 Triangle Region, NC#3 Nashville

#7 Orlando

#4 Charlotte

#5 Boston

#6 Dallas/Fort Worth

#8 Atlanta#9 Los Angeles

#10 Seattle

#11 Tampa/St. Petersburg

#12 San Francisco#13 San Jose #14 Northern VA

#15 Brooklyn

#16 Indianapolis#17 Denver

#18 Orange County#19 Charleston

#20 Portland

Heavily weighted toward growth and the Southeast

More diverse and reflect recent volatility

/ ULI

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PwC

23Number of states experiencing positive domestic net migration• Geographically concentrated across

the South and West• Florida and Texas account for 43%

of all positive net in migration• The top 10 states account for 89% of

all net in migration

2010 – 2018 cumulative domestic net migration (000s)

Emerging Trends in Real Estate 202019

1,160

8

402219924

1,019

13

3643

322

86

67

362

192

206

295

205315

5

Delaware = 33DC = 30New Hampshire = 7

/ ULI

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PwC

1

2

3

4

5Office

Retail

MultifamilyIndustrial

Single Family

Atlanta All Market Average Top 20 Average

Deviation of local market outlook from survey averages by property type

20Emerging Trends in Real Estate 2020

• Scores show how markets are converging rather than diverging throughout this business cycle

• Atlanta outlook exceeds top 20 except for single family and industrial

• Office, retail and multifamily equal the top 20

/ ULI

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PwC

1

2

3

4

5Local Economy

Investor Demand

Capital Availability

Opportunity

Public/PrivateCooperation

Local DevelopmentPlayers

Atlanta All Market Average Top 20 Average

Deviation of local market outlook from survey averages by market characteristics

21Emerging Trends in Real Estate 2020

• Market preference for above average growth shows in factors related to local market growth

• Atlanta equals or exceeds the Top 20 in all categories

• Atlanta exceeds in the strength of the local economy, development capability and opportunities

/ ULI

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PwC

High growth or low growth, Southeast or Midwest, everyone is talking about some form of housing affordability

Emerging Trends in Real Estate 202022

Trend #4Housing: The Great Unraveling

/ ULI

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PwC

Political climate is leading to a rise in rent control rules

23

Concern that areas that enact rent control will inadvertently slow new investment in existing housing stock and slow the development of new housing

Emerging Tends in Real Estate 2020

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PwC

Housing shortfall

24

Household formations easily outpace new supply

Emerging Trends in Real Estate 2020

(4,000,000)

(3,500,000)

(3,000,000)

(2,500,000)

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

Uni

ts

Housing Surplus/(Deficit)

Housing Surplus/(Deficit)

A simple analysis that doesn’t even address geographic specifics, but clearly points to the depth of the problem

Demographic and economic factors are driving household formations

Demographic and economic factors are making it difficult for the housing industry to add units at the required rate

/ ULI

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PwC

Searching for a feeling of place

Emerging Trends in Real Estate 202025

While technology and the gig economy have given us the tools to work from anywhere, human nature seems to crave a sense of community. This is having an impact on the real estate industry as well Employers are finding that creating a sense of

community is a benefit in the attraction and retention of employees

Multifamily properties are substituting unit amenities with community amenities to appeal to tenants

Landlords that can create a sense of community in their buildings find it easier to attract and retain tenants

Neighborhoods are looking to attract the right buildings that will be an anchor to developing a community feel in the surrounding area

/ ULI

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PwC

1960’s interpretation of the open office concept

1980’s interpretation of a private office concept

Today’s interpretation of collaboration space

Remember when it was just work space?

Emerging Trends in Real Estate 202026/ ULI

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PwC

One work space does not fit all workTenants want space to address different goals• Collaboration in formal and informal settings• Quiet space for individualized work• Available space for hotelling workers• Flexible space that can be utilized to house staff on a

temporary basis• Space where employees can relax, eat, socialize

It is all about work process

Emerging Trends in Real Estate 202027/ ULI

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PwC

Suburbs are becoming cool again

Emerging Trends in Real Estate 202028

The expectation that Millennials would begin to move to the suburbs has become a reality. This generation however, is putting their own spin on the suburbs they are choosing.

Suburbs that are in favor offer many of the same amenities that drew the generation to the urban core

Many of these suburbs are also gentrifying to meet the needs of the new residents

“You can’t be a suburb of nowhere” –Suburbs in markets with strong urban cores are seeing the most growth

/ ULI

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PwC

Cool Suburbs

29Emerging Trends in Real Estate 2020

/ ULI

Bellevue, WA

Beaverton, OR

Maplewood, NJ

Denton, TX

Alexandria, VA

Decatur, GA

Somerville, MA

Arvada, COKirkwood, MO

Belmont, NCPasadena, CA

Winter Park, FLRound Rock, TX

Alameda, CAEllicott City , MD

Royal Oak, MIMedia, PA

Evanston, IL

Source: Apartment therapy

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PwC

Big surprise! The boomers may not be doing what we thought they would, what will be the impacts on following generations?

Emerging Trend in Real Estate 202030/ ULI

Page 31: Emerging Trends in Real Estate 2020 - Microsoft...Emerging Trends in Real Estate 2020 2 Emerging Trends in Real Estate 2020 Predictive Industry publication now in it’s 41styear Sponsored

PwC

The percent of total population over 65 in 2046. The year the first millennial will turn 65

35.0041.74

72.68

83.78

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2000 2005 2010 2015 2020 2025 2030 2035 2040 2045

% o

f Tot

al P

opul

atio

n

(milli

ons)

Population over 65

% of Total Population

First Baby Boomers turn 65

Population over 65 on the rise

31Emerging Trends in Real Estate 2020

First Gen Xers turn 65 First Millennials

turn 65

Source: US Census Bureau, Moody’s Analytics/ ULI

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PwC

Estimated amount of wealth transfer that could occur over the next 30 years – Or will the boomers spend it all?

Emerging Trends in Real Estate 202032/ ULI

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PwC

Sustainable and green building has been so successful, that ESG just seems like the natural progression of these ideals

DateEmerging Trends in Real Estate 202033/ ULI

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PwC

Attitudes may be shifting

34Emerging Trends in Real Estate 2020

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PwC

It affirms the essential role corporations can play in improving our society when CEOs are truly committed to meeting the needs of all stakeholders.

- Business Roundtable

Emerging Trends in Real Estate 202035/ ULI

Page 36: Emerging Trends in Real Estate 2020 - Microsoft...Emerging Trends in Real Estate 2020 2 Emerging Trends in Real Estate 2020 Predictive Industry publication now in it’s 41styear Sponsored

PwC

Some asset classes ahead of others in terms of implementation• Real estate trails only private equity

in terms of having ESG policies in place

• Long-term adaption of green building standards gives real estate a head start

• Room for growth due to relatively high percentage of asset classes that have not adopted, nor plan to

Investor plans toward ESGpolicies in their portfolios

Emerging Trends in Real Estate 202036

35%23%

17%28% 27%

12%

13%

8%7%

11% 11%

6%

35%

43%48%

40% 39%

47%

16%25% 28%

21% 23%35%

PRIVATE EQUITY PRIVATE DEBT HEDGE FUNDS REAL ESTATE INFRASTRUCTURE NATURAL RESOURCES

UnsureNo, No Plans toNo, but Plan to within the Next 12 MonthsYes, Have a Policy in Place

/ ULI

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PwC

The ultimate goal of implementing technology is to make the whole equal more than the sum of the parts

Emerging Trends in Real Estate 202037/ ULI

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PwC

We continue to generate more data every year!

38Emerging Trends in Real Estate 2020

/ ULI

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PwC

How technology is being used today

Visualization • Seeing how things are going to happen

Facilitation • Making life easier for tenants

Collaboration • Bringing people and processes together

Efficiency • Improve operational processes

Decisions • Using data to enhance decision making

39Emerging Trends in Real Estate 2020

/ ULI

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PwC

5G will enhance speed and reliabilityThe increased speed and latency provided by 5G will make a number of technologies viable• Increased broadband access• Autonomous vehicles/smart infrastructure• Control of remote devices • Machine learning and enhanced IOT (internet of things)

Will 5G allow current and existing technologies to have a real impact?

Emerging Trends in Real Estate 202040

Date/ ULI

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PwC

What you don’t want to see when…

41Emerging Trends in Real Estate 2020

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PwC

Cities that have invested in their infrastructure are clearly seeing an economic advantage

DateEmerging Trends in Real Estate 202042

Trend #10Washington stumbles; States and Cities pick up the ball

/ ULI

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PwC

Government infrastructure investment has been below average since the American Recovery and Reinvestment Act

The result has been a shortfall in spending of over $100 billion a year

Government infrastructure investment

43Emerging Trends in Real Estate 2020

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

1979 1984 1989 1994 1999 2004 2009 2014

Net Government Investment

Shortfall

1980 – 2000 Average

% of Nominal GDP

Source: BEA/ ULI

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PwC

%Of Emerging Trends survey respondents feel that transportation related infrastructure investment would have the greatest impact on the real estate market

What type of infrastructure investment would have the greatest impact on the real estate market

Emerging Trends in Real Estate 202044

1.7%

3.6%

6.5%

7.2%

7.5%

35.5%

38.0%

0% 5% 10% 15% 20% 25% 30% 35% 40%

Affordable Housing

Education/Environmental/Amenities

Energy/Utilities

Technology

Air/Rail/Port

Mass Transit

Roads/Bridges

Percent of Respondents

/ ULI

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PwC

Not all projects require public funding

45

Several of the high speed rail (HSR) projects on the list are being undertaken by private ventures

Brightline is expanding rail service from Orlando to South Florida with a possible extension to Tampa

A similar project would link Las Vegas to Los Angeles

Emerging Trends in Real Estate 2020/ ULI

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pwc.com

© 2019 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

/ ULI.org

Thank You!Please feel free to download a copy of the report at

ULI.org/ET20Or

PwC.com/us/etre


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