As the condition of the global economy continues to cause uncertainty across all industries, The Counselors of Real Estate, an international professional association of top executives in real estate, asked its members to identify the “top ten” broad structural issues that will define the real estate industry over the next 10-30 years. Many of the issues have strong interrelationships and are common across industries:
1. Aging Population: The aging of the population will broadly and dramatically affect the real estate markets from housing, retail sales, health care, and myriad factors that define the success of different geographic areas. Aging will most directly affect the demand for real estate, but will have scores of less direct effects such as potential capital impacts as the pensioners by the scores of millions move from being net contributors to net users of capital.
2. Funding of Public Employee Retirement Systems: Underfunding of state and local retirement systems in the trillions of dollars provides extreme challenges to the provision of basic local and state services critical to real estate properties and markets. Can existing government assets be tapped for cash in a way that makes economic sense and does not shortchange future generations?
3. Student Debt Burdens: Student college debt averages around $45,000 per student with a total that exceeds consumer debt for the first time. How will such burdens change the patterns of spending, household formation, and financial growth of this generation of graduates?
4. Infrastructure Funding and U.S. Competitiveness: Creative public-private partnerships with state and local governments are being viewed as potential supplements or replacements for federal funding of the next generation of needed infrastructure improvements, and could cover the trillions of dollars of deferred maintenance of existing assets.
5. Changing Office and Retail Demand: Radical reductions in office space usage by larger occupants due to increased use of technology, acceptance of alternative work systems, and changes in retail as Internet purchases change the role and purpose of physical retail space will define winners and losers going forward. Additionally, the Panama Canal expansion and East Coast port expansion are changing the dynamics of warehousing.
6. Real Estate Capital Markets Liquidity: Capital limitations on banks as a result of Dodd-Frank and existing overallocations to real estate, concerns about the scale of return of the commercial mortgage-backed securities (CMBS) market, hundreds of billions of dollars of real estate loans that must be refinanced in the next three to seven years, and growing capital demands by other sectors of the economy will create continuing uncertainty over access to capital. Smaller properties, properties in secondary or tertiary markets, and properties with weak borrowers, substantial vacancy, high rollover of tenants in early years, or other risk factors are already experiencing a severe capital shortage.
7. Global Change and Uncertainty: The political gridlock and budget crisis in the U.S., the European financial crisis, the pending (now underway) slowdown of China’s economy, uncertainty and slow growth in the Middle East, and continuing expansion of global interconnections make uncertainty about the future of finance a certainty. What does it mean for real estate investment in the US and abroad?
8. Integration of Sustainability: Sustainability has moved beyond a gimmick and become part of corporate governance, management and reporting systems, and supply chains of many companies ― increasing the value of sustainable property investment. How must real estate businesses adapt to keep up?
9. Low Cap Rates: Cap rates for core properties are back to troubling 2007 levels. What happens if interest rates increase and cap rates decompress? Has the industry set itself up for another disastrous value decline?
10. Civil Discord and Political Gridlock: Many of the key issues and challenges require broad consensus to solve. Will there be greater cooperation, or will political gridlock continue? Answers to this question will be critical to determining the future of the real estate industry and societies of the world.
The list was developed by the group’s External Affairs committee. Within The Counselors of Real Estate organization, more than 50 real estate specialties are represented; all members provide real estate counseling ― objective advisory services that solve problems and guide a wide spectrum of real estate decisions for clients, including corporations, investment funds, financial institutions, universities, and municipalities.