The Top Ten Threats Facing Real Estate

by Amy Hoak,

Big picture perspectives of the real estate market are rare, as professionals tend to focus on their corner of the real estate world - be it residential or commercial, funding or construction.

But that’s exactly what the Counselors of Real Estate, an international professional group, assembled recently, identifying the top 10 issues facing all real estate in the next three decades. The group of high-profile thinkers came up with a list that focuses on themes from demographic trends to global uncertainty and their effects on real-estate markets.

Essentially, the response to these trends will separate the winners from the losers in the real-estate market, said Scott Muldavin, a member of the group and president of The Muldavin Company, a consulting firm serving the real-estate industry.

“If you pay attention to them you will be able to beat the market,” he said.

Below are the top 10 issues affecting the real-estate market in the next 10 to 30 years.

1. An aging population. When baby boomers enter their retirement years, it will gradually have an effect on housing markets—increasing demand for multifamily senior housing, for example. It will also mean changes in commercial real estate, from retail to health-care centers, to meet the needs of this large demographic. “We’re talking about such a giant wave of elderly people who have different ways of doing things, which will impact how we design facilities,” Muldavin said. Less directly, the aging of Americans potentially could have impacts on capital, as pensioners move from being net contributors to net users of capital.
   
2. Student debt burdens. When college students are graduating with $25,000 in debt, their spending is greatly restricted—and they’re less likely to form households of their own. Already, a growing number of graduates have been moving back in with Mom and Dad, and that’s having an effect on the residential housing market.
   
3. Public funding. The underfunding of state and local retirement systems presents a challenge, and there’s also trillions needed for investments in infrastructure, Muldavin said. Areas where funding problems aren’t as severe will be able to make the infrastructure and quality-of-life investments that encourage real-estate investment, he said. Meanwhile, public-private partnerships with state and local governments could supplement federal funding for next-generation infrastructure improvements.
   
4. Changing demand for office space. More employees are working remotely, stopping in at the office only periodically, and that is reducing the overall need for office space. “Companies like Cisco have gone from 200 square feet per employee to 50 and 60 square feet,” Muldavin said. And that’s only going to become more common as the workforce gets younger and more comfortable with the technology of working remotely. When major tenants sign leases in the next 10 to 15 years, they’re likely to reduce spaces by 30% to 40%, he said. Less building of office space will be required, so investors need realistic expectations about the future, he added.
   
5. Changing demand for retail space. Online retailers have changed the market for brick-and-mortar shopping centers. Online sales volume has been on the rise for years, and companies, such as Best Buy, are attempting to reorganize their physical stores to adapt to the new reality, Muldavin said.
   
6. Liquidity in the real-estate capital markets. There are hundreds of billions of dollars of commercial real-estate loans that need to be refinanced in the next three to seven years, but there are fewer lenders who will be able to provide that capital, Muldavin said. “Commercial real-estate liquidity is further exasperated by capital demands for governments in the U.S. and Europe and more stringent requirements by the lenders that are still investing—making it harder for borrowers to borrow the amount they need,” he said. Properties in smaller markets, those with substantial vacancies and properties with weak borrowers already are experiencing a shortage in capital.
   
7. Global change and uncertainty. The European financial crisis and slowdown of China’s economy is having an effect on companies that do business on a global scale. The uncertainty felt by companies has the potential to affect their real-estate decisions.
   
8. More sustainability. Attention to sustainability in the workplace has already become a theme, as businesses are more concerned about saving water and energy, creating a healthy work environment for employees and paying more attention to the sustainability of materials they use. Expect that to become an even more essential component for commercial properties to stay competitive in years to come.
   
9. Overvalued commercial properties. There’s a concern that properties with the best leases in strong markets have become overvalued, Muldavin said. Investors have flocked to these properties over those in smaller markets and less desirable buildings, he said. Also, after values plunged beginning in 2008, people saw value in quality real-estate as an investment and money flooded to the best properties. “The third reason is that investors looking for a safe haven for their money in turbulent times in the equity markets have underestimated risks, pricing the best real estate like bonds while significant leasing uncertainty still exists,” he said.
   
10. Political gridlock. To solve some of the key issues in real estate today, broad consensus is needed. “Political gridlock increases the overall uncertainty on how we’re going to solve big problems,” including funding infrastructure and public retirement systems, Muldavin said. “I’m not saying everyone needs to sing ‘Kumbaya’ and hold hands, but we do need to have civil discourse,” he said.

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