By Byron Carlock, PwC US Real Estate Practice Leader –
Reflecting on 2016, I’ve had the great fortune to travel around the globe to speak at many industry conferences. While admittedly I may tire of the traveling back and forth, the inevitable delays, and the logistical hiccups, I’ll never tire of talking about the industry’s future.
I recently had the opportunity to do just that at our recent inaugural Assets & Wealth 2016 conference in New York, where our US Real Estate Practice hosted a real assets session.
Given what we’re hearing from our clients, colleagues, and friends, we spent much of our time focused on infrastructure—its role as a significant driver of a city’s livability, as a key real estate development issue, and as an economic issue—and had three panels discuss more than just related financing issues.
With almost 200 professionals joining us, we presented a collaborative forum for industry peers to discuss the current state of real assets and what’s on the horizon for 2017.
Now that I’ve had some time to reflect, here are some of my key takeaways:
- Infrastructure investment as an economic driver. There is a tremendous (dare I say “yuge”) focus on the incoming administration’s plan to fund fixes to the nation’s infrastructure. What I’ve heard from the industry is a demand for clarity around the appropriate policies and legislation that will incentivize these projects. At the local, state, and federal level, infrastructure projects can be catalysts for real jobs and economic growth and an inspiration for effective public-private partnerships (PPPs).
- Geopolitical reality, meet real assets. A sense of guarded optimism continues to surround this extended real asset recovery cycle. Still, geopolitical and socioeconomic issues like immigration, affordable housing, trade construction, and political volatility (inside and outside of the US) continue to drive volatility and current capital market sentiment.
- Capital flows in the search for yield. Traditional sources of capital favor a “risk-off” approach. Acquisitions are extremely selective, and more capital is flowing into less traditional, non-core, niche property types such as medical office buildings, industrial and data storage, self-storage, and student and senior housing—not to mention manufactured housing.
- Emerging technologies disrupt real assets. Artificial intelligence continues to drive automation while predictive technologies increasingly drive real-time decision making. Advances in artificial intelligence have the ability to influence the entire ecosystem from customer service and bank tellers to deal closings. Blockchain technology is likely to increase the speed of real estate transactions such as leasing, deal closing, and financing, as well as reduce operational load and paperwork. With efficiency comes speed, so the impact on our industry will be felt across the entire sector from project inception to completion. And with efficiency comes an impact on employment, so this is an area that we’ll certainly be watching.
My biggest reaction?
Since 2008, we have moved to peak recovery in virtually every asset class. Relative supply-demand is balanced across types and in each major market—with modest softening in luxury apartments and certain types of retail—while industrial dominates investor preferences. Urban multifamily developments continue to reshape the landscape of our cities, and infrastructure development has reshaped our living patterns as the lines have blurred between real estate development and infrastructure.
This prolonged recovery presents at least two causes for concern: the pace at which interest rates rise and cost acceleration, especially in the areas of skilled labor and materials. Protectionism and anti-immigration policies will only exacerbate cost issues. The bigger challenge to real estate and infrastructure development is the issue of cost—including land, labor, and capital—versus the rate of return needed to justify the investment.
The new administration in Washington has an opportunity to extend this recovery through prudent infrastructure incentives—including policies to increase affordable housing and home ownership, and to encourage financing for millennials who still live at home and for others with challenging credit scores. Fortunately, real assets have the potential to further support the economic recovery, given the increase in consumer spending that generally follows home purchases.
Success will ultimately depend on appropriate policies and legislation to inspire effective PPPs while putting to good use the enormous capital flows that continue to demand entry into our industry.
All in all, I remain optimistic about 2017 and beyond as we are likely to see structural improvements to our cities and urban environments through a renewed focus on rapid transit, evolving suburban areas, and renewed emphasis on social issues associated with affordable housing and sustainability.
It’s an exciting time to be part of the industry—and I’m looking forward to what’s on the horizon.