Emerging Trends in Real Estate 2012 - Urban Land Institute

chapter 1
Facing a
Long Grind
“Don’t let availability of capital cloud judgments. Demand drivers
don’t exist, and fundamentals need to catch up.”
Some real estate players take comfort watching ample
capital pour into U.S. property markets, escaping from a
world of troubles plaguing other asset classes. “We are
back to spread investing, with no place else to put money for
a current return,” one Emerging Trends interviewee says. But
the seemingly intractable economic and political vicissitudes
undercutting stocks and bonds eventually catch up to real
estate investors. Absent increasing occupancies and rents,
capital flows inevitably retreat, with sometimes dire consequences.
For 2012, everyone must worry about leasing in soft
markets where chronic economic malaise and technological
productivity enhancements combine to dampen demand for
space. The hard reality is businesses have learned they can
increase profits using less, while people just cannot afford to
live in more.
Most of the investment action concentrates in a handful
of property-wealth islands—notably the diversified 24-hour
gateways located along global trade routes, and the reliable
multifamily sector, buoyed by the after-effects of the housing
market collapse. Following the money, investors secure capital
in the safe-bet cities where the nation does most of its business
and the affluent settle, supporting local economies. With some
overlap, markets generating jobs in resurgent tech and energy
businesses also gain adherents. Apartments, meanwhile, score
just about anywhere because not as many regular folks can
afford to own homes and need to rent.
Otherwise capital generally avoids the surrounding sea of
mostly commodity real estate. Local owners grapple in a tenants’
market to lease space and secure cash flows without the
benefit of cap rate compression to increase values. Because
most commercial developers cannot obtain financing and little
new supply will be added, “any improvement in demand can be
amplified.” But even in the wealth islands, expect “a slow-going
grind” where stubbornly high unemployment delays the filling of
office space, while the consumer drag hurts shopping centers
and industrial space. “Face it: real estate doesn’t offer enough
growth potential to satisfy all the capital demand. People had
been living and feeling large,” mostly off borrowed money.
“That’s gone. We’re living smaller,” says an interviewee.
Indeed, the “Era of Less” heralded in last year’s Emerging
Trends report, appears to have taken hold of real estate fundamentals.
During the past decade, the leverage-induced housing
and private equity booms numbed impacts from stagnating
wages and declining worker benefits across most income strata.
Now, massive ongoing government and personal deleveraging
erodes spending, as well as individual financial security. In
general, people have less money or feel less inclined to spend
what they have.
Even more unsettling, unprecedented government impairment
gridlocks policy makers and roadblocks decisions that
might encourage business expansion and hiring. Concern
grows that any concrete political action awaits the outcome of
next November’s presidential election. In the meantime, the
future of health care depends on a looming U.S. Supreme Court
decision; what happens to Fannie Mae and Freddie Mac is anybody’s
guess; needed reforms to tax policy remain up in the air;
and Dodd-Frank banking regulations are entangled in lobbying
machinations. “With all this uncertainty, nobody wants to make a
move,” spawning additional risk.
For real estate investors, the big question—where are we in
the cycle—proves tough to answer. Almost three years after the
economy hit bottom, recovery appears nearly stalled. Trophy
Emerging Trends in Real Estate ® 2012
3