Emerging Trends in Real Estate 2012 - Urban Land Institute

Exhibit 1-1
Importance of Various Issues for Real Estate in 2012
1
no importance
3
moderate importance
Economic/Financial Issues
Job Growth
Income and Wage Change
Interest Rates
Global Economic Growth
Federal Fiscal Deficits/Imbalances
Tax Policies
State and Local Budget Problems
New Federal Financial Regulations
Energy Prices
European Financial Instability
Inflation
Social/Political Issues
Terrorism/War
Immigration
Social Equity/Inequality
Climate Change/Global Warming
Real Estate/Development Issues
Vacancy Rates
Refinancing
Deleveraging
Construction Costs
Infrastructure Funding/Development
Future Home Prices
Land Costs
CMBS Market Recovery
Transportation Funding
NIMBYism
Affordable/Workforce Housing
Green Buildings
Source: Emerging Trends in Real Estate 2012 survey.
4.82
4.18
4.12
3.99
3.98
3.86
3.83
3.62
3.55
3.53
3.51
3.07
3.01
2.55
2.22
4.10
3.86
3.69
3.67
3.62
3.62
3.41
3.39
3.29
3.03
3.01
2.73
5
great importance
1 2 3 4 5
real estate values escalate due to cap rate compression, but
most other properties languish. “The bifurcation between ‘have’
properties versus the have-nots widens.” “Vacancies aren’t getting
worse, but barely show improvement, and rents roll down
as new leases mark to market.” Tenants hold all the cards, and
instead of expanding, some shrink their space requirements,
“playing with existing inventory.” Class A properties lease up
at the expense of Bs and increasingly obsolescent Cs. The
most optimistic interviewees hope for “a path more like a rolling
hill than a steep mountain climb,” featuring steadily increasing
tenant demand “off very depressed levels,” controlled development,
and investors moving into secondary markets.
Despite widespread borrower distress, frustrated players
uncover few bargains because lenders and special servicers
hold back on disposing of problem assets in an enduring
extend-and-pretend mode. As long as the economy goes sideways
and government regulators turn a blind eye, the banks will
continue to resolve bad loans at a snail’s pace and help avoid a
refinancing crisis.
All these forces combine to bend recovery and limit opportunity.
Instead of a normal rebound, the cycle flattens in economic
languor without prospects for much meaningful improvement.
As markets creep back in 2012, investors can no longer “just
ride the capital tide of rate compression, but instead must pick
projects well and execute on management.” The risk grows of
overpaying for assets “based on rent spikes that aren’t there,”
and developers—except for multifamily—remain frozen in suspended
animation.
“We’re in for a long slog.”
Where Is Demand
Interviewees’ concern intensifies over a U.S. economy stuck in
the doldrums. If the economy is not technically back in recession,
exceedingly tepid gross domestic product (GDP) growth
fails to ameliorate the drags of chronic high unemployment,
suffocating debt loads, high energy prices, and rising health
care costs. Roundly criticized government stimulus may have
generated signs of recovery through 2010 into 2011, but when
budget cutters and deficit hawks halted spending on various
employment programs and began slashing public sector jobs,
any momentum appeared to evaporate, and private companies
have failed to pick up enough slack. Many economists call
for increasing stimulus to boost employment, but others favor
austerity and reducing deficits immediately. The resulting nasty
and supercharged political wrestling match over jump-starting
the economy may miss the point about the real problems facing
the nation’s future. Overcoming the following anchors weighing
down demand will not be easy.
Global Jobs Arbitrage. U.S. wage rates increasingly become
more uncompetitive now that many jobs—not just manufacturing—seamlessly
can be transferred or outsourced via various
communications technologies to lower-cost overseas markets.
Among others, high-paying accounting functions and financial
analysis head offshore. U.S. jobs do not disappear, but employers
are not compelled to pay as much or hire as many domestic
4 Emerging Trends in Real Estate ® 2012