The second day of the Urban Land Institute Fall Meeting in Dallas brought some in-depth insights into what to expect from the U.S. economy and the commercial real estate market in 2017 and 2018. The predictions were not all positive. Here are some takeaways from Wednesday’s general sessions and panel discussions:
- Brace yourself for a recession. There is a high probability of one happening in 2017, and the chances go up for each subsequent year, according to Melissa Reagan, head of real estate and research with MetLife Investment Management. “We see growth continuing to slow,” she noted. Mary K. Ludgin, director of global investment research with real estate investment firm Heitman, noted that while the U.S. has shown considerable resilience to outside shocks in the seven years since economic recovery began, every year seems to bring a new challenge—a “Grexit, if not Brexit,” that could end up disrupting the market. Ludgin described the U.S. as “the cleanest dirty shirt in the global economy.”
- President Hillary Clinton in the White House will likely mean greater spending on infrastructure and a net positive for both job growth and commercial real estate, according to Ludgin and Reagen. President Donald J. Trump in the White House might mean “some pretty frightening trade changes” that can come from an executive order, Ludgin noted.
- In spite of predictions of slower GDP growth in 2017 and a contentious election campaign, real estate investors remain largely optimistic, according to the surveys ULI completed for its newly released Emerging Trends in Real Estate report. One of the reasons is that they expect “a kinder, gentler real estate market,” since the amount of new space supply coming on-line has been constrained compared to previous market cycles.
- The key for investors and developers going forward will be careful targeting of opportunities, according to Thomas R. Arnold, head of Americas real estate with Abu Dhabi Investment Authority, a sovereign wealth fund. For example, Austin, Texas ranked as the number one city for investment opportunities in this year’s ULI report. And yet, in spite of the fact that Austin is experiencing outsized job growth and serves as a Mecca for Millennials, the city’s modest size means that it can get overbuilt a lot faster than the much larger and more diversified Dallas, which came in the second place. “I think Austin is an amazing, fantastic city. But our view on Austin is: it’s going to moderate. We see softness in [high-end] across product types and the middle market is holding up,” Arnold said.
- Given how long the U.S. real estate market has been in expansion mode, it is time to exercise extra caution, noted Matthew S. Khourie, CEO of Trammel Crow Co., a development and property management firm. “We are very long into this cycle, and whenever you are long into the cycle, it’s appropriate to change your thinking,” whether it be on development opportunities, cap rate calculations or financing options, Khourie said.
- The good news for the commercial real estate industry overall is that as a result of the new regulations coming into play, the banks have been a lot more disciplined about extending loans on new projects than they were in previous cycles, according to Greta Guggenheim, CEO of TPG Real Estate Finance Trust, the real estate investment arm of private equity firm TPG Capital. “The banking sector has self-corrected and the lending markets are efficient,” she said.
- In spite of its challenges—or rather, because of them—retail may present the best opportunity for outsized returns on investment today, noted MetLife’s Reagen. “If you are in the right property type, the right location, it could be a big win,” she said.
- Another property type real estate economists feel good about? Multifamily. Even though the sector has been overbuilt in certain markets and lost some of its recent popularity, “you can always lease an apartment, it’s just a matter of the rate,” according to Ludgin. “That’s not true in every sector, particularly in industrial. We all think a recession is coming,” and multifamily represents a defensive play, she added.
- Various panelists also insisted that recent focus on the flight to urban environments has created a misperception that suburban properties are inherently unattractive. In reality, “premier suburbs,” which feature well-thought out development planning and live/work/play environments, can be just as attractive as cities, according to Arnold. “The suburbs are not dead,” noted Khourie. “I think you’ll see continued growth in both: urban and suburban environments.”