The Collective on 4th, a student housing project in Portland, Oregon

The Counselors of Real Estate: Interest Rates and Economy Are Top Current Issues Affecting Real Estate

by Jeff Shaw

CHICAGO — The top two issues facing both residential and commercial real estate today are rising interest rates and the health of the general U.S. economy.

That’s according to The Counselors of Real Estate, a Chicago-based consortium of high-profile property professionals, which has issued its annual list of the “Top Ten Issues Affecting Real Estate” for 2018 and 2019. Joseph Nahas Jr., the 2018 chair of The Counselors of Real Estate, made the announcement during the keynote address of this year’s National Association of Real Estate Editors conference in Las Vegas.

The year’s list is broken down into the top five current and top five longer-term issues being seen for commercial and residential real estate today. The commercial and residential real estate markets are experiencing changes, including decreasing demand for commercial property and higher home mortgage rates as a result of rising interest rates.

The Counselors also report that these rate increases are limiting value appreciation for commercial real estate, while lack of wage growth for all but the wealthiest population segment is limiting consumer spending, which the economy needs for growth.

The group cited a 2017 Brookings Institution study to back up this argument, which showed real wages for most of the middle-class have only increased 3.5 percent since 1979, compared to a 24 percent rise for the top income segment.

The list of current issues continued with politics and political uncertainty in second place, citing tax reform and new policies as a catalyst for change in the balance of trade with other countries. This impacts jobs and incomes, and in turn commercial and residential real estate.

Congressional actions to relax certain bank lending and asset management regulations were also among developing trends cited by the group, which may improve access to capital.

The list of current issues continued with housing affordability in third place, followed by generational change and demographics in fourth. The Counselors note that for the first time in more than half of a century, there are four distinct groups exerting influence on both commercial and residential real estate: baby boomers, Generation X, millennials and Generation Y. This influence can be seen in everything from the design of office space, to the development of student and seniors housing.

Rounding out the bottom of the top five current issues affecting real estate is retail volatility due to the rise of e-commerce, and logistics that support warehousing and the delivery of goods.

Long-term issues

Longer term, The Counselors believe that infrastructure — and the lack of effort by the U.S. to address its condition and much-needed revitalization — will be the biggest issue affecting commercial and residential real estate.

Roads, bridges, airports, water and sewer lines, electricity and public transit were noted by the group as rapidly deteriorating, and in need of revitalization to sustain and expand cities and communities.

Disruptive technology comes in second in the group’s list long-term issues. Examples of this technology include advanced robotic manufacturing and warehousing; driverless cars and trucks; the extensive availability and utilization of personal and transactional data, which enhances all kinds of business decisions; “smart” building technology that enables efficiency; global connectivity; automated business processes; and information protection through cyber security. The group believes that nearly every aspect of real estate is undergoing dramatic change as these types of technology are adopted.

Rounding out the list of long-term issues for real estate is natural disasters and climate change in third place, which result in property and environmental damage; immigration in fourth, which, if reduced by law, may have a negative impact on new housing starts and home purchases, and worsen the current skilled labor shortage; and energy and water in fifth, the availability of which is threatened by environmental damage and state and local regulations, which may complicate development.

The Top 10 list is developed annually by members of The Counselors’ External Affairs group, led by Victor Calanog, chief economist and senior vice president of Reis, and Hugh Kelly, special advisor at the Fordham University Real Estate Institute and principal of Hugh F. Kelly Real Estate Economics. The 1,100 commercial real estate members around the world undertake an extensive, collaborative dialogue on current issues and trends to identify the final list.

Katie Sloan

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