THE TOP 10 ISSUES AFFECTING REAL ESTATE IN 2013

“Many of the issues on this list have strong interrelationships and affect multiple industries,” said Howard Gelbtuch, 2013 chairman of The Counselors of Real Estate and principal of Greenwich Real Estate Advisors Inc. Gelbtuch emphasized the importance of considering each issue in guiding business and investment strategy.

“The headlines are filled with reports of events and conditions that often seem unrelated,” Gelbtuch said. “But, taking a broader view and looking at the issues from all sides will lead to more informed decisions.”

The top 10 issues identified for 2013 include:

1. Low Interest and Capitalization Rate Risks: Real estate has dramatically benefited from low interest rates, which cannot go much lower. Cap rates continue to decline in primary, secondary and tertiary U.S. markets, but are especially low in global gateway markets, posing risk to equity values if cap rates should rise significantly. If interest rates rise as the economy improves in 2013, it could lead to cap rate decompression. Investors must be aware and adjust their property strategy accordingly.

2. Healthcare: Demand for medical services and facilities will continue to increase because of changing healthcare needs of aging baby boomers and expanded health insurance coverage created by the federal Patient Protection and Affordable Care Act. Demand for hospitals, clinics and other medical facilities (including pharmacies, physical therapy and diagnostic facilities) will follow, as will housing for professionals drawn to jobs in medical careers. Younger Americans, many already struggling with student loan debt, will also see potential changes to their own insurance coverage and the increased burden of caring for aging parents, affecting housing affordability and demand.

3. Capital Markets Resurgence: Debt markets have fallen in love with real estate again and money is pouring back into the industry to finance new properties and refinance existing ones. Underwriting requirements are becoming less stringent and loan-to-values (LTVs) are increasing. Energy, agriculture and manufacturing industries are rallying, and recovery efforts along storm-damaged coasts provide opportunity for development. Multifamily investment is still strong following the recession. Such conditions raise concern that the U.S. could return to a period of too-lenient underwriting and overleveraging, similar to the pre-recession boom. Alternatively, the resurgence could be constrained by fiscal problems at the federal and state level or economic uncertainty in other parts of the world. Savvy investors will need to weigh all sides of this equation.

4. Event Risks: Event risks as a group, such as the terrorist attacks of September 11, 2001; recent tornadoes in Oklahoma; April’s tragedy at the Boston Marathon; threats of cyber attack as well as financial crises in Cyprus, Greece and other parts of the world always make the Top 10 list — often in hindsight. In 2013, the potential for a world-altering event with major consequences for real estate is so high, it ranks as a Top 10 issue without having yet occurred. While it is likely a major event will take place with resulting consequences for markets, industries, communities and individuals, without a crystal ball, no one can predict what may occur, or when.

5. Effects of Climate Change/Weather on Coastal Properties: Leaving long-term damage in their wake, storms such as “Super Storm” Sandy in 2012 have rendered some coastal areas more dangerous and less desirable, lowering property values and reigniting intense debate about restoration, new building and investment in the regions. Many local governments are planning for potential flooding and weather turbulence in years to come, which could impact investment in infrastructure and development — and consumer demand for housing.

6. Echo Boomer Housing Demand: The 80 million children born between 1982 and 1995 are now young adults. Like their parents (the baby boomers) these “echo boomers” affect the economy due to their numbers. But unlike their parents, who largely chose to live in suburban areas, they find a more urban lifestyle to be attractive, and many are willing to trade housing size for location, resulting in more demand for multifamily housing. Even “micro” housing is growing in popularity, with square footage measured in the low hundreds, not thousands. While cities welcome the inflow of young professionals, artists and tech workers, suburbs are grappling with a shrinking tax base and potential decreased demand for existing homes. Officials in cities and suburbs alike are devising plans to improve housing options and mass transit to attract this population segment.

7. Increased U.S. Natural Gas Mining and Reserves: New technologies that enable access to North American natural gas reserves are creating an economic boom in the U.S. While this boom creates low unemployment and increased investment options (including real estate) in many secondary and tertiary markets where drilling is prevalent, natural gas exploration is not without risk and cost, including increased carbon emissions, groundwater contamination, reduced economic activity in alternative energy sectors and the potential for boom-and-bust local economies susceptible to rapid declines in production. Expect “fracking” to continue to pose economic and real estate opportunities and risks for years to come.

8. Global Real Estate Growth and Risk: In addition to domestic real estate, U.S. investors are increasingly focusing on emerging markets such as China, Brazil and India, where potential for larger returns exists. Distressed properties and debt in Europe are also attracting U.S. investors. Despite U.S. fiscal balance sheet woes, foreign investors find the U.S. to be an attractive investment environment because it offers a level of transparency unmatched in other parts of the world.

9. Impact of Technology on Office Space: Sophisticated technologies combined with growing acceptance of unconventional workspace models are greatly reducing demand for traditional office space. As younger workers increasingly demonstrate they are as (or more) comfortable working from their mobile phone or tablet computer in a coffee shop as they are in a traditional office, companies are considering whether to continue to reduce square footage allocated per employee. Some industry leaders are predicting the majority of workers in 2030 will be independent contractors; companies may not need to provide office space for them at all. Companies, investors, developers and bankers are all monitoring these trends to ensure informed decision making.

10. Retail Malaise and Repositioning: Rapid ongoing growth of Internet retailing has reduced overall demand for physical stores, reshaping the amount of bricks-and-mortar retail tenants need. At the same time, some shopping centers and malls are retrofitting vacant big box stores, subdividing to attract smaller retailers. More attention is being paid to the shopping experience — successful mall models include more attractions such as restaurants and other entertainment venues which attract families and drive traffic to the mall even after dark. In this way, physical retailers can provide an engaging, in-person experience unavailable online. Repositioning and construction opportunities exist for investors who pay attention to such trends.

Established in 1953, The Counselors of Real Estate is an international group of high profile professionals including members of prominent real estate, financial, legal and accounting firms, as well as leaders of government and academia. As an organization, The Counselors of Real Estate is objective and does not involve itself in advocacy of any kind. Members are experts in more than 50 real estate specialties.

— Staff reports