The U.S. commercial real estate industry is currently balancing a host of market disruptors, and the good news is that those forces are no longer shrouded in mystery like they were at the onset of the COVID-19 pandemic. Speaking at the annual ULI Fall Meeting, real estate professionals outlined social inequity in the industry, teleworking, and the population and investment exodus from gateway markets as the main issues that the industry will face in 2021.
The Urban Land Institute (ULI) hosted the discussion at its annual meeting Oct. 14 to a broad spectrum of the commercial real estate industry. Originally scheduled to take place in San Francisco, ULI made the decision to host the event virtually, symbolizing the change that the Washington, D.C.-based organization tackled in greater detail during the panel and in the 111-page Emerging Trends in Real Estate 2021 report. The annual conference concluded Oct. 15.
The theme for Emerging Trends 2021, a joint production between ULI and PricewaterhouseCoopers (PwC), is “Dealing with Certain Uncertainties,” with the caveat that an advancement in treatment or vaccine for COVID-19 would be the top economic influencer for the new year.
Factors to watch in 2021
Social unrest in the wake of the George Floyd tragedy in Minneapolis this summer has brought race relations to the forefront of the national discourse, and the ULI panelists said that commercial real estate has work to do to turn the dialogue into action. The speakers said that the moment of tragedy is translating into a movement that may bring greater representation of people of color in commercial real estate companies, as well as greater resources and activity for minority-owned businesses.
“As a black woman whose consciousness has been occupied by inequity for a long time, what has been giving me so much optimism is that it’s occupying the consciousness of so many more of my majority [white] colleagues as well,” said Onay Payne, equity owner and managing director at Clarion Partners. “It’s no secret that the majority of those in our leadership ranks are not black or Latino or women. I’m pleased with the [initiatives] that our firms are starting to take to change an industry that is predominantly white and predominantly male.”
A buzzword that ULI and PwC catalogued more than any during its 1,687 interviews with real estate professionals to create Emerging Trends 2021 was “accelerate,” as in the economic fallout from the COVID-19 is acting as a catalyst that is fast-tracking trends that were already in place.
The panelists concurred that the most prominent example of one such trend is working from home, which millions of Americans continue to do as the pandemic has not yet abated. Mitchell Roschelle, managing partner of Macro Trends Advisors LLC and frequent Fox News guest, said that companies are not yet going back to the office en masse so working from home is going to be the operating model going into 2021. Roschelle said the commercial real estate industry should not exactly welcome that trend with open arms.
“Businesses know to grow, they have to bring their workforce back together,” said Roschelle, who concluded that the more dense an office environment is the more employees will continue to work from home.
The Emerging Trends 2021 report found that younger employees and those in the lower-income stratum could be at a disadvantage in the long term if working from home continues indefinitely. The report states that young staffers and new hires aren’t gleaning as much knowledge working virtually, and the Pew Research Center found that low-income employees are less likely than their higher-income counterparts to have stable or high-speed internet connections at home.
Rise of 18-hour markets
Perhaps the most compelling trend discussed during the panel and in the written report was the exodus of people, businesses and investment dollars from traditional gateway markets to secondary cities. Emerging Trends 2021 included a map of the United States that highlighted U-Haul migration patterns (see below). Cities that saw net out-migration in the past several months include Seattle, San Francisco, New York City, Boston, Philadelphia, Portland and Los Angeles, as well as other large markets like Chicago, Denver, Las Vegas, Minneapolis and Washington, D.C.
Cities that U-Haul classified as in-migration destinations included primarily Sunbelt markets such as Atlanta, Dallas-Fort Worth, Austin, Raleigh, Nashville and Charlotte, as well as a few others around the country like Salt Lake City, Phoenix, Boise and Indianapolis. The Emerging Trends report has commonly referred to these cities as 18-hour markets to distinguish those from 24-hour markets like New York City and Los Angeles.
Click on the map to view a larger version. (Image courtesy of Urban Land Institute)
“Tech companies like Facebook, Microsoft, Google and Salesforce are going to places like Atlanta because it’s a real city that we expect will continue to grow,” said Chris Lee, partner and head of real estate for the Americas at KKR.
Panelists at the ULI Fall Meeting said that the recession-inducing pandemic also accelerated the urban exodus trend as gateway markets for years have become increasingly cost-prohibitive, both in terms of living expenses for their employees and the corporate tax burden. Additionally, Sunbelt states for the most part reopened earlier than states in the West and Northeast following government shutdowns in March and April to stop the spread of COVID-19. Companies like Tesla cited that factor as a prime reason to relocate its operations from California to Texas.
Sonny Kalsi, CEO of global real estate investment and management firm BentallGreenOak, said his company is overinvested in the gateway markets and is looking to invest heavily in Sunbelt markets like everyone else in 2021, but he advised against doing so too heavily.
“If companies were to pull out of those coastal markets and reinvest in the Sunbelt wholesale, they will regret it,” said Kalsi, who still believes in the draw of the gateway markets.
Every year the Emerging Trends report features a roundup of top cities for growth prospects in the commercial real estate industry, and the 2021 list is indicative of the urban exodus trend that ULI and PwC are forecasting. Strong population growth, the homebuilding outlook, affordability and job prospects are driving demand for this year’s list, which includes:
1. Raleigh-Durham, N.C.
2. Austin, Texas
3. Nashville, Tenn.
4. Dallas-Fort Worth, Texas
5. Charlotte, N.C.
6. Tampa-St. Petersburg, Fla.
7. Salt Lake City
8. Washington, D.C./Northern Virginia
9. Boston
10. Long Island, N.Y.
Raleigh-Durham has been a rising market in the Emerging Trends report the past few years. Among other 18-hour cities in the Sunbelt, Raleigh-Durham stands out largely because of its trio of research colleges — Duke University, University of North Carolina at Chapel Hill and North Carolina State University — as well as the largest research park in United States, Research Triangle Park.
Raleigh-Durham and similar markets in the top 10 should be the beneficiary of greater family formation among millennials and flexible work-from-home policies going into 2021, according to the report.
Emerging Trends 2021 includes interviews and survey responses from real estate professionals, including investors, fund managers, developers, lenders, brokers, advisers and consultants.
Byron Carlock Jr., the U.S. real estate practice leader at PwC and moderator of the Emerging Trends panel, said that this year’s report reflected the sea change evident in all walks of life.
“Historically this presentation has focused a lot on market activity, as in ‘Who’s the top market? And why is it the top market?’” said Carlock. “That is not the case this year. We have to look at everything thematically. What are we doing different and where are we going?”
— John Nelson