Scarcity of labor, affordability, and market trends shaping the coming year in real estate

Due to Brexit and recent political changes there are fundamental changes occuring and the U.S. is currently a safe haven and investment opportunity. According to the Urban Land Institute’s annual Emerging Trends in Real Estate Report, our country shows a more favorable outlook than much of the rest of the world.

Calm Period

After cataclysmic economic disruption triggered by the foreclosure crisis, it seems the real estate market has entered a prolonged period of calm. According to the report, this current business cycle—which at 85 months has been much longer than average—has entered a “mature” phase. It’s been smooth waters for a while, and seems poised to stay level.

Real GDP growth has hit an unremarkable but steady 2 percent per year and the Federal Reserve doesn’t want to “take away the punchbowl” and raise interest rates. But, there are signs of a development slowdown, due to difficulties securing construction financing, and the amount of capital looking to pick up core properties means pricing has dramatically risen. Overall, investors are looking to avoid risk, even more than normal. While this has led to calmer seas, one investor quoted in the report said they’re at the “white knuckle phase” of the cycle.

Optionality

With the market flocking to safe bets, it makes sense that developers and investors are seeking flexible, multi-use projects. Buildings that can be adjusted to satisfy multiple tenants and changing neighborhoods lets owners maximize rent and seek the highest and best use.

The report cited a Fortune 500 company that entered into a flexible lease akin to coworking to house many of its staff. The owner now gets solid cash flow, and can backfill space when the opportunity arises. It’s an example of the coworking trend writ large, and the potential of those type of arrangements to turn aging buildings into productive office space is incredibly tempting.

Keeping open to the shifting winds of the market, as well as the societal changes wrought by the sharing economy seems like sound investment, especially in the residential sector. As one investor said: “Jobs are no longer careers, and millennials are not yet looking for the commitment of owning a home. They are footloose in the job market, and footloose as to roots in the community.”