At the recent Reinventing Real Estate Conference, Youguo Liang, PhD, CFA, managing director of Investment Research and a member of the Investment and Management committees of Prudential Real Estate Investors (PREI) expressed his belief that there are ten factors related to the housing market and commercial real estate that are currently influencing the recoveries of both markets. Liang, who stated unequivocally that “from an investing perspective, the worst is behind us” regarding the state of both residential and commercial real estate, places heavy emphasis on demographic analysis when it comes to evaluating the state of the market. Below, we have listed his top ten influences and how they are impacting the real estate sector.
1. Real estate integrates with the capital market.
When bond yields go down, real estate goes down, too – and vice versa. Most experts are predicting growth and there has already been movement in the capital market this year.
2. Developing countries are growing fast.
While U.S. investors will see a continuing need to “go global,” Liang believes that a “global perspective” will help restore the real estate market. However, he emphasized, we must move development and even some investments outside of our borders. By 2020 China and India’s markets are projected to surpass our own, and by 2030 China alone will have a larger market share than the United States. To take full investing advantage, we need a presence in global markets that are growing and emerging today.
3. U.S. population demographics are changing.
Liang noted that when populations stop growing, their real estate markets also tend to slow or stagnate. The United States population is growing steadily and becoming more diverse, in addition to living longer. This increased longevity will lead to greater demand for senior housing and a jobs boost in related careers.
4. Sustainability is becoming more sustainable.
“The green trend is here,” Liang said, adding that commercial buildings use far more energy than more conventional “villains” like SUVs. Green buildings are “simple better places to work and play,” said Liang. This makes green real estate not only a good investment from an economic perspective – most LEEDS certified buildings pay for their green improvements within one to three years – but are currently attracting buyers in this new “era of frugality” because they represent an attractive lifestyle decision.
5. Health care is crowding out other expenditures.
“As we get wealthier,” Liang explained, “healthcare crowds out other investments.” Since 2000, there has been little increase in consumption outside of healthcare costs. This is one of the few negative trends in the list, but it’s a “doozie” because our healthcare costs are set to skyrocket even more dramatically. When you remove healthcare costs from the equation, retail costs could have recovered to 2008 levels within a year.
6. Deconsumption could be cyclical and long lasting.
Largely because of the new “culture of less” people are likely to continue to save more and spend – and invest – less. This could be good or bad news, depending on what sector of real estate you are in.
7. Deleveraging is likely to be long lasting.
While the majority of the signs are good for real estate – residential and commercial – the “deleveraging” of the country as a whole could last until 2018. This does not factor in the national debt; only personal and business debts. Obviously, paying off the national deficit is going to take much, much longer and efforts to do so could impact real estate investing as well. For example, the entire industry will be impacted if the mortgage-interest deduction is altered or eliminated.
8. Large deficits will decrease the country’s economic vitality and limit the flexibility of the government.
This means that some of the other recovery trends could be decelerated, and that public funds, which are often a main source of recovery in the commercial sector, could be limited.
9. The housing market will reinflate – sooner than you think!
“Where there is value,” Liang said, “people will see it and eventually buy it.” This is the most affordable housing market since the 1950’s, and the only thing that is preventing a more rapid recovery is the combination of unemployment and a huge inventory. As an aside, he added that real estate investors should not “write off Florida,” predicting that in the near future the perspective on that state’s real estate will be “180 degrees opposite” from what it is today.
10. Location still matters.
Despite the necessity of “going global,” the United States still has more of the most attractive types of real estate than any other country in the world. Liang specified six facets of location that determine appeal: sun, water, mountains, urban settings, centers of wealth and centers of intellect. “Never write off [real estate] in cities that are centers of intellect and/or power,” he said.