Openness to change is the name of the game for the real estate industry heading into 2017, as developers need to be willing to experiment with new technologies and approaches for their businesses.
That's one of the main findings of the PricewaterhouseCoopers and Urban Land Institute annual "Emerging Trends in Real Estate" report for 2017, released last week. The report, which predicts trends for the U.S. through interviews and surveys of industry experts, emphasized the growing importance of economic diversity in communities, the impact of the labor shortage on construction costs, and the positive implications of technology for the real estate industry.
1. The benefits of keeping an open mind
The report authors said the growing trend of optionality, or "not just one use, not just one user, not just one user profile," will shape the market for property owners in an environment of unpredictable tenant demand. Coworking space has become the most prominent example of this optionality trend, as different companies can use spaces in ways that best fit their needs.
PwC and ULI added that optionality in the multifamily sector also offers significant opportunity for developers looking to draw in potential tenants. Some industry experts cited in the report said they have experienced success targeting certain generations, such as millennials, with their building features. The authors emphasized that keeping an open mind when considering possible uses for any property is key for developers and investors.
2. The surging popularity of smart cities and IoT
New technologies are making buildings smarter and more efficient, as they allow owners to track energy consumption, tenant patterns, lifecycle costs and more. Although the real estate and construction industries are traditionally slow to adopt new technology, the report said the building sector is starting to capitalize on the benefits of new innovation and the Internet of Things.
Smart cities, which "gather data from devices and sensors embedded in roadways, power grids, buildings, and other assets," are becoming increasingly popular ways to experiment with the power of new innovations. However, the authors added that poorer cities are often left out of these new technological advancements.
3. Augmented reality poised to disrupt the industry
Augmented reality technology, which imposes a digital image onto the real world through a device, has the potential to benefit real estate professionals seeking to offer clients a realistic image of a space without having to step foot in the building.
In addition to benefiting brokers and potential tenants, AR technology can also aid greater collaboration between builders, architects and developers during the construction process. Although greater reliance on technologies like AR raises cybersecurity concerns, the report authors said they expect the technology will continue to proliferate in the industry.
4. The labor shortage's effect on construction costs and schedules
The skilled labor shortage has plagued the construction industry for years, and its ramifications are seeping into the real estate market as well. As companies struggle to find qualified workers to meet demand, project schedules are longer and costs are higher, according to developers cited in the report.
This labor shortage is the result of millions of workers leaving the industry during the recession, baby boomers aging out of the industry, millennials failing to enter the industry at a quick-enough pace, and immigration trends resulting in fewer workers from Mexico.
The report authors encouraged the real estate and construction industries to ensure that they are creating entry-level jobs that have a clear path to advancement. When younger workers see this potential to further their careers, they will be more likely to choose to enter the industry. Increasing funding for vocational training and apprenticeships, boosting infrastructure spending, and implementing immigration reform that encourages new workers are also potential ways to ease the labor problem.
5. Exclusivity and the danger of "the velvet rope"
The report authors called a problematic trend in real estate "the velvet rope," as growing income inequality and opposition to new development has led to "exclusionary forces" affecting residents of cities and suburbs.
Affluent communities are often averse to change, as many seek to impede new construction and new people from their neighborhoods. However, the report encouraged cities to recognize the benefits of development and diversity because communities have traditionally "grown and prospered by adaptation." The trend away from exclusion to inclusion is more than just a common refrain in politics; it is also a crucial component of real estate.
6. Local governments making moves to improve housing affordability
Limited housing inventory and the resulting lack of affordability for middle-class households are among the top concerns for real estate professionals. The report authors said affordable housing could be either the industry’s "vulnerable flank on the chessboard" or a potential future opportunity, as it represents an underserved yet growing market.
Local governments have launched initiatives to boost affordable housing, largely through inclusionary zoning rules, which require developers to set aside a certain percentage of affordable units in a new property. PwC and ULI said the issue of affordable housing is a long-term challenge for the private and public sectors, especially as growing populations and greater public attention to the problem push developers to find viable solutions.
7. The power of location choice for neighborhood revitalization
More executives are beginning to understand the potential benefits of building corporate campuses in areas that could benefit from neighborhood revitalization, according to the report. Executives referenced the "triple bottom line" of financial, social and environmental benefits of their location choices. Choosing cities such as Cleveland, Raleigh, Oakland and San Diego has resulted in companies being able to draw in new talent to their workforce and benefit from the live-work-play quality of the areas.
However, the authors advised companies to collaborate with local governments when considering a move and major development. When both the private and public sectors work together to ensure long-lasting benefits for the community, they can avoid creating a "company town" and can instead revitalize an area.
8. Recognizing the importance of smaller developers
Although massive skyscrapers and billion-dollar developments typically draw the most attention, the report authors highlighted the crucial role of small and mid-size developers to the broader real estate market. They said that innovation and change often comes from these smaller entities, which have the power to alter the industry from the bottom-up.
The report pointed to the high percentage of small firms in the construction industry as a sign of the potential success of these more niche players. Smaller companies are often more tapped into their local communities and can better meet the needs of the residents, in addition to representing an "ideal laboratory for entrepreneurial innovation," the authors said.
9. Blockchain technology lingering on the horizon
Blockchain, the technology behind bitcoin, is a form of record-keeping that allows users to keep an encrypted register of digital data that cannot be erased or altered. Because of its secure nature, blockchain has been touted as a potentially positive technology for the real estate industry, which must keep track of high-value assets.
PwC and ULI noted that blockchain technology is still in the early stages, with some financial institutions only beginning to experiment with it. However, they said the document-heavy business of real estate is ripe for a new approach, and blockchain could have a hand in that change.
10. Real estate cycle showing no signs of slowing down
PwC and ULI noted that the real estate sector learned valuable lessons from the Great Recession and has taken steps to avoid contributing to the next economic downturn. Experts said this cycle is unique, as it has lasted significantly longer than previous cycles in history, but it also is not in danger of suddenly ending.
The report emphasized that the sector isn't facing any immediate warning signs of an "overheating" in the market. One factor contributing to this tempered pace is construction financing, which experts said has been more difficult to obtain for projects — keeping the market from facing an oversupply situation.