Top Ten Issues Facing Real Estate Today: Beaches, Batteries and Baby Boomers

Good morning! Well, it was morning when I wrote this in Atlanta here at the National Association of Real Estate Editor’s spring conference where we are hearing from Real Estate experts from across the country, rubbing shoulders with fellow real estate journos and bloggers from the four corners of the U.S. I love this stuff, so I’m basically sharing rambling notes. If there is one nugget I am taking away from today’s session, it is this: real estate values are headed up because, well, for a whole lot of reasons but mostly because we didn’t build enough housing units during the depression recession. Beach homes will always retain their value (and I still want one). Oh and go buy a generator for your home! Here’s the overview from this morning’s sessions:

From Howard Gelbtuch, chair, The Counselors of Real Estate in Chicago and New York: Yes, internet retailing has reduced the demand for physical stores and reduced the square footage retail tenants need. But at the same time, some shopping centers and malls —-remember they are being cannibalized by young shoppers who loaf there but buy on the internet– are retrofitting big box stores and subdividing into smaller retailers. More attention is focused on making shopping “an experience” — great example right at the intersection of LBJ and Preston with the transformation taking place at the old Valley View Mall, now called Midtown.

Traditional office space is shrinking. Sophisticated technologies and unconventional workplace models are shifting the way younger workers think of the office. Increasingly, they are comfy working on their laptops or phones in coffee bars o at home. Predictions are that by 2030 the majority of workers will be independent contractors who may not need any office space,  so companies are whittling down square footage allotted per employee.

We love the BRICS: US investors are focused on these hot emerging markets where the potential for large returns exists. The U.S. is increasingly a place where foreigners “park money”, as we are considered a great place to park money safely. Don’t underestimate Africa, it’s where China was 20 years ago. The consumer class is driving these markets. But don’t think a U.S. clone is a shoe-in: the Home Depot was not successful in China because they have way too much cheap labor, they are not do it yourselfers as we are.

Implications of natural gas and reserves. New exploration/excavation technologies are creating an economic boom in the US in some surprising places. (I was chuckling through this slide, like no duh!) Natural gas exploration is not without risk or cost or ecological fallout. But did you know more oil is being produced in North Dakota than California?

Echo Boomer housing demand is all changing: The 80 million kiddos born between 1982 and 1995 are growing up. Unlike their parents, us, they are willing to trade size of home for location — buying smaller square footage, and loving multi-family. My daughter just moved to Hollywood Heights Santa Monica. There, she says, people don’t brag about how big their home is but rather how historical it is! Real estate choices are location driven, urban and smaller. If your city doesn’t have a Japanese restaurant and gay bar you are toast. The suburbs where boomers grew up are fighting back with better mass transit. I call BS on this in regard to this word: schools. In Dallas, many young families do eventually head for the ‘burbs in search of better publica education.

Climate change and coastal properties markets…. again, preaching to the choir here as our neighbors were just tornado slammed. Superstorm Sandy put people out of their homes for weeks at a time. Experts predict weather patterns will be more extreme… there will be an increased emphasis on fiscal and physical preparedness. Manhattan is still not fully recovered from Sandy, and some reas may lose property values. Look for governments to plan for more turbulence like potential flooding in the future, which could impact investment in infrastructure.

In 2013, the potential for a world-altering event with major consequences for real estate is so high, it ranks as a top ten issue without even having yet occurred.

The capital market is coming back. Debt markets have fallen in love with real estate again, and more money is pouring into the industry. Loan to value rations are increasing, and there is a loosening single family REITS thanks to the appreciation of single family homes. Some are concerned that money may get too easy again and we will be all deja vue.

Health Care will affect real estate, as demand for medical services and facilities increases and demand for senior housing will increase. The increased burden of everyone paying more for health care will affect young buyers already strung out by student loan debt.   “A student loan debt is a mortgage without a house,” said Howard. Interesting way to think about it.

Home price progression: home sales driven by employment. Some markets are raging, driven by oil and gas… hello, Texas. In Atlanta though, investors actually drove up the price of local real estate so much that price per square foot of REO’s got higher than psf price of regular re-sale inventory.

Interest rates are so low they cannot go lower. If interest rates rise as the economy improves, could lead to cap rate decompression.

Residential inventory is a problem, especially in California. Buyers with 50% down cannot buy a home. Lots of cash buyers in these markets. FHA first time buyers are getting killed. The experts at this conference do not think this bubble is sustainable… the public usually lags behind markets.

“The markets started coming down, sellers were the last ones to get the memo.”

We have moved from a six month supply to two month supply of inventory, and sellers are going to catch on. Inventory will come on the market sometime later this year and slow that down. Builders are coming back in.

Take-away: REITs will be investing in more single family homes, lack of inventory is driving the current sales madness and pushing up prices, more inventory may cool the madness later this year. The U.S. housing market is strong. High appreciation is short term, but market fundamentals are solid, as long as the government doesn’t push homeownership for everyone. Roughly 30% of homes in the U.S. have no mortgage. In general, the home ownership rate has been in the 60% range. It got in the high 60% range during the boom pre-recession. There are roughly 80 million owner occupied properties in the US and about 55 million have mortgages.

Ha and I love this: People still want to live on the water. Even with hurricanes.