2016 Akerman U.S. Real Estate Sector Report
Contents “R� is for Reset
6
Megatrends
22
Forecasts of the Future
28
Survey Methodology
32
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The Akerman U.S. Real Estate Sector Report provides insights on the economic conditions affecting the U.S. commercial real estate market. Akerman clients and other top real estate executives across the United States contributed through one-on-one interviews as part of an annual Akerman Survey. Since 2010, the Akerman Survey has captured the perspectives of industry executives to provide a view from the C-suite, highlighting a number of market indicators including capital availability, investor trends, and key drivers of growth. Akerman is a leading transactions and trial law firm serving clients across the United States and Latin America. Recognized as a national tier-one law firm for real estate and construction law by U.S. News – Best Lawyers (2016), the firm offers substantial industry experience and local market insights. Akerman’s professionals manage the legal aspects of large land deals and major construction projects, assist developers in meeting environmental regulations and green building standards, conceptualize and obtain development incentives, advise on all aspects of transactional work, including leasing, acquisitions, sales, and financings, and represent clients in litigation matters. With more than 600 lawyers and government affairs professionals, and a network of 20 offices, Akerman is ranked among the top 100 law firms in the United States by The American Lawyer (2016) and is known for its core strengths in middle market M&A, within the financial services and real estate industries, and for a diverse Latin America practice.
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“R” is for Reset
The State of the U.S. Commercial Real Estate Market In economic forecasts as of late, there has been a fairly brisk trade in metaphors of telemetry – and the tendency for things that have been soaring upwards to come back down again. Indeed, after a six-year run of recovery there is a measured tone of cyclic expectancy – that markets inevitably rebalance themselves – and a gathering sense that a slowdown is inevitable. Even under a conservative lens, the economic evidence suggests that the United States is cycling toward a gradual and orderly period of diminished expectations.1 Even now, many are anticipating the next “up-cycle.” “Any time you have extended growth periods,” notes Stephen Owens, president of Swire Properties, “ultimately there needs to be a reset – a rebalance of supply and demand – and these moments in economic cycles are actually very strategic for us.” Owens, a thirty-year veteran at Swire, who has presided over the development of the transformational Brickell City Centre mixeduse project in downtown Miami and whose work has encompassed some $3 billion in projects in Florida, Hawaii, Texas, and Hong Kong, is used to taking the long view of markets and doesn’t see anything alarming in the recent indicators. “Any time there’s a reset in the market,” says Owens, “that’s an opportunity.” If there is to be a “softening” or a “slipping” of economic fundamentals, the good news seems to be it won’t manifest itself into another recession. All signs point to a gradual decline of property fundamentals, with a reset telemetry that seems, by all accounts, controlled and orderly – but nonetheless contingent on further global disruption that has yet to play out. If the International Monetary Fund and the World Bank, for example, have projected a 3.2 percent global economic expansion for 2016, it’s a forecast that is “more disappointing than worrisome,” according to one observer.2 And if the IMF has downgraded its forecast for U.S. economic growth by 0.2 percent, to 1.9 percent (from 2.1 percent), that lowering of expectations is still fairly sunny compared to the rest of the world.3
“Any time you have extended growth periods, ultimately there needs to be a reset – a rebalance of supply and demand.”
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Which best describes your sentiments for the U.S. real estate market throughout 2016?
32%
Marginally more optimistic than 2015
31% No change
30%
Marginally less optimistic than 2015
6% Significantly more optimistic than 2015
2% Significantly less optimistic than 2015
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“Nattering Nabobs of Negativism” Strong Fundamentals Continue Against the backdrop of an economic reset-in-the-making, we are seeing a split-screen forecast for the U.S. real estate marketplace. The “nattering nabobs of negativism” are out in full force again in the financial world. Headlines portray a deep pessimism about the direction of the economy. But seasoned real estate executives who have seen the hills and valleys of multiple cycles have a stoic attitude about the market and feel the slowdown is a sign of a healthy market correction. As we come off an almost-record year of U.S. commercial real estate transaction volumes, an overwhelming 92 percent of real estate executives had little or no change in their optimism compared to last year, according to the 2016 Akerman U.S. Real Estate Sector Survey. One Akerman Survey respondent said, “The talk about a recession [from financial pundits] is more based on the extended run of the economy since the last recession, rather than any real strong market indicators that would point heavily in that direction.” Indeed, strong fundamentals have contributed to continuing positive movement in 2016. Low interest rates (37 percent) and continuing improvement in the U.S. economy (28 percent) are two primary factors instilling investor confidence, according to the Akerman Survey. The gross domestic product (GDP) is poised to grow by 2.5 to 2.8 percent by the end of 2016, which is expected to generate new U.S. jobs and steadily improve worker wages.4 Nearly half of respondents (48 percent) believe the unemployment rate will remain steady, keeping money in consumers’ pockets through the end of the year. Distressed properties are less common, there is a significant amount of equity capital investment available, and tighter vacancies are leading to higher rents. A large majority of respondents (87%) felt that the 10-year U.S. Treasury yield would stay within 2-3 percent by January 1, 2017, but further global disruption has helped fuel the dramatic drop over the course of 2016. As we get deeper into the cycle, investor focus will shift from yield motivation to capital preservation.5 They will be less willing to take real estate risks. Many will start to prune their portfolios and pursue longer-term investments to prepare for what may come when the cycle ends. But the slowdown we’re already starting to see isn’t a reaction to fear; rather, it is evidence of disciplined and responsible growth at work. “As we enter a new phase of the economic cycle, discipline is paramount for market participants at a time of record-high asset prices,” notes Akerman’s
“Discipline is paramount for market participants at a time of record-high asset prices. Smart dealmakers have already shored up their balance sheets and become a lot more diligent and strategic when it comes to capital expenditures.”
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Which of the following is your primary reason for confidence in the U.S. real estate market? 37%
Low interest rates
28%
Continuing improvement of the U.S. economy
21%
Availability of equity capital investments
8%
Loosening of credit requirements for financing
6%
Increased investment in secondary and tertiary markets
Which of the following is your primary reason for any lack of confidence in the U.S. real estate market?
47% Uncertainty in economic conditions
23% Federal gridlock and uncertainty of government policy
11%
10%
9%
Potential for real estate defaults from maturing loans
Interest rate uncertainty
Pace of recovery for fundamentals in core sectors
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Richard Bezold. “Smart dealmakers have already shored up their balance sheets and become a lot more diligent and strategic when it comes to capital expenditures, and so have many in the investment community.” In last year’s Akerman Report we stressed that the real estate sector continues to demonstrate lessons learned from the 2008 downturn. More discipline in the way capital is chasing opportunity indicates the market is on sounder footing than it was before the last cycle.
Steering Through the Turbulence Expectations and Market Realities With the next phase of the real estate cycle coming into view, investors will have more questions and difficult decisions as they steer through uncertainties in the capital markets and an uneven global economy. An investment analyst at Investing Daily says, “The investment road from here requires vigilance, not undue fear. As long as the economy continues to exhibit momentum, you can still find reasonably valued opportunities with plenty of upside left. In the meantime, you need to brace yourself for any bumps along the way.”6 Cascading world events like Brexit, China’s economic slowdown, turmoil in the Middle East, low oil prices, and volatility in the stock market are top of mind for sector executives. Forty-seven percent of Akerman Survey respondents cited uncertain economic conditions as the most pressing issues affecting the real estate sector in 2016. “There is a lot of uncertainty in global markets, particularly developing markets,” says one Akerman Survey respondent. “We have seen significant devaluation in a lot of commodity currencies in Latin America, China, and Russia, and how that may impact the U.S. economy if there is a contagion effect. That is a principal concern.” Even amid these global concerns, one Akerman Survey respondent notes, “I don’t see this issue with the domestic outlook. The U.S. economy is fairly settled and growing at a slow, steady pace, but all of this other uncertainty is being injected into it.” President and chief executive officer of Florida East Coast Industries, Vincent Signorello adds, “even with slowed growth, the United States still has the best property system in the world and our commercial real estate holds the top spot across global capital markets.” The lack of systemic leadership or policy in Washington, D.C., may also cause certain investors to keep their powder dry in 2016. More than a quarter
“The United States is still the best property system in the world and U.S. commercial real estate is very much at the top of the pile for the world’s capital markets.”
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of executives (27 percent) cited federal gridlock and uncertain government policy as the second most significant factor affecting the real estate sector. One Akerman Survey respondent quoted Richard Fisher, the former president and CEO of the Federal Reserve Bank of Dallas, who said, “interest rates at zero are not effective without an economic policy.” Others echoed frustration with an anti-investment environment and the lack of government guidance on regulations.
“The cost of compliance with several new regulations is going to filter through investments and cause some rate shifts.”
Many investors are watching the Highly Volatile Commercial Real Estate (HVCRE) rules under Basel III. Non-traded REITs are also facing significant regulatory hurdles under the new FINRA Rule 2340, while foreign buyers must follow changes within the Foreign Account Tax Compliance Act (FATCA) and the Foreign Investment in Real Property Tax Act (FIRPTA). The Financial Accounting Standards Board (FASB) ASC 840 recently introduced changes to accounting for lease agreements. Eyes are also on the EB-5 Regional Center Program, which Congress extended until the end of September 2016.7 But the greatest regulatory uncertainty comes out of the Dodd-Frank risk retention rule on the CMBS market, which is expected to have a ripple effect on lending and pricing. “You cannot regulate risk away,” says an Akerman Survey respondent. “The industry cannot plan without knowing what is going to happen next.” Akerman’s Jane Hinton cautions, “The cost of capital is rising, relative to the new risk profile. Investors have benefited from a very low interest rate environment, but the cost of compliance with several new regulations is going to filter through those investments and cause some rate shifts.”
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Do you think U.S. job creation numbers at the end of 2016 will be:
3% Significantly lower than in 2015
16%
2% Significantly higher than in 2015
Marginally lower than in 2015
31%
Marginally higher than in 2015
48%
About the same as in 2015
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Which of the following trends do you predict will have the most significant impact on U.S. real estate development over the next three years?
29%
34% Aging population
Preference for city living and more compact development
14%
Changes in office mobility, collaborative spaces, and next-generation workplace design
15%
Effect of technology on real estate
4% Industry response to environmental concerns (including climate change and sea level rise) on development practices
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Top Investment Target Expanding Capital and Funding Sources The U.S. commercial real estate market is in a favorable position compared to other investment alternatives. This asset class has the strongest resistance to market volatility, attracting a deeper and wider pool of capital and investors. U.S. commercial real estate totaled a near-record $5.18 trillion last year, including $3.54 trillion in debt-based investment properties and $2.64 trillion in equity-based institutional properties.8 According to sector data, the number of unique buyers of U.S. commercial real estate is expected to hit an all-time high for any single year. By the fourth quarter of 2015, they projected the total to reach 18,800, breaking the record of 17,825 unique buyers in 2014, which begs the question: Who are these new buyers?9 According to the Federal Reserve, banks held 49 percent of the total real estate debt universe in 2015. Private equity investors led 43 percent of the institutional equity market.10 Forty-two percent of Akerman Survey respondents said private equity would continue to drive real estate financing over the next year, followed by banks (37 percent). Akerman’s Steven Polivy said, “We are seeing a return of the traditional lender. Whereas a number of years ago you would have trouble securing construction lending from a conventional consortium of banks or insurance companies, now you’re seeing those lenders back in the market and back in the most secure part of the capital stack. So if you need a construction loan, the first 50-65 percent of your loan to value will have a number of traditional lenders vying for that position. As you get to the balance of the capital stack, that’s where you’re seeing either the hard money lenders, the foreign investors, or the private equity funds filling the gaps.” Foreign buyers were a significant source of capital acceleration in 2015, investing in commercial real estate at prices and volumes never seen before. From sovereign wealth funds and insurance groups, to ultra-highnet-worth individuals, international capital sources spent a total of $91.1 billion on commercial real estate last year — more than double the amount spent in the prior year.11 We saw a number of historic transactions, including the $1.95 billion purchase of the Waldorf Astoria Hotel in New York City
“Within the first quarter of 2016, overseas buyers invested a total of $19.1 billion in commercial real estate assets.”
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Which do you believe will fund the most commercial real estate debt and/or equity throughout 2016?
2016 2015
Private Equity
Banks
REITs
Insurance Companies
Foreign Investors
Pension Funds
CMBS Market
Government Entities
Crowdfunding
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by Anbang Insurance Group in China, the highest price tag ever for a U.S. hotel, according to Reuters. Foreign investor commitment to the U.S. is expected to stay strong as they continue to diversify their acquisition activity across property types and into more secondary markets. Within the first quarter of 2016, overseas buyers invested a total of $19.1 billion in commercial real estate assets. Top New York City real estate executives also point out that New York City and London have long competed for the same international real estate investment dollars, and Brexit could direct more money to the United States as investors seek out safety. Brexit has created uncertainty in this regard.12 Twenty-seven percent of industry executives believe foreign capital will remain a main source of real estate financing throughout 2016. However, with heightened regulations and other external forces affecting the real estate market, we may see a change of characters. A third of industry executives think REITs and insurance companies will be the top funding sources this year. Some predict bank interest rates will become more competitive in the lending environment, particularly as the CMBS market practices greater caution with the Dodd-Frank risk retention requirements going into effect later this year. Non-traditional investment vehicles will also continue to expand at significant rates. Pension funds, for example, are increasing their real estate capital allocation. More non-regulated private equity money will likely enter the U.S. real estate market as well.
Slow and Steady Growth Sustained Sector Strength While commercial real estate transaction volume has remained modest in 2016, capital flows will continue across property types. More than half of executives (59 percent) believe multifamily will continue to be the most active real estate sector. At least 57 percent agree apartment development will drive multifamily activity, compared to senior living facilities (23 percent), affordable housing (11 percent), and condominiums (9 percent).
“More than half of the Akerman Survey respondents expect China will be the dominant source of foreign capital in four out of the six core real estate sectors.�
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Executives predict single family homebuilding will be the second most active real estate sector (18 percent), followed by industrial (7 percent), office (6 percent), retail (6 percent), and hospitality (3 percent). Four in 10 executives say multifamily will attract the most foreign investment, with the majority of capital coming from Latin America. Despite currency depreciation, Akerman Survey respondents believe investors from the Latin America region will lead debt and equity funding in the single family homebuilding sector as well. Nearly a third (31 percent) anticipate the greatest increase in Latin American real estate investment in the United States will come from Brazil (42 percent). More than half of the Akerman Survey respondents expect China will be the dominant source of foreign capital in four out of the six core real estate sectors: industrial, hospitality, office, and retail. To a lesser extent, investment in commercial real estate is also expected to come from Canada, Europe, and the Middle East.
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How do you expect cap rates to perform for 2016 in the following market segments?
No Change
Decrease
Increase
48%
13%
39%
59%
13%
28%
44%
13%
43%
52%
11%
37%
42%
20%
38%
Hospitality
Industrial
Multifamily
Office
Retail
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“Investors seem to be willing to pay at a premium…When cap rates increase, cash flows will change in kind.”
Changing Destinations By the fourth quarter of 2015, the pace of price increases slowed, suggesting that values and prices will begin to level off this year.13 But with unprecedented amounts of offshore investment dollars entering the U.S. commercial real estate market, is it possible for prices to increase further in this cycle? At least 40-60 percent of Akerman Survey respondents say cap rates will not change from current levels in each of the core real estate sectors. Slightly fewer think rates will increase. “There is so much money chasing core real estate assets and it has driven prices upward,” said one Akerman Survey respondent. “As the competitiveness for real estate assets continues to grow, investors will make decisions to acquire property that are outside of economic fundamentals.” “Cap rates are really aggressive,” another Akerman Survey respondent noted. “Investors seem to be willing to pay at a premium. There is urgency based on the low interest rate environment. When cap rates increase, cash flows will change in kind.” Trends indicate that U.S. investors are leaving trophy assets to their foreign counterparts who are willing to take a much lower yield. As the market matures, we see much greater appetite to invest in smaller markets than in the past. “We are seeing a number of significant investors waiting for the right offmarket deal,” says Akerman’s Eric Rapkin. “The greatest opportunities are creative new segments in the secondary and tertiary markets.” This idea of the “Great Reset” is then a necessary and beneficial process that nurtures a well-balanced environment for commercial real estate. Headwinds, yes, but there will also be huge pocket markets exploding in burgeoning mega-zones and dynamic tier two cities, expansion and innovation in many real estate sectors, and a marketplace that is thinking ahead to the future of urban mobility and sustainability. Promise and major trends are emerging in a period where agility and innovation thrive.
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Which of the following do you predict will be the most active market sectors for foreign investment in U.S. real estate?
Multifamily
Hospitality
Office Single-family Residential
Retail
Industrial
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For each of the active market sectors mentioned, which of the following will contribute to this activity?
Multifamily
Latin America China
Hospitality
Latin China UAE America Europe Canada
Office
Latin China Europe UAE America Canada
Single-family Latin Residential America
China
UAE
Europe
Europe Canada
Canada
UAE
Retail
Latin China Europe America UAE
Industrial
Latin China UAE America Europe Canada
Canada
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In 2016, from where will we see the greatest increase in Latin American real estate investment into the U.S.?
31% Brazil
29% Mexico
16% Other Nations
13% Argentina
11% Venezuela
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In 2016, into which country do you expect to see the greatest increase of U.S. investment into Latin America real estate?
32% Cuba
19% Mexico
14% Brazil
* 35 percent of responses were comprised of other nations. Top responses included Argentina, Panama, Colombia, and Venezuela.
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Megatrends
The Short View While many variables will determine the course of the U.S. real estate market, there are three megatrends executives believe will have the most impact on short-term real estate development.
Generation-Specific Housing Thirty-four percent of Akerman Survey respondents believe the aging population will have the greatest effect on real estate development. The ranks of those age 65 and older are swelling by the thousands each day, with the potential to reach 71 million by 2030. Developers have responded with a significant increase in senior housing development. In 2015, transaction volumes reached 514 deals totaling $18.7 billion, exceeding 2014 figures by nearly $1 billion.14 Although showing early signs of slowing activity, there are a number of senior housing units under construction. Like other segments of the real estate market, we are starting to see a healthy balance of supply and demand trends. The ability to secure financing appears to be top of mind for these developers, particularly in certain sub-sectors. Last year we noted that because of the specialized nature of assisted living and memory care, developers with a qualified track record will have the greatest success in this housing boom. But the number of lenders with experience in this space is fairly limited compared to other real estate sectors, and those that have recently entered the space are challenged with navigating layers of complex regulation. According to sector data, healthcare REITs have expanded and diversified in recent years but government policies are putting financial pressure on specialized care facilities, such as skilled-nursing and post-acute care, which has prompted the largest REITs to focus on private-pay facilities.15 Because assisted living is tied to healthcare, this space remains an attractive option for banks, which continue to exercise vigilance and tighter lending standards. In addition, financing for senior housing from the U.S. Department of Housing and Urban Development (HUD) continues to decrease. Loan volume dipped 53.4 percent since HUD’s record total in 2013.16
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Which of the following do you believe are the most significant factors affecting the real estate industry right now?
Uncertainty in economic conditions Rise in purchase prices or reduction in cap rates
34%
Interest rate uncertainty
17% Federal gridlock and uncertainty of government policy
16%
9% Availability of institutional credit
7%
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As a result, developers continue to look for creative avenues to finance new construction. Alternative funding sources such as crowd-funding and private placement may soon become commonplace. Others operating in the space have found value in the bond market and the EB-5 Immigrant Investor Visa Program.
Co-Urbanism Twenty-nine percent of industry executives say changing lifestyle preferences in a compact city center will have the most significant impact on real estate development. Along the same lines, some believe office mobility and collaborative workplace design are key trends shaping the next iteration of buildings and spaces. “Macro changes in our society are shifting the pace of real estate development. Industrial is changing in tandem with population needs. Office development is driven by co-working trends. Retail is changing as the overall shopping experience is evolving,” says Akerman’s Cecelia Bonifay. “In particular, the rise of omni-channel marketing means retailers must combine all possible purchase channels for clients in one single solution at the intersection of physical and digital spaces.” From urban projects to suburban town centers, the next phase of the Live/ Work/Play life-stage trend is not really about baby boomers or millennials, it’s about a societal shift to a sharing economy. Peer-to-peer companies like travel-sharing EasyNest, car-sharing Bla Bla Car, or clothes-sharing Rent The Runway, are creating this burgeoning new society. Real estate will evolve to keep pace with these new norms and technology will play a large part. Responses to the Akerman Survey indicate that executives are seeing a shift. “Connectivity expectations are evolving,” says one executive. “In financing, we already see peer-to-peer lending through crowdfunding platforms,” says another. In an economy where ‘ownership’ is a redefining concept, leasing commercial space may need to pull a page out of the WeWorks-of-theworld playbook. Tenants will demand more flexible space and shortterm accommodations, which will affect costs. They may require unique arrangements for flex space to meet peak demands or special projects. The sharing economy could also revolutionize the location and use of public spaces, such as parks, as an access-point for car and bicycle sharing.
“Macro changes in our society are shifting the pace of real estate development.”
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Which of the following market sectors do you predict will be the most active for real estate transactions?
3%
6%
6% Office
Hospitality
Retail
7% Industrial
18% Single-family Residential
59% Multifamily
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Within the multifamily sector, rank which of the following areas you predict to be most active? 57%
Apartment Development
23%
Senior Living
11%
Affordable Housing
9%
Condominium
60
50
2016
Sector Activity Prediction Comparison
2015
40
2014 30
20
10
0
Multifamily
Office
Hospitality
Retail
Industrial
Single-family Residential
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Cyber Risk in Real Estate The real estate sector has historically viewed itself outside the bubble of cyber security. But with increasing automation of systems and linking sources of information through the “Internet of Things,� the exposure to cyber risk continues to accelerate for all sectors. Most insidious among them are ransomeware attacks, in which malicious software freezes computer files until a ransom is paid. Other attacks are designed to shut down and manipulate systems, or seize valuable, sensitive information. The string of interconnected data between tenants, service providers, property owners, and their facilities can lead to significant losses and liability, including the costs to replace a compromised system. This can also quickly spiral into costly and reputation-damaging government enforcement actions and litigation exposure. These are among the reasons why industry executives (15 percent) ranked the effects of technology as one of the most significant factors impacting real estate. Real estate companies need to develop a security and privacy framework as they embrace and adapt more technology. From smart grids to intelligent office buildings and increasingly automated retail complexes, developers and property owners also need to think about the safety of the reams of data stored from customers, residents and tenants, and many others. As part of their risk mitigation strategies, the security maturity of a particular property, and potential for data loss, should also become a bigger priority when it comes to due diligence and deal-making.
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Forecasts of the Future The Longer View What is the next interesting chapter? As global forces prompt investors to increasingly take a longer-term view of real estate opportunities, this section will attempt to envision the future market, making early predictions that may manifest by the year 2020 or beyond.
Potential in Cuba The Akerman Survey captured a historic first when it comes to U.S. investment overseas. For the first time, the majority of industry executives (32 percent) predict that Cuba’s burgeoning real estate market will present the greatest opportunities for U.S. investment in Latin America. This number is higher than the usual powerhouse markets, such as Mexico (19 percent), Brazil (14 percent), Argentina (9 percent), and Venezuela (2 percent). The unprecedented response follows the gradual rapprochement between the United States and the island nation, after the White House announced plans to normalize relations in December 2014. Since then, the Treasury and Commerce Departments have enacted four rounds of regulatory openings for American businesses to enter the Cuban market. The process also has included the country’s removal from the State Department’s list of countries that sponsor terrorism, followed by the reopening of respective embassies in Washington, D.C., and Havana. Between those events and the 2016 presidential visit to Cuba, an uptick of travel, investment, and commerce has made many real estate investors eager to jump into the land rush. But Americans are still banned by the U.S. embargo from buying or selling property on the island, and the Cuban government generally does not allow foreign ownership of land. Only in the last five years has the government allowed an emergence of a real estate market by permitting its local Cuban nationals to own up to two properties. While the real estate market is closed to foreign investment, there are some exceptions. We have seen joint venture cases in recent years to manage Cuban-owned enterprises. Starwood, for example, was recently approved by the Office of Foreign Assets Control to pursue a business transaction in Cuba, making it the first U.S. hotel chain to have a presence on the island in nearly 60 years. Marriott International also announced its intention to develop a hospitality relationship with potential partners. This is a situation where the market forces and interests are ahead of
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the law. Many foreign companies are circling around proposed sites and building relationships with prospective partners. U.S. investors who want to be first entrants in Cuba are also making headway now. If the Cubans want to develop on an industrialized scale, they are going to have to build a system that allows capital to protect its investment.
Post-Brexit The Brexit victory is indeed unexpected, causing an initial shake up in the investment world. While Brexit by itself may have a significant effect on the U.K. economy, it is probably not going to have a direct impact on the United States – but global economic conditions will. The geopolitical, economic, and global financial market uncertainty resulting from Brexit may extenuate some trends that were otherwise already affecting the U.S. economy and real estate markets across the nation. These uncertain conditions should result in an influx of European and British investors entering the U.S. commercial real estate market, particularly in gateway cities like New York, Miami, and Los Angeles, since these markets are in a favorable position and maintain the strongest resistance to market volatility. Real estate executives are already seeing a deeper and wider pool of foreign investors than ever before, and this referendum will be a significant driver of capital acceleration to the United States. The good news is, as the bond market forces interest rates down further, real estate markets generally will benefit. Some say U.S. equity REITs are the power play for investors. According to the National Association of Real Estate Investment Trusts, equity REITs are currently generating dividend yields of 3.7 percent and 11 percent earnings growth on average. Reports have noted that with the 10-year Treasury hovering below a surprising 1.5 percent, U.S. REITs may offer investors a stable haven to park their cash and generate returns while they wait out the Brexit upheaval.17
The Green Rush The early years of legal medical marijuana have revealed the opportunities and challenges of this newest emerging commercial real estate market. Twenty-five states, plus the District of Colombia, have legalized select forms of marijuana, and Canada is trying to fast-track its recreational use. As more states legalize marijuana, its impact on the real estate market will continue to spread. For now, industry players and observers are focused on consistent priorities.
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The interplay between federal and state laws continues to shift, and property owners need to be keenly aware of the local laws that may restrict the production or distribution of legal marijuana. The federal ban on the substance also places owners at risk of losing their property. From core production to ancillary businesses, it is still difficult to obtain commercial loans and other funding, and most business transactions are done on a cash basis, which raises security concerns. Whether in the retail or industrial sector, the limited availability and increasing value of property are additional risk factors influencing investor decision-making. However, there is growing demand for extracted products in the form of wax, oils, edibles, and creams – a trend that is driving retail sales, tourism activity, and a movement of millennials to live and work in city centers where marijuana is legal. This will likely lead to more development across all asset classes and attract an uptick of real estate investors.
Generation Z A lot of conversations regarding the demographic shift and Live/Work/ Play lifestyle trend in recent years has centered on the influence of aging millennials and baby boomers on real estate development. In the not so distant future, today’s teens, or Generation Z, will be entering the workforce with a new set of interests and demands that will reshape the next wave of development. By 2019 it is estimated that more than 30 million of this post-millennial generation will be employed.18 Those born in the early-2000s grew up post-9/11 and during the Great Recession – a time of uncertainty and vulnerability – setting the stage for a new set of attitudes and expectations for life. Their media consumption habits differ from previous generations, giving them a different sense of socialization and boundaries. Amid a constant hum of pressing social and environmental issues, this generation is also more aware of their role in the world as part of a larger ecosystem and focused on ways to improve it. Many environmental issues will affect real estate development in the near future, especially for trends that are starting to gain more scrutiny, such as the impacts of global warming and sea level rise. “There’s no question about global warming and seal level rise, the science is clear,” says Akerman’s Neisen Kasdin. “You must have some public leadership in all cities affected, like Miami Beach is showing, and it must be across all of our government constituencies to be effective.” As another important characteristic, these digital natives are the first cohorts to grow-up entirely during the age of the Internet, smartphones, and social media, building one of the most capable generations to achieve advanced technology innovations and the entrepreneurial dream. Between 50 to 72 percent want to run their own start-up company instead of work for an established business.19
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These traits illustrate that technology and green building will be key considerations in this generation’s future home buying decisions. Travel, office mobility, and global connectivity will be increasingly important in their adulthood. Driving these consumers to a brick and mortar retailer will be more challenging than ever but their desire for connection and meaningful experiences means they will want to entertain themselves in diverse and creative ways.
The Autonomous Vehicle While technological, financial, and regulatory hurdles remain, the advent of the autonomous vehicle is well within a long-range planning horizon. In the next half century, self-driven vehicles will be a mainstay for most U.S. households.20 The U.S. government promised to invest $4 billion over the next 10 years “to accelerate the development and adoption of safe vehicle automation through real-world pilot projects.”21 And 16 states and the District of Colombia have either passed or introduced legislation related to self-driving vehicles. California, Michigan, and Nevada are likely to set the standards for this nascent regulatory framework. Chief among the priorities for both the public and private sector is the need to adapt roadway systems to driverless cars. Indeed, the rollout of autonomous vehicles is anticipated this decade, and it will have a significant influence on real estate and infrastructure development. A modest 5 percent of real estate executives expressed the need for new infrastructure as a top priority in 2016. One Akerman Survey respondent says, “We have a critical transportation issue affecting real estate. The population is increasing daily. Bridges and highways need to be replaced. We cannot develop unless we have the infrastructure to support it.” While autonomous vehicle developers are focusing on creating vehicles that can exist within our current infrastructure, the rollout of new modes of transportation will eventually force us to rethink the way we build and organize our cities. Densification, for example, can be encouraged by driverless cars, as there would be less need for parking and more housing could be developed on these existing spaces. Property values also will also be affected. People may be willing to tolerate a longer commute from the suburbs if they are able to be productive in a driverless car. They also have the potential to enhance road safety, reduce traffic congestion, and improve the carbon footprint. Right now we are witnessing a movement to a sharing economy, which is about using fewer resources more efficiently to benefit the wider society. This suggests that people may be more willing to share a driverless car or utilize public transit in still yet to be discovered ways.22
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Akerman Report Contributors Richard M. Bezold U.S. Real Estate Sector Cecelia Bonifay Sustainable Development Jane Hinton Real Estate Financing Neisen Kasdin Urban Redevelopment Steven P. Polivy International Financing Eric D. Rapkin Real Estate Transactions External Contributors Stephen Owens Swire Properties President Vincent Signorello Florida East Coast Industries President & CEO Akerman Report Staff Kasi MacFarland Project Manager Christine Eschenauer Nick Facchin Krista Kellogg Marlisa Serrano Diana Striker Learn more at akerman.com.
Survey Methodology Top real estate executives from across the U.S. were interviewed by telephone on their perceptions of the health of the commercial U.S. real estate market. 189 interviews were completed between February 15 – April 10, 2016. • Question No. 6 was calculated by using the mean rank (score). Selections were ranked 1-7 and then 1 = 7 points, 2 = 6 points, 3 = 5 points, 4 = 4 points, 5 = 3 points, 6 = 2 points, 7 = 1 point. • Question No. 9 was calculated by using the raw numbers (score) as multiple responses were accepted. • Question No. 10 was calculated using the raw numbers (score) as multiples responses were accepted. Respondents must have chosen the industry sector in question 9 to respond to question 10 for the sector. • Due to rounding, all percentages used in all questions may not add up to 100 percent.
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Endnotes 1
“ U.S. Real Estate Economists Growing More Cautious,” Urban Land Institute, April 5, 2016, http://on.uli.org/1MS7ssD
2
“ Lower Growth Prospects Cloud World Finance Chiefs’ Forum,” New York Times, April, 13, 2016, http://nyti.ms/1WqTkc4
3
“ Lower Growth Expectations Cloud World Finance Leaders’ Forum,” New York Times, April 12, 2016, http://nyti.ms/1WqTkc4
4
“ Navigating Through the Crosscurrents,” Deloitte and National Association of Realtors, January 2016
5
“Commercial Real Estate Look Ahead,” The Deal, May 24, 2016, http://tinyurl.com/jfr9ueh
6
“How to Spot a Dying Bull,” The Street, May 22, 2016, http://tinyurl.com/j57kjm7
7
“ Navigating Through the Crosscurrents,” Deloitte and National Association of Realtors, January 2016
8
“ Navigating Through the Crosscurrents,” Deloitte and National Association of Realtors, January 2016
9
“Chart of the Weekend: More Commercial Real Estate Buyers than Ever Before,” Auction.com, January 22, 2016, http://tinyurl.com/javb7g5
10
“ Navigating Through the Crosscurrents,” Deloitte and National Association of Realtors, January 2016
11
“ Foreign Buyers of U.S. Assets Show No Signs of Slowing Down,” National Real Estate Investor, March 16, 2016 http://tinyurl.com/hq3awcv
12
“ Real estate execs cheer Brexit as New York properties will become safe haven for foreign money,” Crain’s New York Business, June 24, 2016 http://bit.ly/290q3oD
13
“ Navigating Through the Crosscurrents,” Deloitte and National Association of Realtors, January 2016
14
“ 5 Tips for Securing Your Senior Housing Development,” Commercial Property Executive, June 1, 2016, http://tinyurl.com/zkcdvod
15
“ Health Care REITs Outperform Despite a Murky Horizon,” ULI, May 16, 2016, http://urbanland. uli.org/news/health-care-reits-outperform-despite-murky-horizon/
16
“ Top 5 Senior Housing HUD Lenders,” Senior Housing News, October 22, 2015, http:// seniorhousingnews.com/2015/10/22/top-5-senior-housing-hud-lenders/
17
“ Why U.S. Equity REITs Don’t Mind The Brexit Upheaval,” The Street, June 20, 2016, http:// tinyurl.com/h69qd2a
18
“ Generation Z: Why HR Must Be Prepared for Its Arrival,” SHRM, October 3, 2013, http://tinyurl. com/jte4dso
19
“Generation Z: Born in the digital age,” AFP, February 11, 2015, http://tinyurl.com/jpjfwlx
20
“ Ten ways autonomous driving could redefine the automotive world,” McKinsey & Company, June 2015, http://tinyurl.com/z5k95nj
21
“ The Federal Government Must Act to Ensure that the AV Revolution Takes Place in the U.S.,” January 17, 2016, http://tinyurl.com/jg2mar3
22
“ Automated Vehicles: The coming of the next disruptive technology,” 2015, http://www.cavcoe. com/articles/AV_rpt_2015-01.pdf
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