Real Estate Digest - September 2016 Issue by First American Title Chicago Taking Flight Newsletter

Real Estate Digest

September • 2016

Volume 42 • Number 9

3 Mega Trends Are Changing U.S. Real Estate

ome major changes in the upcoming years are expected to create huge changes on commercial real estate, according to executives surveyed by Akerman LLP as a part of the law firm’s annual commercial real estate report. These trends are expected to shift real estate over the long term and may even result in permanent changes in how the real estate industry conducts business. Here are the three major trends that are expected to shift the pace of commercial estate development.

Generation-Specific Housing According to 34 percent of survey respondents, the number of seniors will reach levels not previously seen in U.S. history. The senior population, those individuals who are age 65 or older, is growing by the thousands

every day and may reach 71 million by 2030. Developers have responded by significantly increasing the construction of senior housing. While more senior housing is being built, finding financing has become a top concern for these developers. This applies particularly in some subsectors where there are many complicated regulations, since this population has assisted living and memory care needs. However, the number of lenders that have experience in senior housing is generally limited compared to other real estate sectors.

Co-urbanism Another 29 percent of executives reported that society’s shift to the sharing economy will change lifestyle preferences in city centers. That will mean big changes in real estate development in the long term. Trends continued on next page

September • 2016 toward office mobility and collaborative workplace designs will begin to impact commercial real estate development, according to 14 percent of executives surveyed. “Macro changes in our society are shifting the pace of real estate development. Industrial is changing in tandem with population needs,” says Akerman’s Cecelia Bonifay, Orlando-based partner and chair of the firm’s land use and sustainable development practice. “Office development is driven by co-working trends. Retail is changing as the overall shopping experience is evolving. 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.”

Increasing Cyber Risk in Real Estate The survey also notes that real estate will start to keep up with new norms, especially in technology. Executives are seeing a greater emphasis on connectivity, especially with peer-to-peer lending via crowdfunding platforms. Fifteen percent of the executives who responded to the survey expect technology to become one of the most important issues to affect real estate. As a result, cyber risks could pose a substantial threat to the industry, with ransomware and other attacks focused on the private information and systems used to manage real estate transactions. The industry faces a growing need to develop a security and privacy framework for the entire industry. Executives also believe that firms need to include the various risks related to breaches in cybersecurity as a part of their risk mitigation strategies. “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,” according to the Akerman report.

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Americans Prefer Real Estate for Long-Term Investment A new poll by Bankrate has found that Americans would prefer to invest in real estate over other options if they had cash they would not need for the next 10 years. The desire to invest in real estate ranked higher at 25 percent in the Financial Security Index poll than CDs and savings (23 percent), and the stock market, and gold or other precious metals (16 percent each). Bonds were the least preferred investment option, with only 5 percent of respondents reporting they would invest in bonds. “Real estate has some notable advantages over other popular investments,” Roofstock CEO Gary Beasley said. “Yields are much higher than the anemic rates paid by certificates of deposit and investment grade bonds, gold has no current yield and is entirely an appreciation or store of value play, and stocks are increasingly volatile. Investment in rental housing is particularly interesting today given discounts to peak housing values and being able to capitalize on the macro trend of ‘rentership’ vs. home ownership.” According to Noel Christopher of Renters Warehouse’s National Business Development Lead, real estate investors are now more interested in homeownership because professional landlord services have made it easier for them to manage their investments. In addition, Bankrate determined that many investors may prefer real estate because of continued volatility and uncertainty in the stock market.

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September • 2016

China Remains Top Buyer of U.S. Real Estate For the second year in a row, buyers from China have topped the list as the largest group of foreign buyers of U.S. homes. Chinese buyers have purchased 29,195 houses with total value of $27.3 billion U.S. In addition, the amount of activity and number of units sold to the Chinese have far exceeded any other foreign demographic. According to Lawrence Yun, chief economist at U.S. National Association of Realtors, the Chinese purchased 26.7 percent of the total amount of residential property available for sale. Chinese buyers tend to select residential properties located in central cities, as well as in suburban areas that have higher property values. The average purchase price among Chinese homebuyers is $936,615, nearly triple the amount spent by Canadians, the second largest demographic of foreign homebuyers. So, which local real estate markets are benefiting from the boom? Roughly 30 percent of the properties Chinese buyers bought were located in California, New York, Texas, Washington and New Jersey. They made roughly 10 percent of their purchases in New York City alone. Buyers from China were also more likely to purchase the property so a child studying at a U.S. university could use it. Roughly 50 percent of reported real estate transactions were all-cash sales. In the past five years, Chinese buyers have spent $110 billion U.S., and that figure continues to grow by 20 percent each year.

Foreign Buyers Look to Purchase Cheaper U.S. Homes Foreign buyers’ interest in U.S. real estate is increasing. However, they are making the switch

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from luxury properties to lower-value properties. This could result from the stronger U.S. dollar, which means foreign buyers are spending more when it comes to negotiating prices. According to the National Association of Realtors’ annual report on international activity in the U.S. real estate market, foreign buyers have purchased $102.6 billion worth of residential properties in the U.S. between April 2015 and March 2016. This represents a decline of 1.3 percent from the previous survey. However, the number of properties purchased increased 2.8 percent, to 214,885. The value of all homes bought by foreigners was generally higher than the median price for all U.S. homes. Chinese buyers, who made up the largest group of international buyers, bought the most expensive homes at a median price of $542,084. “The slight drop in dollar volume can probably be accounted for based on the types of properties purchased, and the locations of many of those properties. We’ve seen at least some evidence that foreign buyers — both investors and people just looking for a home — have begun looking beyond expensive markets like San Francisco, New York City and Washington D.C., and are buying properties in smaller, less-expensive cities in the Southeast and Midwest,” said Rick Sharga, executive vice president at Ten-X (formerly Auction.com).

Many U.S. Suburbs Are Ignoring Affordable Housing Concerns At a recent ULI Housing Opportunity 2016 conference, officials from U.S. Department of Housing and Urban Development, Ohio State University and other groups discussed the problems that U.S. suburbs have yet to address in the push to build more affordable housing for families. continued on next page

September • 2016 With urbanization making it increasingly too costly for families to live in urban centers, one option would be to build more affordable multifamily homes in the suburbs. However, regulators have encountered a number of trends and practices that need to be reversed before these new homes can be built. These concerns range from systemic pro-segregation policy— from racial zoning, racial covenants, the impact of urban renewal, and public housing programs, to redlining and predatory lending, says Jason Reece, director of research at the Kirwan Institute for the Study of Race & Ethnicity at Ohio State University. While some of the problems were supposed to be resolved by the Fair Housing Act, there has been significantly less change than expected. In addition, conference attendees are concerned about making sure that all Americans can live in decent neighborhoods. “Unfortunately, the number of Americans [who] are living in highly concentrated neighborhoods of poverty—often without access to good jobs or good schools and other opportunities—has really doubled since 2000, while the number of neighborhoods that have been identified as ‘high poverty’ have increased by 75 percent,” says Ali Solis, senior vice president of advocacy and external affairs for Enterprise Community Partners Inc.

Luxury Real Estate Buyers Expected to Shift to U.S. From London “Brexit” has had many major effects on the global economy. However, one of largest impacts of the United Kingdom’s exit from the European Union is occurring in the real estate sector. In two trading days following the vote, real estate firms and home builders in the U.K. lost 20 to 30 percent of their value. Major London real estate agent Foxton also issued a profit warning the day

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after Brexit was announced. The company projected adjusted earnings and revenues “significantly lower” than for the previous year. Although single-family homes in London saw a rebound after the 2008 financial crisis, many analysts are speculating that U.K. real estate will see an extended downturn. Sales of high-end properties in London were already declining even before the vote because of higher real estate transaction taxes that went into effect in 2015. Leonard Steinberg, the president of major U.S. real estate brokerage Compass, is predicting a decrease of 5 percent in London real estate sales for at least the next two years. He also predicts that foreign buyers will shift to U.S. real estate markets in New York City, Los Angeles, Miami and San Francisco. “London has, for the longest time now, been the global center of the economy, and I do believe that this is a stumbling block for them,” Steinberg commented in a recent interview.

Tim Duncan Sues Realtor Who Used Photo to Promote Real Estate Business Only two days after Tim Duncan announced his retirement from the NBA, a Keller Williams real estate agent allegedly altered a photo of the NBA star in order to promote his realty business. Duncan, who retired from the NBA on July 11, subsequently filed a lawsuit against Robert Elder, Stefanie Graham, Keller Williams San Antonio, R.E.S.A., Inc. and John Does 1 and 2 on July 15, 2016. The photo involved in the lawsuit was taken by Sarah Brooke Lyons, a San Antonio photographer, as a part of her “1005 Faces” project, in which Alamo City residents held up signs that expressed their personal thoughts. According to the details of the lawsuit, Elder, Graham, and two continued on next page

September • 2016 unknown individuals were alleged to be responsible for altering the photo to promote Elder’s real estate business. They allegedly took out the original text in the photo, with an original quote from Tim Duncan, and replaced the text with the logo of Elder’s business along with a website address. According to court documents, Lyons posted the photo on July 11, 2016, just after Duncan announced his retirement. Duncan alleges that the altered photo was used as an attempt to capitalize on the high regard that San Antonio residents have for him and that the firm intended to misappropriate the image for profit. Duncan has also requested a temporary restraining order.

Why Brexit Might Be Good News for U.S. Homebuyers Recent market changes indicate that Brexit might actually be good news for U.S. homebuyers. According to Freddie Mac, the average rate of a 30-year fixed mortgage declined to 3.48 percent shortly after the Brexit vote, which was the lowest level since May 2014. The interest rate on 15-year fixed mortgages also declined to 2.78 percent from 2.83 percent following the Brexit vote. “Obviously it’s a good time for anyone who is the market for a home purchase or had been on the proverbial fence about refinancing,” said Mark Hamrick, senior economic analyst at Bankrate. Some analysts believe that the economic problems the U.K. is facing could be a boon for the U.S. real estate market, as foreign investors look for safe havens to store their cash. The U.K.’s decision to separate from the EU also triggered a massive stock selloff in the global stock market in the few days after the announcement was made. More than $3 trillion was erased from the market, setting a record.

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U.S. real estate markets are currently experiencing low inventory and higher demand for housing throughout the country, which is creating affordability issues for would-be homebuyers. According to the S&P/Case-Shiller National Home Price Index, home prices rose 5 percent in April 2016 from the year before.

Why Commercial Real Estate Is Slowing Down The environment for commercial real estate will become less favorable in the next few years, according to UCLA Anderson Forecast Senior Economist David Shulman. Shulman recently published an economic letter in which he discussed his observations on commercial real estate. “Prices are leveling off as investors have become concerned that the period of extraordinarily low interest rates may soon be coming to an end. In addition, job growth—the source of much real estate demand—will inevitably slow as the economy approaches full employment. At the same time, supply will pick up as more construction is completed in 2017 and 2018,” says Shulman. While retail spaces are closing across the country, there has been an uptick in industrial real estate, with warehouse rents growing at a 5 percent clip. E-commerce is fueling the demand for these spaces. Markets such as Los Angeles, East Bay San Francisco and northern New Jersey are seeing some of the highest increases in rents at double-digit percentages. In the past seven years, the national office vacancy rate has only declined 2 percent to 16 percent, with new construction continuing to grow at a very sluggish pace. Technological disruptions due to a continuing shift toward e-commerce is reducing businesses’ need for office space for workers, physical file space and reference rooms. continued on next page

September • 2016 Although he is not forecasting a crash, overall Shulman is predicting that the seven-year bull market in commercial real estate will be coming to an end.

Agents’ Corner

5 Things You Can Learn From Real Estate Entrepreneurs As a real estate agent, you may be wondering exactly what it takes to achieve success. Although many paths can lead to the goals you want to achieve, you also want to find the most efficient ways of getting there. This means learning some important lessons about the real estate business without actually having to go through the pain of making mistakes on your own. Entrepreneurs experience first hand many of the challenges that real estate professionals struggle with at all levels of the organization. In fact, often the entrepreneurs who make working in the real estate industry seem so effortless have in fact overcome the most challenges to achieve success. As the real estate industry undergoes dramatic changes due to new technologies and changes in buying and selling trends, Realtors need to adapt. Fortunately, real estate entrepreneurs are already accustomed to dealing with these changes and can offer some valuable lessons. Whether you work for an agency or you are starting your own real estate company, here are five things you can learn from real estate entrepreneurs. 1 Discover the Needs Other Realtors Aren’t Filling With stiff competition from other real estate agencies in your

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area, creating a niche as an agent or for your company is no easy feat. What sets the most successful real estate agents apart is that they were able to identify underserved needs of their local real estate market and capitalize on these problems as new opportunities. Develop Your Team It is one thing to set new goals for performance, but another thing to put them into action. If you want to get better results, you need to develop your team. That means ensuring you have the right people in place to help you achieve your goals. Use Technology to Your Advantage In an age where the use of technology has become almost mandatory for managing your work life, there is absolutely no reason that you shouldn’t be using it to help you manage your clients. In short, technology is a tool that any modern real estate agent must be adept at using. Get Rid of Distractions Becoming a successful real estate agent means that you believe in the value of the services that you provide to your clients. When things go wrong, you need to keep yourself motivated and focused on success. Your level of commitment has a direct impact on the results that you get for your efforts. Know Your Industry In a fast-paced industry like real estate, is important that you stay ahead of the game as much as possible. Pay attention to the trends in the real estate industry, tune in to the best sources to learn about upcoming changes, and make sure to prepare for the unexpected. Adaptability is perhaps one of the most important traits that will help you survive in this industry.