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Top 6 Issues Affecting Commercial Real Estate

WASHINGTON DC 10.19.2017

THE FAIRFAX COUNTY STATE OF THE MARKET

Development Pipeline and Current Projects

Katherine Bonnafé -- Combined Properties
Greg Trimmer -- JBG SMITH
Alex Nyhan -- First Washington Realty

Political volatility, tech disruption and rising sea levels — these are but a few of the issues on the minds of commercial real estate professionals and policymakers globally. The following are six of the top trends CRE players worry will affect real estate in 2017 and the years to come, according to a survey conducted by the Counselors of Real Estate Association in Chicago. 

1. Climate Change

Boston could see $80B in real estate damage with rising sea levels.

Sea levels in the Atlantic and Gulf Coasts are expected to rise 14 inches by 2100, which could result in disastrous levels of damage and disruption to commercial properties.

To combat this, developers are making fundamental strides toward building and maintaining protective frameworks, including constructing fences for older residential buildings and moving electric infrastructure up off the bottom floors of buildings.

Flood prevention building criteria — such as minimum elevation heights — are still relatively new, so coastal developers are largely setting precedents for the proper construction of building foundations. Experts say the first and most important step coastal cities should take is preparing a climate action plan.

“If you’re a real estate professional, the effects of climate change are no longer a matter of being on different sides of the political spectrum,” Counselors of Real Estate chair and Muldavin Cos. CEO Scott Muldavin said. “Developers have to begin planning ahead. And not just around their own developments, but [planning for] public transit, access points, highways and airports and other nearby properties.”

2. Generational Disruption

Top 6 Issues Affecting Commercial Real Estate

Millennials and baby boomers are the two largest living generations in the U.S., with more than 75 million millennials in the country and 74 million baby boomers. Together the two account for 60% of the adult population, and they impact housing, office and retail trends in the U.S. and all over the world.

To some extent the two generations have swapped preferences.

“We’re in a big transitional period,” Muldavin said. “In 10 years, developers will be looking back and asking how we coped with all of these drastic changes in such a short period of time.”

Suburban retirees and empty nesters with spare funds are shifting toward city centers and cultural hubs. Conversely, millennials priced out of these residential spaces in major cities are spreading outward. Theirs is a generation that values walkability, public transit access and experiences over material wealth — all while harboring the dream of eventual homeownership. Consequently, many suburbs are urbanizing to include co-working offices and retail/dining options on par with downtown city neighborhoods and amenities.

3. Political Volatility

American flag

Populist and nationalist sentiments have been simmering across the Western Hemisphere for months, boiling over in U.S. and Austrian elections in 2016, in addition to the Brexit referendum, even manifesting briefly — if intensely — in candidate nominees this year in the French and Dutch elections.

The months that followed have increased uncertainties regarding immigration and trade policies around the globe, jeopardizing domestic and foreign property investments, hospitality and retail. On the local and state fronts, political divisiveness has rendered it difficult for many politicians to move forward with legislation geared toward solving crises in infrastructure, affordable housing and social welfare.

4. Lost Decades Of The Middle Class

Middle Class

The median American household income in 2015 was $56,516, a 5.2% increase from the year before — but still well under pre-recession levels of $57,403 in 2007.

Middle-class jobs and wages have barely budged in the past decade despite student debt increasing 97% since the Great Recession. This is largely due to the heavy outsourcing of administrative and tech labor coupled with a sharp increase in automation. America is plagued with too little supply meeting excess demand for affordable housing

In addition, shifting consumer preferences have resulted in fewer Americans shopping at brick-and-mortar stores. Same-store sales have declined, exacerbating rampant store closings. Experts say this trend points less to the death of retail and more to a shift in favor of e-commerce and experiential retail.

5. Immigration

U.S. immigration customs, travel

Since January, the Trump administration has taken strides toward enforcing stricter travel and immigration policies, stemming from populist concerns regarding national security and job loss to foreign workers.

Research reveals such policies could bog down future homeownership patterns. Immigrant families have historically displayed strong tendencies toward homeownership, and aimed for freedom of movement between suburbs and cities in their search for work. Immigrant families are a primary source of population growth and workforce talent pools. Imposing long-term restrictions on immigration and travel could lower homeownership rates and make it more difficult for tech and corporate employers to locate talent, the Counselors of Real Estate found. In high-supply markets like Denver, this dearth of labor equates to the stagnation of development projects.

6. Affordable Housing Undersupply

Apartment window, apartment building, apartments, mulitfamily

Plateauing wages and crippling student debt have netted enormous demand for affordable housing, but little supply is online to meet that demand as developers continue to build Class-A product.

To combat this imbalance, developers are looking for value-add opportunities to purchase and upgrade older product. Some builders are taking steps toward constructing affordable residential spaces close to mass transit stations, primarily thanks to municipal incentives in the form of tax breaks and the ability to bend zoning codes.

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