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'It Ain't Gonna Be Our Fault': ULI Experts Detail Recession Risks, New Trends In Annual Report

The economy may be approaching a recession, but the real estate market remains strong and it is unlikely to be the spark that ignites the next downturn, according to a new report from the Urban Land Institute.

Jamestown's Cathy Pfeiffenberger, Lionstone's Andy Lusk, CPPIB America's Hilary Spann and PwC's Mitch Roschelle

Concerns over a potential downturn highlighted ULI's annual Emerging Trends in Real Estate report for 2020. The report, authored in partnership with PwC, compiled a survey of over 1,400 real estate industry experts to take their temperature on the market. 

Beyond the nationwide economic analysis, the report also ranked U.S. markets by the strength of their real estate prospects and highlighted a series of new trends to watch. Here are the survey's key findings.

Real Estate Remains Strong Amid Downturn Concerns

The U.S. economy is now in its longest-ever expansion, and concerns over an upcoming recession have become more prevalent in recent months with the appearance of potential downturn indicators such as the inverted yield curve and, most recently, liquidity issues in overnight money markets.

The ULI Report found the economy may not be as robust as many believe, and it says there are multiple indicators of the economy's fragility. It cites the inverted yield curve, slowing housing starts, "languid" auto sales and the effects of January's government shutdown. During the shutdown, it said workers with otherwise secure jobs were forced to go to food banks and struggled to make housing payments, validating the concern that many Americans don't have significant savings. 

The economic event that triggers the next recession could come from a variety of issues, from overvalued tech companies to student loan debt, but experts agreed the next recession won't be caused by the real estate market, as multiple downturns have been, including the Great Recession.

"The real estate community caused two recessions, we caused it in housing and we caused it in the savings and loan crisis," PwC's Mitch Roschelle said. "This go-around, whatever happens, it ain’t gonna be our fault."

Roschelle, speaking at a press breakfast Thursday at ULI's Fall Meeting in Washington, D.C., said he is most worried about the federal budget deficit and the student loan crisis.

"Both of those are trillion-dollar-plus things, and those are the kinds of things that, if not resolved the right way, could have a catastrophic effect on our economy," Roschelle said. 

Rosen Consulting Group Chairman Ken Rosen, a ULI trustee, said he is particularly concerned about the technology sector. 

"We have a bubble valuation in the tech sector, it’s huge and if it unwinds it will help contribute to some of the volatility," Rosen said. "So I’m not a believer in no more volatility, I think volatility is about to come and hit us in a big way."

Rosen Consulting Group's Ken Rosen, PwC's Mitch Roschelle and Boston Properties' Owen Thomas

Despite these risks in other parts of the economy, the commercial real estate market has remained strong with a steady flow of capital coming into properties, said Boston Properties CEO Owen Thomas, ULI's global chairman.

"There's an enormous amount of capital that has been raised into funds," Thomas said. "You look at transaction volumes, and most classes remain at robust levels. Cap rates are stable. For the right properties and locations, there’s a strong bid and competitive market."

No Such Thing As Secondary Markets

The ULI report breaks down the U.S. markets that have strong real estate prospects, and it finds many of the highest-ranking cities are ones that would not previously have been considered top-tier markets. 

"We’re seeing what would have been called secondary markets 10 years ago [now in the top 20]," PwC Director of Real Estate Research Andy Warren said. "We want people to think of markets not as primary or secondary, but more on what my risk profile is and what my target is."

Rather than break markets into tiers based on metrics like population, the ULI report assigns more descriptive categories. It groups cities into clusters such as "Capital Magnets," "Stalwarts, Surprises and Determined Competitors," "Markets Aligning with Expectations," "Treasures Ripe for Discovery" and "Potpourri: Thrifty Choices, Boutiques and Special Situations."

One of the most highly anticipated aspects of the report, it ranks the top 80 markets in overall real estate prospects from the survey respondents. 

Austin took the top spot, followed by Raleigh/Durham, Nashville, Charlotte and Boston rounding out the top 5. Dallas/Fort Worth fell from No. 1 in last year's report to No. 6 in the 2020 list.

"The population growth in Austin is three times the U.S. as a whole," Roschelle said. "It’s obviously a force of nature of people moving there."

Orlando, Atlanta, Los Angeles and Seattle rounded out the 10 most appealing real estate markets.

"Markets moved earlier than the institutional real estate community," Jamestown Managing Director Cathy Pfeiffenberger said. "It’s about: Where do people want to live? People want to live in Austin, they want to live in Dallas … But from a real estate definition perspective, it's not a core market."

New York City was split into Brooklyn, Manhattan and the other boroughs, which ranked 15, 40 and 39, respectively. The D.C. area was divided into Northern Virginia, the District and the Maryland suburbs, which ranked 14, 28 and 34, respectively.  

PwC Director of Real Estate Research Andy Warren

Affordable Housing and Rent Control

The issue of affordable housing has been a main focus of ULI for several years, but this year's report highlighted new rent control regulations as an emerging trend to watch. 

"What came up this year and what has everyone’s attention given the political climate is the rent control increases," Warren said. "That’s a reaction to the housing crisis and it’s very difficult to solve."

California legislators last week passed a statewide rent control bill that limits rent increases to 5% after inflation. It also exempted buildings constructed in the last 15 years. Rosen said this provision limited the opposition of the real estate industry, but he said the bill was still dangerous for the market. 

"It's a terrible mistake," Rosen said. "California is shooting itself in the foot and in the heart, and I would pay less for buildings built from 1979 to 2004 and 2005 ... This should be challenged to the Supreme Court. As a free-market economist, I’m disgusted with my state."

Lionstone Investments partner Andy Lusk said the uncertainty around what types of rent control laws will be instituted has made real estate investors anxious. 

"The hardest thing for private market participants is ambiguity and uncertainty around how legislation is going to unfold," Lusk said. "When I talk to folks who are worried about what’s happening in California, it’s not so much the rules themselves, it’s the potential for more rules and uncertainty about what the rules of the game are." 

Younger People Moving, Older People Still Working

Two of ULI's emerging trends centered around demographic shifts involving millennials and baby boomers. 

On the younger side, the report coined the term, "Hipsturbia." It says it refers to suburban areas that millennials are migrating to that still offer amenities such as trendy coffee shops and craft breweries. 

"People that are thriving within the knowledge economy want walkable, mixed-use, interesting environments, they want a village square experience, and in many cases they want affordable housing," Lusk said. "Particularly if you have a young family, the suburbs are the best option. There is a real opportunity to create those quasi-urban amenitized environments in the suburbs. People are trying out that experience, and I think that trend will have legs for a long time."

The baby boomer generation reaching retirement age has led real estate developers to lean into senior housing and areas where they think seniors want to live. But the ULI report said that just because they are reaching retirement age doesn't mean they are retiring. 

"We’re going to throw the challenge flag on the preconceived notion that as people turn 65 they will think about retiring and move to a warmer climate," Warren said. "It’s not happening that way."

Warren said medical advancements and people working less strenuous office jobs are allowing people to work well past the age of 65. He said this is affecting the workplace, with older employees competing with young professionals, and it impacts the housing decisions seniors make. 

"It’s going to have impact on where people want to live, what kind of housing they’ll need and where they’re going to work," Warren said. "I'm not saying what we always thought is going to happen is wrong, but it’s something maybe we want to rethink."