The real estate industry encompasses the many facets of property, including development, appraisal, marketing, selling, leasing, and management of commercial, industrial, residential, and agricultural properties. This industry can fluctuate depending on the national and local economies, although it remains somewhat consistent due to the fact that people always need homes and businesses always need office space.
Today, the real estate industry is one of the most lucrative sectors of the U.S. economy, and it continues to provide opportunities for interested and motivated individuals. Since many professions within real estate are based on sales, success depends on effort. This is an industry for hardworking, goal-oriented people who are always ready to take on more. However, the hard-charging lifestyle is balanced by some flexibility: Those who succeed in the real estate industry often set their own hours, are not limited by a fixed salary, and can be their own boss.
Professions within the real estate industry vary. Brokers and agents lease and sell properties. Real estate developers buy land, build property on it, and sell it to interested parties. Building managers act on the owner’s behalf and deal with day-to-day issues of properties. Appraisers must assess the value of properties before they can be sold. In addition, support staff, office managers, real estate attorneys, loan officers, and others are essential players in every real estate transaction.
The real estate industry is an important element of the economy. In the mid-2000s, the industry faced major challenges when the commercial real estate market peaked and then fell in step with the recession. The economy has strengthened in the years since, however, and the real estate market continues to rebound. In 2014, real estate construction alone contributed nearly $1.1 trillion, more than 6.1 percent, to the nation’s economic output as measured by Gross Domestic Product. Whether the economy is strong or weak, people will always need a place to live, work, and shop, and there will always be a steady need for real estate professionals. Their degree of success simply depends on their motivation, geographic location, and the tides of the market.
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ASSOCIATIONS & INSTITUTIONS:
The entry to some of the jobs in real estate may be fairly quick, which is why many people decide to change careers and go into the real estate business. For instance, although the requirements to become a real estate agent vary by state, in many instances people can meet the requirements and be licensed in a matter of months.
Many real estate workers have flexible schedules, especially residential real estate agents. You set your own hours and have no need to stop into the office except to file paperwork or maybe to attend the occasional staff meeting.
Working in real estate can be fun. For developers, agents, brokers, and others, researching properties and then sharing that knowledge with clients is often a rewarding experience. Closing real estate deals where everyone is happy with the transaction is professionally satisfying, as is the commission check at the end.
Real estate professionals have the potential to make a lot of money if they do their research, work hard, and put in the hours. Those who take multiple approaches to securing more business, such as advertising their services and networking for referrals, can further boost their monthly income.
People will always need shelter and a place to work, and they need real estate professionals to help them find homes, office spaces, and other properties. There may be more competition for jobs when the economy is weak, but there will still be opportunities in the real estate business.
The real estate licensing exam is really tough. Passing it requires many hours of study and the ability to understand complicated subject matter. Licensed real estate professionals usually have better employment opportunities than unlicensed professionals. Even after investing time in studying and then getting licensed, there is still no guarantee the work and money will be forthcoming. It all depends on the real estate professional’s motivation and dedication to the job.
The flexible schedule comes at a price. Real estate agents’ and other professionals’ time may not be as flexible as imagined. Open houses – when a property for sale is shown to the general public – are invariably held on evenings or weekends. Real estate clients may be unable to see properties during the traditional workweek as well.
Many real estate workers are paid on commission only. The first few months can be particularly challenging for new agents who are still learning the ropes. Even after putting in long hours and really hustling for business, the first paycheck may still be a month or two away. Having at least six months of savings before entering the field will help ease the stress in the beginning.
Residential real estate can be fraught with emotions because it has to do with people and their homes. Handling clients is vitally important. People get emotional when buying or selling a house, and are often nervous about the large sums of money spent or acquired. Managing clients and their expectations is a crucial responsibility for the successful realtor.
Self-employed real estate professionals work independently and are therefore responsible for tracking their sales and handling their own accounting, as well as filing tax returns. These tasks can lengthen an already long workday and workweek.
Talent strategies are constantly evolving. However, with workplaces and work itself becoming increasingly digitalized, new talent needs are emerging and should become a business priority. Institutional investors agree—nearly 9 in 10 of retail-property-focused investors and nearly 7 in 10 of industrial-property-focused investors somewhat or strongly agreed that CRE companies need to do more to nurture their talent.
Next-generation talent, both millennials and Gen Z, appear to prefer working in a startup culture.22 The industry, meanwhile, seems unprepared to recruit, engage, and retain this talent pool—93 percent of pension funds and 95 percent of hedge fund investors believe so. As a result, many CRE companies continue to face a scarcity of skilled talent. Further, most CRE companies also appear unprepared to deal with the high proportion of baby boomers likely to retire over the next three to five years.
Along with talent, the work itself will evolve as artificial intelligence and cognitive technologies reshape roles.23 Some existing skills will become redundant, while new ones will need to be learned.24 Workers’ jobs will likely be oriented toward tasks that require human intervention. They could be supported by technologies that execute more of the routine and repetitive tasks inherent in their work. Investors also believe that CRE companies should prioritize the use of business intelligence and predictive analytics to enhance the talent experience. As examples, AI and predictive analytics can be used for résumé screening and to spot turnover risks, respectively.
Senior leadership teams and boards should also include a fair and more even representation of women, minorities, and the LGBT community. Investors—particularly 92 percent of the respondents who were large investors with more than $30 billion in assets under management—believe that a more diversified board helps generate better returns.
What should CRE companies do to be more agile with talent?
Overall, the CRE landscape should evolve toward creating and enabling a more agile and engaged workforce. This typically involves not just overhauling talent strategies and work processes but also creating an environment that reduces bureaucracy and inculcates a sense of purpose for employees. CRE companies should double down on efforts to attract next-generation talent, retool existing talent, and diversify senior leadership and the board.
Attract next-generation talent
Our 2018 Real Estate Outlook recommended that companies consider tapping the open talent economy and enriching the employee experience to help overcome the ongoing talent shortage. For example, CRE companies can consider structured corporate social responsibility programs that give a sense of purpose to employees by connecting them to the community.27 Along with this, companies should consider using the power of social media and branding to change marketplace perceptions and attract next-generation talent. It’s important for companies to recognize that today’s digital natives have different aspirations and expectations.28 Policies that enable mobility—such as flexibility to work from any location or make lateral moves within the company to build a portfolio of experiences—and revamped performance management and incentive programs may elevate the sense of belonging and recognition among employees. The 2018 Deloitte Millennial Survey indicates diversity and flexibility as the keys to loyalty.
Redevelop internal talent pool
There is significant variance in investor perception about companies’ ability to reskill baby boomers across geographies. More than 9 out of 10 Singaporeans and Chinese surveyed believe CRE companies are not doing enough to retool baby boomers, compared to 50 percent of Brazilian and Japanese respondents.
The baby boomer workforce itself is generally divided between employees who want to exit the workforce and ones who would like to continue to be in employment, albeit with more flexibility.30 Companies should consider knowledge-transfer programs from baby boomers to Gen X and millennials in situations where the former are likely to retire. Further, companies may choose to deploy technology to automate parts of a work process. Subsequently, they can engage the available workforce, including baby boomers who prefer to extend their careers, more efficiently. Although, baby boomers would likely need to be reskilled in select areas to remain relevant.
CRE companies should develop a culture of lifelong learning; this may involve both structured and experiential learning opportunities. For instance, many employees are increasingly looking at garnering exposure to different types of work in their pursuit of meaningful work and career enrichment. Other focus areas often include developing soft skills and nurturing leadership traits at all career levels.
Diversify senior leadership and the board
Research suggests that diverse leadership teams and boards with a wider representation of women tend to have positive financial impact for an organization.31 CRE companies should become more intentional about improving senior leader and board diversity, with specific targets to recruit women and minorities, followed by tailored programs to support them through their career life stages. They should facilitate focused awareness-building sessions for majority-population members addressing the value of and mechanisms for creating inclusion and connection within the organization.
In addition, CRE companies should reward inclusive behavior such that it becomes a part of the fabric of the organization. Companies should also consider mentorship programs to help women and minorities prepare for leadership roles, and vice versa, to help senior leaders appreciate and value diverse up-and-coming talent.
In the United States, real estate has a long history. After the Revolutionary War, no longer under England's thumb, the federal government sold and granted land to private owners for their own use. This practice continued as the country expanded westward, most notably starting in 1862 with the Homestead Act, which allowed private ownership of U.S. land in exchange for improving and developing the land for at least five years. The U.S. government distributed more than 300 million acres of public property to private landowners through the Homestead Act, creating the basis for the real estate market.
The real estate industry evolved as the United States evolved from an agricultural society to an industrial one. Several shifts occurred during the transformation of the Industrial Revolution. For one, urban centers swelled as people moved to cities to work in factories. These workers needed places to live, and they had money to spend. In addition, as the United States increased its wealth through industry, banks and other financial institutions stopped their practice of lending only to the wealthy. Suddenly, the middle class and blue-collar workers were able to secure mortgages. Home ownership became more common.
As cities developed, the need for real estate transactions increased. Office buildings, retail centers, hotels and restaurants, and residential housing boomed, and someone was needed to develop, sell, and manage it all. Soon, urban sprawl would create the need for suburbs, and with that more housing, town centers, and eventually, businesses.
There's no avoiding the facts: The real estate "bubble" has burst. Beginning in 2006, a significant housing downturn affected all corners of the real estate industry-from commercial real estate developers to real estate investment trusts (REITs) to mortgage lenders. Whether you're looking to rent out apartments or develop condominiums, the atmosphere is vastly different from just a few years ago.
Of course, the basics are still the same. The real estate industry's pared-down definition is land. However, it's much more complicated than that. The industry involves the buying, selling, renting, leasing, and management of commercial, residential, agricultural, and other kinds of property, including all the functions that support such activity, such as appraising and financing. The successful realtor is necessarily a shrewd salesperson with a deep knowledge of real estate markets and a broad understanding of the contracts, laws, and tax regulations that apply to real estate transactions.
Thinking big is part and parcel of the real estate industry, and grandiose speculation has created some of America's greatest fortunes. John Jacob Astor traded in his empire of beaver pelts for a gamble on uptown Manhattan real estate and in the process became the richest man in America. Arthur Levitt's own development virtually created that fixture of American life: the suburbs. More recently, moguls like Sam "the grave dancer" Zell and the perennially overreaching Donald Trump have made fantastic fortunes on real estate gambles. Even for non-billionaires in the industry, the thrill of deal making, the promise of financial reward, the potential to have a lasting impact on cities and communities, and the sociability make real estate a rewarding profession.
Subprime Mortgage Crisis
Subprime mortgages, which are mortgages given to borrowers who do not meet typical lending criteria, generally upon which little or no down payments are made, had been increasingly popular through the early 2000s. Several lenders led people with questionable credit into these loans by giving them a low interest rate for the first few years. But when those years ended and interest rates skyrocketed, the homeowners who had entered into these subprime mortgages were no longer able to pay. Starting in late 2006, the real estate industry saw sweeping foreclosures, tighter requirements for mortgages, and bankruptcies of more than two dozen subprime mortgage lenders, including major government financers Fanny Mae and Freddy Mac. Though several properties became vacant, it was harder for buyers to get money to buy those properties and the markets became stagnant.
In early 2009, President Barack Obama's stimulus package offered benefits, such as tax credits and home-improvement incentives, to help homeowners recoup their losses and encourage new homebuyers to enter the real estate market. Foreclosure rates continue to grow (they were up 4.6 percent in June 2009 over May) as record unemployment and the down economy render people unable to pay their mortgages. The problem is spreading quickly through the commercial real estate market as well. As of July 2009, there were $108 billion worth of distressed commercial properties in the U.S., and experts predict commercial real estate prices will tumble 40 or 50 percent below their peak in 2007 before the crisis subsides.
Technology advancements and interconnectedness will increasingly influence CRE business models. As we have observed, most institutional investors are committed to the CRE industry over the next 18 months despite concerns around a flattening yield curve, various country tax reform initiatives, the potential of trade tariffs in the United States, and the uncertainty around the impact of Brexit in Europe. Their investment mandate is leaning toward technology-enabled companies that emphasize tenant and employee experience, and newer real estate assets and business models. One may argue that investors perhaps have tunnel vision, as they fundamentally focus on the return on their investments.
Investors’ investment mandate aligns with our analyses of the technology influence on the CRE ecosystem over the last four years. CRE companies will have to find ways to realign their business priorities and adapt to the new demands of their stakeholders to remain relevant.
To enhance agility, CRE companies should innovate continuously and improve organizational fluidity rather than work within set guidelines and in silos. Running pilots of new products and services with a “fail early, fail fast, learn faster” approach could allow them to learn from failures, develop better offerings, and/or discard the unviable ones.
Taking it all in can be a challenge. And adopting new behaviors and mind-sets tends to go against the grain for most people. But the alternative to proactive change is organizational irrelevance. Although some CRE companies won’t adapt, many of their competitors will—taking not only their customers and top talent but the investment dollars as well.
Ultimately, the winners will be those that can adapt to the forces of change faster than the speed of change itself.
A survey of 500 global investors, which provides insights on factors that are influencing their CRE investment decisions, revealed the following key themes:
-A large proportion of respondents plan to increase their capital commitment to CRE, with the United States, Germany, and Canada leading the way.
-Nontraditional assets such as mixed-use properties and new business models such as properties with flexible leases and spaces are expected to attract an increased allocation of investment dollars.
-Many surveyed investors expect to prioritize their investments in existing and potential investee companies that respond rapidly to changes in business models and adopt a variety of technologies to make buildings future ready.
-Survey respondents see a significant impact from technology advancements on legacy properties in fewer than three years
With investors seemingly committed to investing in newer business models and a tech-enabled ecosystem, how can CRE companies cash in on the gold rush?
Fundamentally, CRE companies should gain a thorough understanding of the changing usage pattern of the built space. Take the example of WeWork, the co-sharing space owner that is positioning itself as a “services” company rather than a property owner-operator. Since its inception in 2010, the company has grown from a single space in New York City to 287 physical locations across 77 cities and 23 countries globally, as of August 2018.2 At $20 billion, WeWork is considered among the most valued tech startups, following Uber and Airbnb.3 The company’s growth outstrips many traditional CRE companies.
What are the companies with new business models doing differently? These companies, which can be considered change agents, are typically retaining the core ethos of the real estate business—the importance of location—while changing the mind-set about how the physical space is consumed. Powered by technology, their value proposition lies in augmenting the user experience. For instance, WeWork’s goal appears to be to create not only a functional experience but also a memorable one through a vibrant ambience, varied open-seating options, amenities, and networking opportunities for the on-the-go millennial and Gen Z workforce.
Change agents like WeWork are repositioning the CRE asset as not just a physical space but a service hub. In addition, they strive to differentiate themselves with a nimble and flexible business model. Once CRE companies are ready to change their mind-set, agility tends to be the most important factor that can enable them to rethink the way they approach change, remain competitive, and grow.
Given the increasing uncertainty in the CRE sector, this year’s outlook takes stock of the current business environment and uncovers key investor preferences on capital allocations, use of technology, cyber risk management, talent, and the role of proptechs. We also provide actionable recommendations for how an agile CRE company can respond to these key investor preferences.
Increase tenant centricity
CRE companies should reimagine tenant experience by weaving technology throughout the tenant life cycle. This can help strengthen tenant stickiness and therefore valuations. For instance, CRE owners and developers can use a combination of augmented (AR) and virtual (VR) reality, commonly known as mixed reality, to allow potential buyers or tenants to visualize the new property using a 360-degree immersive experience and offer multiple finished site options. This may also expand the reach to potential clients across different geographies. Companies could also leverage technologies such as Internet of Things (IoT), artificial intelligence (AI), and predictive analytics to (re)develop and tailor existing or new buildings to suit changing tenant preferences and to anticipate tenant needs. This also provides an opportunity for CRE companies to partner with tenants to augment the end-user experience.
Companies should reconsider their existing tenant mix, as physical spaces that offer diverse experiences are providing an opportunity to yield higher occupancy and rents. CRE companies should consider using traditional and alternative data, AI, and predictive analytics for smarter tenant repositioning by having a more diverse tenant portfolio. For example, some retail owners are now offering empty mall space to retail incubators or even co-sharing workspaces.
These new arrangements seem beneficial to most stakeholders, even though these new forms of tenants occupy a relatively smaller portion of the leasable space. Retail incubators get a marketplace to demo their products before they expand their physical presence, and people working in co-working spaces get more networking opportunities and increased “walkability” for their eating, shopping, and entertainment needs.10 And of course, for retail owners, all this generally means a higher-value experience for the entire property due to an attractive tenant mix and increased retention of existing tenants through higher foot traffic.
Companies can add other leading models, such as enhancing existing lease administration processes, to better offer short-term leases or a hybrid along with longer-term leases. With increased business uncertainty, traditional tenants are looking at more flexible leases, while the newer form of tenants thrive on such lease models.11 Landlords, for their part, can see a direct benefit on their net operating income by leasing out vacant spaces. Moving from longer-term to short-term leases may require a change in financial forecasting techniques, as it would impact revenue stream predictability.
By revamping the user experience, tenant mix, and lease administration processes, companies can not only reduce tenant risk but also create a differentiating brand.
The National Association of Realtors expects home prices to keep increasing through the year. However, according to new data, economists estimate that home prices will rise more slowly in 2019 than they did in 2018. Zillow’s forecast, for example, calls for the average property price to increase by about 3.8% nationally. On the other hand, Realtor.com has them rising at just 2.2%. Nonetheless, the fact remains that sellers are asking for prices that first-time home buyers can’t afford.
Based on NAR’s data, there were some interesting variations regarding this housing market forecast based on price and region. Home prices, of course, vary by region and local real estate trends. Therefore, some cities in the US real estate market might experience a large jump in prices while others could see relatively small gains. For example, the National Association of Realtor reported that house prices in the Northeast had an 8.2% jump over the last year while homes in the West rose only by 0.2%.
Moreover, the slower growth in home prices suggests that real estate appreciation will slow down in most parts of the US housing market 2019. This means that while prices will continue to rise, the days of easy price gains might come to an end. House price increase also indicates that most first-time home buyers in the US will continue to rent. This is good news for real estate investors with rental properties as it suggests strong rental demand. Not to mention that when home prices grow, so do rental rates.
Mortgage Interest Rates Continue Rising
According to Freddie Mac, the average rate for a 30-year, fixed-rate mortgage was 4.5% in 2018. While this is low by historical standards, it’s an increase from 3.9% a year earlier. Our housing market forecast and predictions suggest that mortgage rates will keep climbing even higher in 2019. Experts project the current mortgage interest rate will even exceed 5% by 2020! Both Realtor.com and Redfin estimate that mortgage rates will rise to 5.5%, while Zillow expects rates to reach 5.8% by the end of 2019.
Assuming that this actually happens, this will drive up home buyers’ borrowing costs and even shut others out of the housing market entirely. It seems that buyers are already sitting on the fence right now – based on data from the Mortgage Bankers Association, mortgage applications have dropped 5% this February compared to the same time a year ago. The rising mortgage interest rates combined with unaffordable property prices are also keeping existing homeowners from moving up on the property ladder.
The projected result: a cooling housing market and falling home sales nationally. As of February 2019, Freddie Mac data shows that the current mortgage interest rate is 4.37%. For a real estate investor, this means now might just be the best time to buy an investment property before rates start climbing up (if you’re looking to finance your investment with a mortgage).
Overall Home Sales Will Drop
As mentioned, the previous real estate trends will lead to our next US housing market forecast which is a decline in home sales. The demand for homes for sale is diminishing as lower-income buyers are struggling to buy at current prices and interest rates. According to Realtor.com:
As we look toward 2019, we are anticipating home sales to decline around 2%. We’re expecting it to be another slightly slower year as buyers continue to wrangle with higher mortgage rates after contending with several years of rapid price growth.
As of January 2019, home sales dropped 8.5% from a year ago which is the lowest home sales since 2015 according to the National Association of Realtors. NAR is not surprised to see the slide in home sales “given the government shutdown, slowing GDP, and employment numbers in January.” This housing market forecast, however, varies by region and house prices. For example, home sales of properties under $250k in the West dropped 29% in January. However, home sales of properties above $750k in the Northeast jumped an average of 18% according to NAR.
In addition, this housing market forecast 2019 is not all bad news for real estate investors. If you’ve found an investment property for sale, you’ll have less competition against home buyers who can’t afford to buy. This is also another indicator that more people continue to see that living in rental properties is more affordable than buying a home.
Millennials in the US housing Market 2019 and 2020
The rising mortgage interest rates aren’t slowing the millennial generation’s desire for homeownership. Yes, property prices and interest rates are making homes for sale less affordable. However, the oldest millennial will be turning 29 years old this year and entering the house-buying age as their needs adjust. Moreover, millennials still make up the largest segment of buyers (45% according to Realtor.com).
As a result, we can expect that demand from millennials will continue to unfold in 2019. But the housing market forecast to keep in mind is that 2020 will be the peak millennial home buying year. Furthermore, remember that supply and demand affect the housing market. So, this pent-up demand from millennials in 2020 is likely to move home values up across all price points.
While it’s too early to tell what could happen in the real estate market by 2020, real estate trends suggest millennials might face the same unaffordability issue as home buyers today. For real estate investors, this means that buying rental properties will continue to be a good investment in the US housing market 2020.
Proptechs are increasingly popular with investors and are expanding their coverage across the real estate value chain. Consider this: Globally, almost 9 in 10 of those surveyed believe that proptechs will have a moderate to significant influence on the CRE industry. Geographically, Asia Pacific respondents are the most optimistic about proptech influence (97 percent), although North Americans plan to commit the highest percentage of their investment portfolio (roughly 16 percent on average) to proptechs. Not surprisingly, fundraising by proptechs was the highest in 2017, compared to previous years, at $13 billion.32 Yet, the number of proptech launches declined to 21 in 2017 and none in the first half of 2018 (see figure 5b).33 One reason for this trend could be investors’ preference for established proptechs, which have more evolved products/services and a performance track record.
Given the investor preference for proptechs, there is merit in CRE companies becoming knowledgeable about areas of proptech that may create value for their businesses. Proptechs are using existing and developing technology to nurture new, innovative ideas that enhance operational efficiency, tenant experience, and information flow. Take the case of Open Box, which promises automation services to real estate companies on a robots-as-a-service (RaaS) model.34 One of its applications includes automated data transfer from budgeting function to valuation, through its real estate automation engine, thus saving hours of monotonous and manual work.35 Another example is Leverton, a company that provides real estate document abstraction services through AI-powered deep learning algorithms.35 By using natural language processing and machine learning systems, Leverton’s platform is designed to extract and structure the relevant information from complicated documents related to purchase-sale, lease, title insurance, and mortgage transactions.
What should CRE companies do to be more agile at engaging with proptechs?
In our 2018 Real Estate Outlook, we highlighted that CRE companies can work with, acquire, or use proptechs’ services. However, we have seen limited engagement of CRE owners with proptechs. This is at a time when investor enthusiasm for proptech seems quite high.38 To better engage with proptechs, CRE companies can consider the following options.
Collaborate with proptechs
Today, CRE companies tend to be more aware of proptechs, but the industry seems to perceive them more as a disruptor than as a collaborator.39 This is a stage that most of the broader financial services peers have passed, and many are now looking to proactively engage with fintechs.40 It is important for CRE owners/operators to understand that it is a win-win situation, where CRE companies can match their industry knowledge and business opportunities/needs with proptechs’ technology know-how and nimbleness. Nearly a third of the survey respondents acknowledged that incumbents’ collaboration with proptechs will influence their future investment decisions. It may not be a good idea to consider proptechs as just vendors of a product or service, as it may limit the range of benefits that companies can achieve by partnering on potential innovations. For instance, as per a global agreement, Leverton will automate lease abstraction systems for JLL’s clients across North America, Latin America, Europe, and Asia Pacific.
Reassess proptech engagement approach
CRE companies may consider identifying a single point of contact to drive conversations with proptechs.42 To ensure a coordinated approach, companies may develop a governance model and guidelines to evaluate proptechs.43 CRE companies should consider assessing the size, scale, maturity, level of innovation, and relevance to existing business.
Of course, cultural differences with proptechs—because of their startup nature—are natural, and CRE companies should acknowledge these. For instance, proptechs tend to be leaner and make faster decisions compared to CRE companies. Both sides should therefore develop a shared understanding of the communication flow that allows incumbents and proptechs to coexist successfully. A bigger mind-set change for CRE companies is to increase agility by enhancing their risk appetite and adopting a fail-fast approach, as every proptech investment may not generate the desired returns.
CRE companies should also establish quantitative and qualitative metrics to measure their return on investment from proptech investments. They may consider firm revenue and cost-saving targets, market penetration, or qualitative measures such as tenant feedback and level of transformation.
Real estate has arrived as a meaningful and strategic long-term play for many investors. With increased investor interest in CRE, REITs can expand and diversify their investor pool. They can take advantage of the separate Global Industry Classification Standard (GICS) of real estate and help generalist investors to better understand the nuances of REIT operations, performance, and valuation. Companies can frame a targeted expansion strategy for generalist investors—such as pension, endowment, and foundation funds—who have traditionally under-allocated to REITs but are warming up on REIT investments.
For instance, on average, pension fund respondents to the Deloitte survey, plan to increase CRE capital commitment by 9 percent in the next 18 months (see figure 1), and a significant portion of this could be directed toward REITs. Further, the increased investor interest can particularly help smaller REITs (market capitalization of less than $1 billion) to gain exposure to more institutional investors, as the investors plan to expand beyond core markets in search of yield.13 CREs are also able to use data insights to achieve geographical diversification by targeting investors from different countries. For instance, our survey respondents from Canada (55 percent) are interested more in the Northeast region of the United States, while Chinese respondents (40 percent) focus more on the Sunbelt.
Global CRE investments continue to rise on the back of steady economic and employment growth in key global markets. This is despite some concerns about a flattening yield curve, various country tax reform initiatives, and the threat of trade tariffs as well as the yet to be fully determined impact of Brexit in Europe.4 In the first half of 2018, global CRE transaction volume increased 13 percent year over year (YOY) to $341 billion.5 The Americas’ volume rose by 9 percent YOY to $132 billion.6 The United States led the Americas’ growth with a volume of $122 billion (+11 percent YOY).
The trend is expected to continue, as 97 percent of our survey respondents plan to increase their capital commitment to CRE over the next 18 months (see figure 1). Respondents from the United States plan to increase their capital commitments by 13 percent in this time frame, while those in Germany (13 percent) and Canada (12 percent) show similar levels of interest. In terms of inbound capital, the United States is the most preferred CRE market globally, followed by Hong Kong and China.
Surveyed executives plan to diversify their portfolios through higher investments in newer and emerging business models and thematic investments. Over half of the survey sample aims to invest or increase investments in properties with flexible leases, and 44 percent plan to do so for flexible spaces. Investors seem to realize that their investments should be tied to the changing nature of work and tenant preferences. As such, the new capital commitment is unlikely to flow entirely into traditional CRE. For instance, survey respondents specializing in mixed-use and nontraditional properties plan to increase their capital commitment by a higher percentage than those focused on traditional properties (see figure 1c). Specifically, under nontraditional properties, those surveyed are likely to increase investments in data centers and health care (including senior housing) facilities. While investors diversify their risks, they are expected to continue to value traditional properties and longer-term and high-credit-worthy tenants.
With the change in investor preferences, CRE companies should consider rebalancing their property portfolios, focusing on creating memorable tenant experiences, and diversifying their investor base to attract higher capital investment.
Rebalance property portfolio
Investors’ capital commitment plans suggest CRE companies could have an advantage if they stay close to and demonstrate clarity on their core investment strategies, and risk alignment against those strategies, while balancing and diversifying their property portfolios. However, even the meaning of “diversification” could be challenged. Properties and portfolios could take different shapes and forms, such as building more flexible spaces and making properties more experiential and engaging.
Most traditional property real estate investment trusts, except industrials and certain classes of nontraditional REITs, are trading at a discount to their net asset values.8 Accordingly, CRE companies may also be able to take advantage of mergers & acquisitions (M&A) and joint venture or partnering routes. Companies can leverage data-driven analysis to craft a more robust strategy around current market positions and analyze how expansion into newer properties could complement their existing ones. Strategy linkage driven by supporting data can help demonstrate how a single investment not only presents operational synergies but also evolves the broader portfolio. For instance, retail owners could conduct highest and best use analysis based on location, surrounding demographics, and other macro factors to repurpose some of their vacant assets into nontraditional uses such as data centers and senior housing and create new sources of revenue.