Question

In your opinion, what will be the biggest challenge to the real estate industry (both sales and finance) during the next few years? Will the real estate industry still offer its members the easy, upper middle-class living they had become accustomed to? Will families still continue to achieve the dream of individual home ownership or will we see the continued expansion of government housing projects and rent control of the private property? What effect have the refinance/loan modification programs had on real estate values and home affordability/availability of credit for first-time buyers? Will the replacement of former president Barak Obama, with President Donald Trump, a more business-friendly Republican, have any lasting effect on the housing industry?

Answer 1

It’s complicated. In the course of compiling its annual Emerging Trends report, the Urban Land Institute found that the only certainty in its outlook for 2019 was uncertainty. Expert analysis points to a more complex, multi-layered series of overlapping trends, with unpredictable results, as opposed to a few strong narratives.

Tapering growth leads to a new numbers game

Less growth means a more challenging environment, and analysts predict a slow down on multiple fronts. Population growth has continued to trickle up, labor force availability, especially in the construction industry, is lackluster at best, and productivity figures for the economy at large show minuscule improvements. Add in government forecasts of an economic slowdown—Congressional Budget Office projections show average GDP growth of 1.9 percent in 2018-19, much slower than at the beginning of the current economic upswing—and real estate activity will likely taper off as well. This deceleration means identifying and capitalizing on new opportunities—such as emerging markets, replacing older buildings, adaptive reuse, and new office space—will be much harder.

Second cities, and now their suburbs, may be key markets

Investors have long seen urban revitalization in smaller U.S. cities as a great bet, but as these downtowns boom and millennials continue to return, young adults have started to make inroads into the suburbs. Researchers are seeing more evidence the younger generation that put off buying a home has its eyes on single-family homes, meaning that housing surrounding these so-called 18-hour cities—especially if it’s in walkable, transit-oriented developments—is in high demand.

Amenity creep and the apartment arms race

In a competitive housing market, apartment landlords and builders have been engaging in an arms race for new amenities. Fancy gyms and rooftop access doesn’t cut it anymore. Today’s cutting-edge multifamily developments include movie theaters, dog runs, communal gardens, and access to coworking space. As landlords “knock themselves over” looking for new selling points to attract downtown renters, smart home and service-economy firms are also rising to the challenge, offering benefits such as laundry service.

Technology tackles the real estate market

Tech has always had its eye on opportunity, and real estate, which represents 13 percent of the U.S. GDP, is a big prize. Next year will see increasing inroads by tech firms, services, and startups seeking to capture and consolidate this fragmented market. Venture capital and tech investors have responded in kind. CB Insights projects real estate tech investment may top $5.2 billion by the end of 2018, firms such as Fifth Wall have zeroed-in on the industry, and investment in building and construction tech has boomed. New platforms for home sellingkeep popping up, trying to disrupt how this traditional transaction works.

Dealing with the real costs of free delivery

As next-day increasingly becomes just-in-time, a sea change in logistics and shopper expectations has created new challenges for the real estate industry. The never-ending hunger Amazon and other e-commerce companies have for warehouse space has supercharged the industrial real estate sector, but the possibilities of increasing speedy delivery have contributed to transportation gridlock in major U.S. cities, as well as pollution near logistics centers.

Add this to increasingly underfunded infrastructure: Businesses will bear an estimated $240 billion in congestion costs over the next five years, while annual spending on roads and highways is just 37 percent of what’s needed to keep pace with deterioration. It’s clear real estate will not only have to factor in, and pay the price for, this oversight, but will need to pay attention to how potential solutions—such as congestion pricing—impact land values and investment opportunities.

Mortgage rates may finally be at the end of their long run of rock-bottom lows. They've already jumped four-tenths of a percent since the election, and more could be on the way. Federal Reserve Chair Janet Yellen recently hinted the Fed may be raising the federal funds rate soon, which sets the pattern for interest rates overall.

Aside from that, Trump and Republicans in Congress are keen to dismantle the Dodd-Frank Act and other regulations, which they view as a burden on business and finance. Rolling back Dodd-Frank's major provisions could make it easier for banks to lend, creating an increased demand for credit. And greater demand for credit means higher interest rates, simply as a matter of supply and demand.

Similarly, Trump's proposals for tax cuts could free up capital that could trigger increased investment, meaning more demand for credit and higher rates.

On the other side, some of Trump's plans could generate higher costs for businesses and consumers – which would tend to slow the economy, at least in the short term. Tearing up trade agreements and imposing tariffs would drive up prices on a broad range of goods. However, it's not clear whether congressional Republicans, who generally favor free trade, would support any new tariffs, though they may well embrace new trade agreements.

Trump's plans to expel unauthorized immigrants and enact strict immigration controls could reduce the low-wage workforce that currently does much of the labor in agriculture and food processing, along with a substantial presence in construction and service jobs. That could cause prices to rise – perhaps sharply for produce and meat – meaning a dampening effect on the economy, which would put downward pressure on rates.

One of the main complaints about the Dodd-Frank Wall Street Reform and Consumer Protection Act, as it's officially known, has been that it increases compliance cost for lenders. That's been a particular complaint of small lenders, such as community banks and credit unions, who can't absorb those costs as readily as big banks can. A rollback of Dodd-Frank could enable those smaller lenders to expand their lending and reach out to a broader range of customers – increasing mortgage availability.

Another element of Dodd-Frank was the creation of the Consumer Financial Protection Agency (CFPB), whose mission includes protecting borrowers against predatory lending. It doesn't seem likely Trump or congressional Republicans will seek to do away with the agency outright, but it's a good bet they will replace its current single-director model with a multi-member board – which Republicans have urged since it was created. That would likely make it less nimble in responding to new problems, but also might shield it from big swings in policy from one administration to another.