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Property Market Consequences: Entering the Era of Less

Jonathan D. Miller / Nov 19 2010

For Release Sunday, November 21, 2010

Jonathan D. MillerFollowing a hard crash on the heels of the nationwide housing bust, U.S. commercial real estate markets have just begun their crawl off bottom. And investors — as well as the nation at large — have to confront an unwelcome reality.

The harsh fact is that America, whether we want to admit it or not, has entered a new economic period — an “Era of Less.” It is producing unsettling consequences, including reduced investment returns, restrained development prospects, and for the larger housing picture, shrinking space demands on a per capita basis.

That’s the central conclusion of Emerging Trends in Real Estate 2011, the annual forecast which I author for the Urban Land Institute and PricewaterhouseCoopers. The report is based on nearly 900 confidential interviews and surveys of real estate industry leaders.

Numbers help tell the story — today’s $4 trillion (approximate figure) in commercial real estate capital (debt and equity) is suffering 30-50 percent losses off the peak asset values that were ginned up earlier in the decade by a cheap-credit fueled trading mania. At the same time, Americans have collectively lost about 20 percent of their wealth to a combination of housing and investment declines. Living large won’t be possible in the new world order of constricted credit as borrowers struggle to disengage from rampant overleveraging. On the residential side, homeownership rates could decline from nearly 70% closer to 60%.

Even after steep drops in housing prices, many Americans just can’t afford to buy homes — they don’t have the savings for down payments or credit scores to satisfy necessarily more circumspect lenders. Instead of living large in sprawling suburban dwellings, stuffed with shopping center purchases, more folks will turn to renting apartments or smaller houses, preferably closer to where they work. Balancing checkbooks requires paring utility bills and especially transportation costs for car loans, fuel, auto insurance as well as auto maintenance and repairs.

Prospects for various commercial property sectors and markets also hinge on satisfying shifting tenant requirements for more efficient and productive space.

On the apartment front, multifamily unit owners and investors almost certainly will benefit in the surge in rental demand from housing refugees as well as demographic trends — the increasing numbers of young adults (the Echo Boomer bulge) now entering prime apartment renting age (20s to early 30s before raising families). More of their empty-nest, Baby Boomer parents also look to downsize and gain the greater convenience of apartment and townhouse living, closer to 24- hour, urban amenities — shopping, entertainment and cultural districts. As a result, some apartment markets in major coastal gateway cities could register rent spikes next year, and developers anticipate building new units in markets with lowering vacancies.

How about retail? Shopping centers will undergo a significant shakeout — more frugal, credit-constrained consumers living in smaller spaces won’t buy or need as much. E-commerce and web-retailing also inexorably gnaw at the market share of bricks and mortar stores, which begin to slim down space requirements. Tellingly, U.S. developers have stopped building regional malls, the iconic “town centers” so emblematic of post World War II suburban expansion and middle class prosperity. Eventually, Emerging Trends respondents expect more local governments and developers to collaborate and readapt increasing numbers of failing malls into more pedestrian-friendly, apartment-oriented, residential neighborhoods with urban retail features. Either these places try to tap into expected multifamily demand or risk the loss of significant tax base.

In case you were wondering about warehouses — Changing distribution logistics will reduce future growth in demand and alter their requirements. Increased point-to-point shipping from manufacturers to end users eliminates supply-chain links, and reduces the need for warehouses at some intermediary distribution points. Still, the manufacturing-depleted U.S. will remain a net importer, continuing to depend on key East and West coast seaports as distribution hubs. A widened Panama Canal, scheduled for completion in 2014, should increase the significance of Gulf and Atlantic Coast ports for handling traffic from the Pacific Rim.

Office space demand continues slack as companies cut office space needs through a range of productivity strategies — outsourcing work to freelancers, off-shoring jobs to cheaper labor markets, and reducing the size of offices/cubicles. Large employers are concentrating headquarters in eight or nine global gateway cities with direct transportation links to each other as well as primary overseas capitals.

The leading investment markets for office space — Washington, D.C., New York, San Francisco, Boston and Seattle — tend, in our Emerging Trends analysis, to cluster along the East and West coasts.

Los Angeles also appears poised for a rebound. These markets, with their concentrations of higher paying brainpower jobs, tend to attract the “best and the brightest,” including recent grads looking to build careers. Except for a handful of interior markets with big international airports — Chicago, Dallas, Denver, and Atlanta — most cities in the nation’s vast center edge off investor radar screens, especially in the woebegone Rustbelt and places where the housing debacle takes its greatest toll — Phoenix, Las Vegas, and Florida metros.

Not surprisingly, suburban offices, a growth sector in the 1980s and 1990s, look especially problematic to investors as corporate tenants concentrate in prime downtown hubs, attracted by transportation conveniences.

Simply, this Era of Less promises relative prosperity for strategically located metropolises, big curbs on the hyped-fast suburban expansion of recent decades, and likely diminishing prospects for everywhere else.

Jonathan Miller authors the authorative annual Emerging Trends in Real Estate report for the Urban Land Institute. His email is columns are not copyrighted and may be reproduced in print or electronically; please show authorship, credit and send an electronic copy of usage to