Global Economic Instability Drives Investors to US Real Estate

John Jordan | November 2019

Mitch Roschelle, partner with PwC, gave a presentation on how the US economy is impacted by world markets and how the real estate sector will fare in 2020.

NEW YORK—In an informative, yet concise overview of the recently released ULI “Emerging Trends in Real Estate 2020” report, author Mitch Roschelle, partner with PwC, offered some heartening insights to attendees of the Global Real Estate Summit 2019 Conference and Expo as to why the US real estate market remains a favorite with foreign and domestic investors.

He also related that despite some talk of an impending economic downturn, the US will most likely not fall into recession in the next several years.

Roschelle, a founder of PwC’s Real Estate Advisory practice, shared some of the highlights of the 104-page report co-published by PwC and ULI released in September that was the result of interviews and survey responses from more than 2,200 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants.

His afternoon presentation was part of the day-long Global Real Estate Summit NYC held on Nov. 4 at the New York Marriott Marquis. presented by the Hudson Gateway Association of Realtors, the Staten Island Board of Realtors, the Long Island Board of Realtors, theGreater Bergen Association of Realtors and The Brooklyn Board of Realtors.

Roschelle noted that the rather optimistic view by many of the survey respondents of the U.S. real estate market came when some experts and media pundits were predicting a possible U.S. recession was on the horizon earlier this year.

He related that while the Federal Reserve is data-dependent, the stock market both in the U.S. and abroad is “headline dependent,” which has resulted in extreme market volatility that has caused both domestic and foreign investors to flock to safer investments.

He cited several examples of daily events, such as the recent news when British Parliament rejected Prime Minister Boris Johnson’s plan to fast-track Brexit legislation, for causing dramatic declines or increases in stock or currency values.

“That shows you how wired to the headlines the market is,” Roschelle said of the pounding the British sterling took on the news of the failed Brexit plan, and said that many wealthy investors who get spooked by the day-to-day volatility in the political and economic arenas turn to the more stable returns afforded in the real estate markets.

Another emerging trend is that while the U.S. economy continues to perform well, it is being dragged down by other world economies.

Roschelle, a contributor and frequent guest on Fox Business and Bloomberg TV, said that while uncertainty may not be good for the stock market, it is good for the real estate market.

He noted that the combination of continued steady GDP and job growth will fuel the US economy in coming years. “All of the previous recoveries other than the one that we are (currently) in and the expansions that we have had, have seen greater employment growth and greater GDP growth. So, here is the good news… we are not overheating this economy and we are not inflating bubbles. And all other growth spurts had overheating taking place,” Roschelle related.

He added that the slow “drip, drip, drip” GDP growth of between 1.9% and 3% is beneficial because it is “preventing real estate people from getting ahead of their skis, which they love to do.”

Roschelle noted that IHS Markit recently stated that it does not believe the U.S. economy will fall into recession in the next three years.

However, he added that if there was one headwind that could take down the U.S. economy that would be the jobs market and in particular the lack of skilled labor to meet employment demand. Another byproduct of the tight labor market will be rising wages, Roschelle added.

The PwC-ULI Emerging Trends report stated that survey respondents perceived the threat of recession to be higher abroad than in the United States right now, which has prompted some concerns about “contagion.”

“Yield, adjusted for risk, is in America’s favor right now even in today’s environment.” The report stated that from all corners of the United States there is no shortage of equity or debt capital, but stated that buyers and lenders are “discriminating.”

“At this point, the abundance of capital is a blessing and a curse, the ULI Report stated. “Excellent liquidity is letting the market function, and will continue to do so in 2020. However, as more of that capital comes without the sophistication to sort out opportunities and to price risk keenly, the presumption that such capital will remain available no matter what could lead to a bad end. There are ‘alternatives’ and one of those is safer harbors, as the move of trillions of dollars to negative interest-rate instruments should suggest.”

The ULI Emerging Trends report also noted some troubling trends in the housing market in a section entitled: “Housing: The Great Unraveling.”

The report stated that affordability has reached the breaking point even in markets that previously boasted the availability of low-cost housing. Housing conditions in many markets were routinely described by survey respondents as “challenging,” to the point of discouraging employers to locate in areas with inadequate affordable housing.

One attempt at a solution: a rise in co-living, among older as well as younger generations. Increasing numbers of municipalities are implementing policies, such as inclusionary zoning and offering incentives such as density bonuses to address the problem, the report stated.

Other emerging trends in the ULI/PwC report included: “Hipsturbia”—the live-work-play districts that spurred 24-hour downtowns in the 1990s have spread to many suburban communities, which are seeking to become hip destinations, or “hipsturbs” of their own right. The key to success of these emerging districts are: transit access, walkability, and abundant retail, restaurant and recreation options.

The report also predicts that “Boomers can expect to stay active while living longer, which has positive implications for housing demand in downtowns and hipsturbs, as well as workplaces, as many may choose to keep working or pursue second careers.”

Top Markets for Investment, Development

The Emerging Trends report ranked Austin, TX as tops out of 80 cities in the U.S. for overall real estate prospects for 2020, followed by Raleigh/Durham, Nashville, Charlotte, and Boston.

Other favorites for 2020 included: Dallas/Fort Worth, Orlando, Atlanta, Los Angeles, Seattle and Tampa/St. Petersburg.

Leaders in other categories were:

Major Capital Magnets – Manhattan, Chicago, Inland Empire (Calif.), Northern New Jersey, Houston, Phoenix, San Diego, Oakland/East Bay (Calif.), and Miami. These markets accounted for more than 17% of total U.S. transactions over the past three years.

Stalwarts, Surprises and Determined Competitors – Philadelphia, Long Island, Fairfield County (CT.), Queens, Bronx and Staten Island. Minneapolis/St. Paul, Sacramento, Kansas City, Las Vegas, Baltimore, District of Columbia, and Detroit. All have a credible track record of capital inflows and recent evidence of solid transaction volume.

Treasures Ripe for Discovery – Jacksonville, Salt Lake City, Columbus, Cincinnati, Louisville, Pittsburgh, Greenville (SC.), Oklahoma City, Cape Coral/Fort Myers/Naples (FL), Boise, Spokane, Des Moines, Tacoma, and Jersey City.

John Jordan
Editor, Real Estate In-Depth