2018 Executive Summary
The United States has had the opportunity to experience more than a full year under the current Trump administration. Volatile would be an understatement, as Trump was unsuccessful in attempts at changing immigration policy, Obamacare and most of what he touched until the end of 2017, even with Republicans holding the majority of the House and Senate. During his campaign, his promises included $1 trillion in federal funding to infrastructure. Obviously this excited real estate executives, however, it appears to no longer be a priority. Combine those changes with the weekly headlines of the dismissal of top White House executives, continued Russian investigations and controversial and thoughtless tweets and the outcome could seem questionable. Even so, 2017 turned out OK, and now the question is the outlook for 2018.
Trump’s only significant accomplishment was finalized in late December 2017, slightly after the Real Confidence executive survey was completed, as he and his team managed to pass the Tax Cuts and Jobs Act. The two larger talking pieces of the bill included corporate tax cuts from 35% to 21%, and the removal of the tax penalty to those who violate the mandate to purchase health insurance, starting in 2019. Based on the Real Confidence survey, our executive participants don’t expect Trump to have a productive 2018 but, from a handful of selections, they did have the most significant belief that a change in tax reform was coming – before it passed.
Understanding Real Confidence
Altus Group, a leading provider of independent advisory services, software and data solutions to the global commercial real estate industry, created Real Confidence, a web-based publication that launched in 2015, and has continued to improve its content by adding depth and looking at the economic and real estate forecasts from multiple angles with input from industry executives. After the success of the Real Confidence University Challenge, comprised mostly of graduate-level student participants, Altus Group elected to survey our extensive network of young professionals to get insights from young leaders on demand trends that could impact the economy and commercial real estate. As a result, the publication now combines an institutional executive vision for the coming year along with future leaders’ thoughts and decision-making rationale.
Both groups are polled and asked to rate their 2018 outlooks on a wide range of topics. They were asked to evaluate their 2018 confidence level, from a scale of 0 (no confidence) to 100 (absolute confidence), on the outlook for specific topics. Additionally, the executives were asked to allocate $1 billion to a variety of commercial real estate investment options, including property sectors and subsectors.
Real Estate & The Economy
The U.S. economy continues to grow, but at a slower pace than desired. At this point, the economic cycle is the longest running in history, exceeding nine years. It’s also the least gainful as far as gross domestic product (GDP) growth. While real estate executives still believe in the strength of the economy in 2018, a Real Confidence value of 68.8, up only 0.5% from 2017 results, is a sign that they might believe that we’re nearing the end of this run. Nonetheless, an infusion of capital from tax cuts could change their present position. Even with these monetary corporate gains, executive survey respondents only expect GDP growth to fall within the 2- 3% range. Remarkably, young professionals have almost the same outlook, answering the same question with a 69.4, only moderately confident in our economy this year.
Executives and young professionals aren’t as much in agreement when it comes to forecasting employment, even after the U.S. adding over 17 million jobs since the Great Recession and Presidential promises that more gains are to come this year. Maybe it’s the motivation of starting your career, but potential future leader’s results were much more optimistic, registering an 80.3 of confidence that they will have the ability to maintain or change employment over the next five years.
Executive’s thoughts on employment were mixed as the majority, 59.6%, expect monthly average gains of 150,000 to 200,000, while almost 41% predict additions of less than 150,000. Ironically, when asked if there would be a lack of skilled or unskilled labor in 2018, the consensus agree that a shortage is a concern as 47% fear a shortage of skilled labor and 36% worry about shortages in both categories. Immigration reform is back at the top of the President’s agenda and this may affect the volume of skilled and unskilled laborers, causing concern as corporate pockets are fuller and companies eye expansion.
The commercial real estate cycle looks to have run its sequence and prices in many major markets have exceeded 2007 pre-recession levels with sellers outnumbering buyers. Transaction volume is down, even with more than enough domestic and foreign capital investors. Executives are still confident in the health of the commercial real estate industry but less so than compared to 2017 with the value dropping 6% to 66.3. Almost all real estate focused supply based questions fell within the 45-60 value range, indicating limited to moderate confidence in any significant changes to the industry in 2018. Development spending increases aren’t expected, possibly due to labor and material costs, and interest in suburban locations and alternative investments are still doubtful as a volatile government and a questionable economy increase investor risk. Executives aren’t forecasting doubt for the industry in 2018, but they are indicating a need for caution as many of the mechanics aren’t in their favor.
One sector that looks unbeatable is industrial. In its second year in the number one spot, industrial remains the king of all sector options based on the $1 billion portfolio allocation question. According to the 2018 Real Confidence Executive Index, respondents allocated the most capital to this sector, in both REITs and private equity selections. Even though development spending is expected to be minimal, 43% of respondents chose industrial as the property they would build this year. The consistent growth of e-commerce continues to fuel this sector, as it has been the demise of many retail brick and mortar locations. Executives don’t see an end to either trend, as almost 32% expect the e-commerce to total retail sales ratio to exceed 14%.
Two other sectors worth noting are healthcare and infrastructure. Healthcare drew much interest from survey respondents allocating 16.9% to health care REITs, up 9.5%. Senior living, a new 2018 sector for private equity, started strong with a capital interest weight of 14.6%. The demand for health-related services is high as baby boomers age and the need for medical office buildings, hospitals, and retirement facilities increase. Infrastructure didn’t stir the interest it did in 2017 as a result of Trump’s campaign promising $1 trillion in federal spending. Allocation to this sector was down 8.2%, falling to 7.3% of the equity REIT interest. Investors questioned Trump’s ability to create change and noted needed foundation improvements throughout the country that are unlikely to be seen in 2018.
Other Trends to Watch
The sharing economy model of business continues to expand, moving into a variety of areas that can impact our economy and commercial real estate. Based on the Real Confidence Young Professionals survey, many had moderate to absolute confidence that the sharing economy will have a more significant role in their daily activities in 2018. Businesses like Airbnb, WeWork, and even Uber are gaining popularity and could be earning enough ground for real estate companies to take notice and make changes shortly. Yet Real Confidence executives aren’t there yet, scoring only a 47, 0 – no confidence to 100 – absolute confidence when asked if the sharing economy model would have an impact on real estate in 2018. This story is one to watch, as new concepts in sharing and its growth continue to develop.
Open-air office space layouts have been trending for years as many firms began copying the technology-driven office design of less individual offices and more kiosks, bench seating and a variety of other styles reducing privatized locations and increasing opportunities for collaboration. Survey executives were mixed about the concept in 2018, scoring a 65.5 when asked if more redesigns of offices would incorporate more open-air plans this year. More interesting was their response to whether open-air design led to greater productivity in the work environment with 59.6% saying no. The movement might work for some, but the trend may slow if companies start to see signs of inefficiency.
According to the 2018 Real Confidence results, demographic focus will be a major factor for real estate investors. Out of all the questions asked, executives scored this factor their highest value – 74.8. Up over 14% from the 2017 survey, executive respondents agreed demographics were a key component to making real estate decisions this year. Generation Y or millennials, those aged 20-36, represent the largest generation in U.S. history and are the generation that 67.4% of real estate executives said they are most focused on when making real estate investments in 2018. Executives, if this is your generation to pursue then take note -according to the young professionals surveyed, social media doesn’t have an impact on their personal decisions; they prefer face-to-face communication over texting, emailing and social. However, 53.1% say they do over 50% of all retail shopping online.
The 2018 Real Confidence Survey is unique as one of the first to offer a two-look perspective for commercial real estate, combing top real estate decision-makers’ insight on supply with up and coming young professionals’ thoughts on what drives their demand. Hard real estate assets comprised of either office space, apartments and places to shop, will always exist but new concepts and directions, driven by trends created by the next generation of leaders, continue to generate innovation and ideas that will likely continue to modify the real estate industry we know.