Playing Defense May Define Commercial Real Estate Next Year, Urban Land Institute Finds
Annual Survey Shows Industry Remains Optimistic Despite Economic Uncertainty
Next year may be the time to get defensive with real estate investments, according to the Urban Land Institute’s annual survey.
For now, few are preparing for the possibility that the economy takes a sharp negative turn next year, ULI’s “Emerging Trends in Real Estate 2020” survey of about 1,450 real estate professionals shows.
That could change, the group said, citing Congressional Budget Office forecasts that gross domestic product growth will drop to 2.1% next year and remain below 2% in the coming decade as inflation remains steady at 2.4% to 2.6%. Job growth also is projected to drop from 200,000 a month to 46,600 new jobs over the next decade with unemployment ticking up to a still low 5%.
“We could be looking at an especially jolting shock to the system,” the report says.
The looming possibility of recession or a slowing economy hasn't quelled optimism among commercial real estate professionals, but it has led some investors to shift tactics in finding and analyzing where to make deals.
The industry has been in an “end of cycle mindset for 36 months,” Catherine Pfeiffenberger, managing director and head of development and construction for Atlanta-based real estate company Jamestown, told a packed room at ULI’s fall meeting in Washington, D.C., this week. Jamestown manages more than $10 billion in assets.
Pfeiffenberger said “there’s a lot of take-your-cash-and-run right now.” But if investors look beyond the traditional acquisition avenues, “you’ll find new value opportunities,” she said.
The panel included Andy Lusk, head of acquisitions for Houston-based Lionstone Investments, and Hillary Spann, managing director and head of the Americas real estate investment for the Canadian Pension Plan Investment Board.
Uniformly, the panelists said a city’s job and wage growth as well as the types of jobs are big data points when looking at buying property. Cities with “knowledge economies,” those with large universities that churn out talent, attract the investor attention.
These are metropolitan areas that may have less than 2 million in population, which historically weren’t top places for institutional investment. But Lusk said the old designations of primary, secondary or tertiary markets has pretty much fallen by the wayside as guides for investing.
Lusk noted Pittsburgh as one of the metropolitan areas that’s been under the investment radar. While nationally the capital market is crowded, he said, “Pittsburgh is a great example of a market that’s not crowded.”
It has a growing knowledge economy. A year ago, Lionstone teamed up with locally-based Walnut Capital to buy the old Pittsburgh Athletic Association building in the city’s new Innovation District, which revolves around Carnegie Mellon University, the University of Pittsburgh, and University of Pittsburgh Medical Center. Google has had office in Pittsburgh since 2006 and other technology giants have set up there as well.
If the economy sours, that may not cause a collective pullback but could create opportunity. Spann said you have to “take everything on a case-by-case analysis.”