NAREE Special Report: Kelly Ranks Top 10 Issues for RE

By Suzann D. Silverman, Editorial Director

Hugh Kelly, chair of The Counselors of Real Estate, offered the organization’s annual list of the top 10 issues affecting real estate as the opening speaker for the National Association of Real Estate Editors’ 48th annual Real Estate Journalism Conference. The conference launched  in Houston on June 11.

This year’s ranking is as follows:

1. Energy
2. Jobs
3. The Millennials
4. Healthcare
5. Globalization
6. Water
7. Capital Markets
8. Housing
9. Manufacturing
10. Agriculture

Kelly placed energy at the top of the list, ahead of jobs, because it is “the game changer for the U.S. economy.” While energy is currently a job creator, the opportunities vary by location, from fracking in North Dakota, Montana, Pennsylvania and elsewhere to renewable energy in Massachusetts, for instance. Whatever the opportunity, though, the U.S. is going to require more energy in order to grow, he said. Invoking Albert Einstein’s E=MC2, he noted, the big question is: “Can we generate enough energy to make changes that matter?”

With jobs lost during the last recession finally replaced, the big focus for real estate will need to be on how the job market is changing. The number of new jobs this year is likely to continue at a pace of 200,000 to 250,000 per month. But job mobility–which varies by city, with New York, San Francisco and Boston featuring about 10 percent mobility among workers and Dallas and Charlotte featuring only about 5 percent mobility–reduced square footage per employee and increased replacement of some traditional jobs by technological alternatives will change the real estate needs of a wide variety of businesses.

The Millennials have been much studied as the next market changers, but they, too, present challenges. Overall, they carry $1 trillion in student loans, and the younger group are having a difficult time finding jobs, and as a result, appropriate housing. Their unemployment rate, at 9.1 percent, is higher than the overall U.S. jobless rate. And their average income remains low. Yet they have a strong desire to explore and expand residential markets, and their numbers are high in specific cities, including Houston, Austin, Dallas, San Diego, Los Angeles, San Francisco and Washington, D.C.

The healthcare sector promises continued growth. Kelly estimated $40 billion in healthcare real estate construction in the next year, even while medical offices and clinics increasingly move into such unused facilities as empty stores in Class B malls around the country.

Global expansion will be challenged in the coming years by necessary expansion to accommodate the larger ships to come through the Panama Canal, shifts in energy markets, political unrest around the world and the emergence of manufacturing technologies, especially 3-D printing.

Demand for fresh water represents a significant challenge in the coming years, Kelly said, with demand set to exceed supply by 40 percent in 2030. And while growth markets like China, Northern Africa and India will be extremely short on water, “we can’t take it for granted that we’re in a better position” in the U.S., Kelly added. Los Angeles, Phoenix and Las Vegas are all at risk if Lake Mead continues to decline, and Great Plains agricultural expansion will likewise be impacted by decline in the big aquifer there.

The good news for real estate investors is that the capital markets are well infused: “We don’t have a capital shortage for real estate at this point,” Kelly said. “The question is, will that be wisely deployed? Will we price risk appropriately?” For investors, though, real estate will remain a preferred focus because the yields are higher than those for alternative investments.

The housing market has moved from a headwind to a tailwind, with improved liquidity and affordability, although homeownership continues to lag. Only three states are still losing jobs: New Mexico, Virginia and New Jersey. But each new housing unit produces three jobs and every new multi-family unit produces 1.2 jobs, so new construction is critical to continued job growth.

Manufacturing is undergoing significant change, with production shifting back to the U.S. but the types of manufacturing becoming more advanced. 3D printing is the “disruptive technology,” Kelly said, transforming the U.S. economy from post-industrial to post-post-industrial. The increased need for faster delivery is driving production as well as distribution facilities closer to populations, and that is driving changes in zoning. That, Kelly declared, will reshape the cities and suburbs and make the economy more productive. But it does not necessarily translate to increased jobs, he cautioned.

Finally, while Kelly ranked agriculture 10th, he warned that real estate executives “ignore it at our peril.” While the U.S. produces more than it consumes, anticipated population growth is going to drive greater demand, and investment in agricultural property will become increasingly important.

Look for an upcoming video interview with Hugh Kelly about the most critical changes on CPE TV.