Rising interest and capitalization rates top the list of issues that have future implications for real estate. That’s according to industry expert Scott Muldavin, chair of the Counselors of Real Estate and senior advisor at the Rocky Mountain Institute in San Rafael, Calif.
Muldavin shared his insights on the 10 top issues that could affect real estate in the coming years at the National Association of REALTORS® 2013 Conference and Expo last November. Members of the Silicon Valley Association of REALTORS®, along with about 20,000 REALTORS® from across the country and around the world, attended the conference held in San Francisco Nov. 8-11.
1. Rising Interest and Capitalization Rate Risks
Record low interest rates have driven the economy and real estate markets in recent years. Rising interest rates could raise capitalization rates, which could create anxiety about investing in real estate.
“Interest rates are going to rise significantly, so my advice is to be careful about your investments today and lock in those low rates if you can,” said Muldavin.
2. Health Care
Health care is an important issue with implications for real estate. As the population ages, there will be greater demand for senior housing, requiring a change in the configuration and size of available housing, including composition of households. A growing number of seniors will require greater medical care, leading to expansion in medical facilities.
3. Capital Market Resurgence
A continued capital market resurgence will be good for real estate, according to Muldavin. Underwriting is still tighter for the residential sector than commercial, but rates are near historic lows and affordability is still high in many parts of the country.
4. Event Risks
Major global events, such as war and acts of terrorism, will continue to dominate headlines. Their impact on the stock market and global economies trickle down to real estate.
“The risk of future events is high, and while it’s always hard to anticipate these risks, they need to be considered because their impact is often great,” said Muldavin.
5. Implications of Climate Change/Weather on Coastal Property Markets
Climate change will continue to have a strong impact on properties across the country. Property owners in areas hit by Hurricanes Katrina and Superstorm Sandy are now dealing with changes in zoning standards and higher insurance premiums.
6. Echo Boomer Housing Demand
Future housing demand is likely to come from echo boomers, the 80 million Americans born between 1982 and 1995. This generation prefers a more flexible and active urban lifestyle, relies heavily on mass transit, and is more willing to trade home size for location.
“We are the only developed country that has had an echo boom, and that’s a positive thing if the country can react and respond to it,” said Muldavin.
7. Implications of Increased Natural Gas and Oil Reserves on the U.S. Economy
While increased natural gas and oil production creates more jobs and reduces U.S. dependence on foreign oil, the increase in fracking has raised concern about the environment. More new homes and offices are being built with environmental friendly features.
“Older buildings have become functionally obsolete,” remarked Muldavin.
8. Global Real Estate Growth and Risk
The global economy cannot be ignored. Unemployment in Europe and the global debt crisis affect foreign investment in real estate.
9. Impact of Technology on Office Space
Technology will continue to impact office space. The office market has the highest vacancy rate because technology has introduced new ways of doing business at the expense of employees and space. Work-from-home and telecommuting have allowed people to work when and where they want. This significantly reduces office space requirements and changes neighborhoods, as more people stay home.
10. Retail Malaise and Repositioning
The impact of the Internet on retail stores is causing retail malaise and repositioning. Retail demand is down due to increased Internet sales, which are expected to rise from the current 6.5 percent to nearly 15 percent by 2020.
“Many people are replacing physical items with electronics and free or virtual products, such as e-books and smartphones enabled with cameras, GPS and flashlights. This means businesses will continue to require less retail space, so I believe the trend in the future will be for fewer and smaller stores,” said Muldavin.