What trend is expected to shape markets, cities and home- building in the next 12 months and beyond? 18-hour cities.
According to one of real estate’s most reliable bellwethers, Emerging Trends 2017, an annual report published by the Urban Land Institute (ULI) and the accounting firm PwC, when it comes to real estate investment and development prospects, Austin; Dallas; Portland, Ore., Nashville and Seattle are all looking good.
Meanwhile, cities like Columbus, Ohio; Richmond, Va.; Pittsburgh; Charleston, S.C.; and Salt Lake City are beginning to percolate upward as markets to watch, according to the report.
Released in conjunction with ULI’s annual fall conference in October in Dallas, the report draws upon insights gained through interviews and surveys with more than 1,800 industry experts.
In spite of a growing note of caution, the investment and development outlook is generally positive for all markets in all regions. Last year, at the same conference, recession and the prospect that we are closer to the next downturn than the last one, entered the conversation. This year, discussions still pointed to an eventual slowdown but, in general, experts put it on the back burner.
Even though the current real estate cycle is the fourth longest in U.S. history, the consensus was that there is “little in the U.S. macroeconomic data that suggests overheating,” which is considered a well-recognized red flag for trouble ahead for real estate. Throughout the recovery, a lack of financing has constrained homebuilders, but in this instance it’s considered a positive. By putting a damper on development, it has also worked as a protection against over-building, which potentially will extend the current recovery cycle “even deeper into the future,” experts say.
The most important takeaway from both the Emerging Trends’ report, as well as this year’s conference, is the continued, but subtle, shift toward places generally considered second-tier metros, which ULI has dubbed 18-hour cities. These so-called 18-hour cities are those where many businesses operate outside the traditional business hours of 9 a.m. to 5 p.m. like in smaller cities, but not 24 hours, such as businesses found in bigger cities, like New York City. When Austin first appeared among the Top 10 list five years ago, it was “viewed as a fluke,” shared Mitch Roschelle, real estate research leader for PwC. Now, the top group includes a contingent of 18-hour cities including Raleigh/Durham, Charlotte and Nashville.
Expectations suggest this trend will continue as more residents and businesses move away from high-cost areas. “This year’s report shows that there are opportunities stemming from a shift in how, where and when people work,” says ULI Global CEO Patrick L. Phillips.
For homebuilding, Raleigh-Durham (also No. 7 on overall Markets to Watch) ranked as the top U.S. market for homebuilding prospects, followed by Charleston, S.C. The top five also included Portland, Ore., Nashville and Orange County, which were also in the overall Top 10.
Going forward, new developments expect to see more of what ULI calls “optionality,” which is defined as: “Allowing for the adjustment of space needs to vary in terms of size, location and use on an as-needed basis.” While this might seem solely applicable to commercial projects, it’s also spilling over to residential construction. For example, developers might have several different target groups in mind, so a building could easily be adapted in response to shifts in a market, say from renting to owning. In this example, a property might initially be geared toward renters, but the way it is designed, including amenities, would make a future conversion to condos easy. Other examples of optionality include developments, projects or even homes designed to appeal to multiple generations.
Development and construction has been dominated by large firms, but this year ULI finds smaller firms playing an important role in both new communities and also neighborhood redevelopment.
“These smaller firms are capable of addressing a range of current needs: affordability for users across property types, infill in older neighborhoods and attention to smaller markets of lesser interest to big developers,” according to the Emerging Trend report. Acknowledging that change is often incremental, report authors conclude, “The enormous number of firms composed of 20, 50 or 100 employees provide the industry with an ideal laboratory for entrepreneurial innovation.”
Affordability, which ULI considers the industry’s “vulnerable flank on the chessboard,” remains an overriding concern. While housing for low-income families remains a focus, expect to hear more about what is described as “small A” affordability issues of middle-income wage earners. In many markets, middle income households are spending more than one-third of their incomes on housing. Experts see this broader focus as a strategic opportunity to move toward a growing market with incremental profiles.
Local governments are cited as moving more aggressively, “more than at any time in memory” to incentive or compel the private sector to address affordability. Many are implementing inclusionary zoning, a strategy that dates back to the early 1970s, which encourages or compels developers to create below-market-rate rentals or for-sale homes to gain approval for new developments.
While 18-hour cities, new transit hubs and urban parks continued to garner attention as incentives for development, an increasing number of developers are also looking toward an age-old cue — food. And the interest is not just limited to new urban food emporiums such as Ponce Market in Atlanta or Union Market in Washington, D.C.
Instead, it extends to community gardens in new developments and even in some urban condos. Examples include Rancho Mission Viejo, a new community in Orange County, Calif., that includes orchards, acres for vegetable farming and even cattle ranching, or Summers Corner outside of Charleston, S.C. Harvest, a master-planned community in Argyle and Northlake, Texas, incorporates a professionally managed farm, two community crop areas and raised garden beds available for residents to rent.
Change is slow but incremental and taken together all these trends will shape real estate future.
Camilla McLaughlin is an award-winning writer specializing in house and home. Her work has appeared in leading online and print publications, such as Yahoo! Real Estate, Unique Homes magazine and Realtor magazine. She has also freelanced for the Associated Press.