The Counselors of Real Estate, an invitation-only professional organization of 1,100 real estate advisers and other professionals around the world, has revealed its annual list of the 10 top issues facing real estate.

The Counselors of Real Estate (CRE), an invitation-only professional organization of 1,100 real estate advisers and other professionals around the world, has revealed its annual list of the 10 top issues facing real estate.

Here’s how CRE chair Julie Melander broke down the list at the annual conference of the National Association of Real Estate Editors (NAREE), hosted in Austin, Texas this week.

1. Infrastructure

Eroding infrastructure is a chronic issue and often loses oxygen to controversial headlines on other topics, Melander said.

But the crumbling of American roads, tunnels, railways, airports, power grids, water and storm water systems and levees is a big problem, making adjoining communities suffer from unreliability and safety issues,

By hampering the flow of goods, services and data, the deterioration reduces the U.S.’s international competitiveness and “creates a hard ceiling for economic growth” — not to mention a “daily aggravation” for citizens, she said.

2. Affordability 

Housing costs have outpaced inflation and real wage growth for decades. The same has been true of growth in healthcare expenses and student loan debt, leaving less income to cover rent and mortgage bills.

Constrained housing supply is the root cause of the affordability crisis, Melander said. In the wake of the housing meltdown, the problem has worsened as builders have shifted construction towards pricier units that are more profitable, rather than cheaper housing.

Underling the apparent intractability of the problem, Melander was short on examples of cities that have implemented policies that have effectively addressed affordability.

3. Weather and climate risks

“We can no longer rely on historical performance to predict future returns,” Melander said.

Destruction from hurricanes, flooding, wildfires, droughts, heat waves and landslides has ballooned.

While annual damage averaged $20 billion between 1980 and 2018, it spiked to a record $300 billion in 2017, according to Melander. 2018 will likely clock around $91 billion in weather-related damage, she said.

It should be surprise then that, according to Melander, property insurance premiums have climbed by a third since 2008.

Climate change is driving a “host of new building laws and ordinances” that operators must adapt to, she said.

It’s also resulted in legislation in Washington, D.C. and New York City that mandates rapid decarbonization — sure to impact real estate.

And it’s spawning new underwriting and lending products. These initiatives, combined with deteriorating infrastructure and the responses of investors and policymakers, are leaving “a dramatic and indelible mark on the real estate industry.”

“As of February this year, 580 companies responsible for $100 trillion of real estate assets have gotten together and are supporting TCFD (Task Force on Climate-related Financial Disclosures) and are working to upgrade and integrate climate information in real estate reporting,” she said.

4. Technology

“Real estate has somewhat of a different … adoption path compared to other industries because of the bifurcation of what goes on in the back office and the front-office technology,” Melander said.

Software focused on accounting, leasing, document management and customer service management has been “keeping up with changes in the marketplace.”

But operational technology for buildings, such as that which governs HVAC systems, lighting, elevators and parking, has lagged behind technology’s application in some other industries.

Now that’s changing, Melander said. The Internet of Things, big data, artificial intelligence and blockchain are driving new advances that “are moving faster as the industry is able to assimilate them.”

5. End-of-cycle economics

“There’s a … a false expectation that the shape of a previous downturn will dictate the next one,” Melander said. There is bound to be another recession or economic slowdown. But who knows what the next one will look like?

The U.S. economy has seen its longest growth spurt ever, in the decade-plus since the Great Recession. But uncertainty looms on the horizon and business and consumer confidence is waning.

That’s affecting business decisions, she said, “whether it’s to hire the next employee, to spend on occupancy or to buy a new building,” she said. Investment decisions are being reexamined. And a downturn could be on the near-term horizon.

6. Political divisions

Political gridlock is limiting options and increasing the cost of addressing many issues in the U.S., according to Melander.

But to improve the economy, board members of CRE, think a “a middle way is required that elevates pragmatism above party puritanism,” she said.

7. Capital market risk 

“The message here is there’s a tremendous amount of liquidity in debt capital markets, which is pushing competition, and there’s increased aggressiveness to get the money out,” Melander said.

This could fuel risky investing that could end badly.

Declining all-cash deals and a glut of capital earmarked for real estate investment (private equity “dry powder” for real estate)  are ominous signs that things could be headed in this direction.

8. Population migration

Population influxes, particularly across the west and south, continue to strain prosperous cities. The rural south, Midwest and Rust Belt, meanwhile, continue to struggle with population outflow.

9. Volatility and confidence

More market volatility is making businesses and consumers less confident. Amid the uncertainty, homeowners may adjust their investment decisions, she said.

10. Public and private indebtedness

Interest rates have hovered near record lows for years, making the ballooning debt of nations, corporations and citizens relatively manageable. All three will feel more of a squeeze as rates inevitably rise, though.

Household debt is outpacing income growth, potentially curbing demand for homes, Melander said.

Email Teke Wiggin

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