Acceleration of Small Business Job Growth is Altering U.S. Commercial Real Estate Industry, Says New PwC US and ULI Forecast


Gateway Markets Fall Out of Favor as Dallas/Fort Worth Voted Top City for 2016

SAN FRANCISCO – October 7, 2015 – (RealEstateRama) — The commercial real estate industry is increasingly focused on the needs of small firms employing fewer than 50 people where job growth is outpacing larger firms by nearly five to one, according toEmerging Trends in Real Estate® 2016, co-published by PwC US and the Urban Land Institute (ULI).

“The real estate industry’s traditional focus on big cities and large employers is shifting significantly as small businesses emerge as the growth engine for the U.S. economy,” said Mitch Roschelle, partner, U.S. real estate advisory practice leader, PwC. “This is creating disruption in the office sector as it finds ways to create new space models to accommodate these employers.”

“Advancements in technology that are affecting how people live, work, learn, socialize, and get around are reflected in the rising popularity of cities other than the largest coastal markets as magnets for investment,” said ULI’s Global Chief Executive Officer Patrick L. Phillips. “More and more of these cities are gaining a competitive edge by positioning themselves as vibrant, more affordable places to live and work, with amenities that appeal to different generations.”

10 Trends to Watch

PwC and ULI outline the top trends in real estate for 2016:

  1. 18-hour cities 2.0 – The real estate industry is expressing growing confidence in the potential investment returns in these 18-hour markets. The growth in investor sentiment is evident in the 2016 top ten rankings – with the exception of San Francisco and Los Angeles, the balance of the markets are 18-hour gateway cities.
  1. Next stop: the suburbs – As the cost of living and housing prices have risen in the core gateway markets, it’s apparent that a fresh look at suburban opportunities is gaining investor favor. In the top 40 metro areas, 84 percent of all jobs are outside the center-city core – and that’s the basis for optimism for the suburban future.
  1. Offices: barometer of change – The office sector has been benefiting from the strengthening employment numbers and a rethinking of how employees can maximize their productivity through improved workspaces that are seen as more open and promote collaboration. Some surveyed respondents see the redesign as a way to accommodate an alteration in work style itself, while others view it as a way to attract and keep desired talent – and for others, it’s both.
  1. A housing option for everyone – Economic and demographic factors are influencing the housing market as it deals with issues around providing the type of housing desired by the peak of the baby boom generation, aging millennials, a population making an urban/suburban choice, and finding a way to provide affordable housing to support a vibrant workforce. Developing improved housing options for everyone is passing from the realm of “nice to do” to “must do” – and that will be shaping the housing trends going forward.
  1. Parking for change – Miles traveled by car for people 34 years old or younger are down 23 percent (United States Department of Transportation – Federal Highway Administration), while the percentage of high school seniors with driver’s licenses declined from 85 percent to 73 percent between 1996 and 2010, according to the American Automobile Association. The urbanization trend and gen-Y preferences already suggest that existing parking represents a suboptimal use in land and in both 24 and 18-hour cities, that’s creating change.
  1. Infrastructure: Network it! Brand it! – In light of the urban population growth, cities are looking to urgently prioritize repair and maintenance, and at the same time tackle critical needs in areas such as water supply and distribution, public education, aviation, vehicle and pedestrian traffic, and rail safety. This is leading to creative solutions such as high-frequency bus networks and green infrastructure. As the need to do more with less becomes more acute, innovative solutions to infrastructure needs is likely to mark the latter half of this decade and beyond.
  1. Food is getting bigger and closer – There are many cities where neighborhood land is cheap or older buildings sit idle, and where median incomes are low and the need for fresh food is high. What is trending is the new vision that has urban land as the most precious and flexible of resources. Just as the reinvention of the suburbs is an emerging story for the decade ahead, so is the creative adaptation of inner-city uses.
  1. Consolidation breeds specialization – The evolutionary trends in development, equity investment, and lending are showing that “small can be powerful.” Developers may find it difficult to access sufficient capital unless they have scale, but this means fitting the quality demands of conservative lenders. That requires finding niche lenders and investors willing to fund the smaller projects; and small developers with their lenders may be accessing the most innovative parts of the business. Firms may find themselves in the middle and will need to choose which side – smaller or larger – they wish to be on.
  1. We raised the capital; now, what do we do with it? – New capital will be invested in: additional markets (capital is expected to flow more freely in 18-hour cities), alternative assets (what constitutes real estate will continue expanding), old is new again (older space is being embraced and it’s making the market consider a wider range of potential investments), and alternative property types (medical office and senior housing may see a benefit from changing demographics – and data centers and lab space may be in demand due to technical changes).
  1. Return of the human touch – The industry is trending toward more intensive active management. Risk management of hacking issues is of critical concern – and attention to cybersecurity will penetrate more deeply into the real estate business. Attention to individual decision-making is needed as much as ever.

5 Markets to Watch

A snapshot of the top five markets ranked by survey respondents and their outlook for each market:

  1. Dallas/Fort Worth – Impressive employment growth is the story behind this area’s rise to the top of this year’s survey (it ranked #5 last year), which is supported by a business-friendly environment along with an attractive cost of doing business and cost of living.
  1. Austin – Austin (same spot as last year) fueled by another year of diverse job creation, it remains an attractive place to live for all generations. One concern from surveyed participants – the market is growing faster than the local infrastructure.
  1. Charlotte – This city (up from #7 last year) embodies many of the components of the 18-hour city. Good job and population growth along with the development of urban centers makes the market attractive to residents.
  1. Seattle – Seattle (#8 in 2014), is popular with domestic and global investors, offers a diverse industry base and is benefiting from growth in the technology, advertising, media and information industries.
  1. Atlanta – The market (which ranked #11 last year) enjoys strong growth in key sectors of the economy without the typical concern of oversupply. The lower cost of doing business is attracting corporate relocations which contribute to market growth.

Property Types

Industrial – The results of the Emerging Trends survey not only place industrials at the top of the commercial property sector for investment and development prospects, but also posted the highest score achieved for industrial properties in the surveys since 2004. Investors like the value-for-price relationship in a property type where the average cap rate is 6.9 percent, the downside protection afforded by the triple-net leases that are typical in this sector, and the cash-in-hand quality of industrials.

Apartments – The multifamily sector has enjoyed a long run of success during this decade – and while surveyed participants still rate this prospect well, the high prices and low cap rates in many locations are giving some interviewees pause as they contemplate the future. There may be a shift in investment and development outlook in 2016 and beyond.

Office – The breadth of the U.S. office market is one of its greatest strengths – having options provides value. Secondary office markets are experiencing higher levels of investment for this reason, somewhat greater volatility priced by higher yields, and the ability to accommodate fast-growing companies with a volume of new construction at costs much lower than that available in the primary downtowns. Interviewees spoke of “pocket markets,” conversions and redevelopments, and opportunities to reposition struggling suburban office parks with vast parking into more effective mixed use.

Hotels – A rising U.S. dollar is making international travel to the U.S. more costly for tourists and business visitors. Survey respondents expect 2016 to be an inflection point for the hotel sector, especially for full-service facilities. While the overall development and investment outlook for both of those segments is up from the survey scores a year ago, the percentage of respondents favoring a “sell” posture has risen since the last survey for limited-service hotels – and for full-service hotels there is a higher proportion of “sell” recommendation (30.7 percent) than “buy” (24.8 percent).

Retail – For neighborhood / community centers, survey respondents concluded “good” investment prospects for smaller shopping centers in 2016, giving them the best outlook score in the past dozen years. With malls, institutional returns on the top-tier have surpassed the performance measures of the smaller shopping centers by a considerable margin. For technology, e-commerce, and multichannel retailing, the “bricks and clicks” discussion will get sharper; stores are adapting e-commerce while internet retailers have increasingly been dabbling in physical stores as a supplement to online sales.

Housing – Recent residential starts had the best construction activity for housing since late 2007. The growth was spurred by single-family housing after apartment development had provided the momentum during the past several years. The elements of a housing development trend toward greater normalcy are falling into place.

Now in its 37th year, Emerging Trends in Real Estate® is one of the most highly regarded annual industry outlooks for the real estate and land use industry. It includes interviews and survey responses from more than 1,800 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants.


About the Urban Land Institute
The Urban Land Institute ( is a nonprofit education and research institute supported by its members. Its mission is to provide leadership in the responsible use of land and in sustaining and creating thriving communities worldwide. Established in 1936, the Institute has more than 36,000 members representing all aspects of land use and development disciplines.


About PwC US 
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