ULI Emerging Trends – January 17, 2017

As the New Year brings new opportunities, ULI took the opportunity to present the findings of its annual Emerging Trends in Real Estate Report on January 17th. Nearly 300 ULI members and guests enjoyed the hospitality of the Belo Mansion and listened to Mitch Roschelle, PwC Partner and Co-chair of the Emerging Trends in Real Estate Report’s Research Leadership Team, and Mine Kuban Yucel, Senior Vice President and Director of Research at the Federal Reserve Bank of Dallas, discuss what we have to look forward to in 2017.

In the 2016 Emerging Trends report, DFW was ranked first in the U.S. Markets to Watch: Overall Real Estate Prospects. We still look good for 2017 as we swapped places with Austin, and are now the second best US metro area for investment and development.

Mitch focused on five items that he feels will affect our market in 2017: an Auto-Correcting Market, Optionality, Labor Scarcity, Affordable Housing, and the Role of the Small Developer. He predicted that the market will be Auto-Correcting in 2017, with office, industrial and retail property demand stable, but unspectacular. His view is that we are not getting ahead of ourselves with supply.

The term “Optionality”is used to describe the need for new propertiesto be flexible enough to adapt to a change in use, quickly switching from office to retail to residential as the need arises.

Mitch expressed concern that we are still feeling the effects of the Great Recession as the construction labor force still has not recovered. Many laborers left the industry altogether and our existing labor pool is aging. He also noted that manufacturing positions will continue to be lost to technology and our labor pool is not ready for this shift.

The scarcity of Affordable Housing continues across the country, as increasing housing prices far exceed the increase in personal income. We have less than a 5 month supply of homes and that is driving up prices. DFW is still one of the more affordable markets based on the percentage of income spent on housing, but that percentage is on the rise. Thus far, however, rising housing prices have not impacted in-migrationas more and more people are moving to the DFW area.

Lastly, Mitch addressed the influence of small developers on the market. Almost 91% of all developers have 0-20 employees. Their superior grasp of local markets makes them effective, but they will be the first to feel the impact of restricted access to capital when that occurs.

Following Mitch, Mine presented the Texas Economic Update. She stated that Texas survived the recent energy bust with few scars, butHouston and Midland-Odessa still feel the effects of the pricing drop. The second half of 2016 brought back some optimism as oil and natural gas pricing moved up a little.

Mine discussed employment growth in Texas and the impact of the energy bust. Texas ranked 17th in in the nation in job growth, but would have been much higher except for the major job losses in the energy sector and minor losses in manufacturing. Job growth, even in energy, was higher in the second half of 2016. On more local terms, metro employment growth continues to rise in Dallas, Austin and San Antonio with Houston being flat. Overall job growth in Texas was at 1.6% and she sees that increasing to 2.0% growth in 2017.

After their presentations, Mitch and Mine sat down for a little Q & A. The best nuggets from that session were the following:

  • Rising interest rates have been expected for years, so when they do go up, it shouldn’t be a major factor as they have been included in everyone’s underwriting.
  • We are currently at the “functional equilibrium” unemployment rate of around 4.3%, but our aging population has caused labor shortages.
  • Mitch thinks it’s possible that we may have an inverted yield curve in the next couple of years.
  • Although this is one of the longest recoveries in US history, the trend has been to have longer downturns and recoveries, so it’s not inevitable that we are nearing the end of this recovery. Mitch guesses that the next downturn may be the result of labor shortages.
  • The strong US dollar helps when traveling abroad, but it is a drag on S&P 500 earnings that are heavily leveraged in multinational corporations.
  • The weak Mexican Peso is hurting retail sales in border cities.
  • Tax reform from the new administration should help smaller businesses who are taxed at very high rate. This should yield new job growth.
  • In Mine’s view, the more independent the central banks are, the better it is for the economy. She expressed some concern that the Trump administration may seek have more control over what the Fed does.

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