Every year, the Urban Land Institute and the consultancy PwC publish their Emerging Trends in Real Estate report. Seattle is back in the top 10 for next year.
Surveys or interviews with 1,450 individuals in the sector nationwide, including property owners, developers, adviser firms, lenders and investors, help make Emerging Trends a gold standard.
The value of the report is the big-picture view, especially for investors and developers. It doesn’t drill deep into the future of residential real estate — what might happen with home prices or rents. But real estate is a major part of the economy. More than 133,000 were employed in construction in Seattle-Tacoma-Bellevue as of July; and that’s not counting others who work in real-estate related professional services.
For 2020, Seattle (measuring Seattle-Bellevue) ranks No. 10 in overall prospects, with Austin, Texas, first.
Re-entering the top 10 is a six-step improvement from where the survey rated Seattle for this year. It ranked first in 2017.
Boston is fifth, but otherwise all the top 10 metros are in the Sunbelt (including No. 9 Los Angeles, which is famously losing population in the latest census snapshot). But not every Sunbelt metro ranks well. Phoenix is 31, behind even No. 16 Indianapolis. Las Vegas is No. 46.
Elsewhere in the Northwest, Portland is 20, Boise 43, Tacoma 59 and Spokane 61. Eighty markets are evaluated.
Seattle performs worse in the outlook for house building: No. 31, with Raleigh-Durham first. This is where real estate connects with most people, but Emerging Trends only notes that house prices have begun to level off.
Seattle gets its juice from such factors as strong investor demand, development and redevelopment opportunities, job density, projected net migration and an overall strong economy.
The report said, “Seattle real estate remains in expansionary mode.” Some 8.8 million square feet of office space is under construction already (nearly six Columbia Centers, the city’s tallest tower). Half of it is in South Lake Union. Industrial and logistics demand are high, too.
Caution comes from slowing trade with China and the Boeing 737 MAX troubles. I would add: The composition of the next Seattle City Council. If the far left gets a veto-proof majority to bring back the jobs tax, prepare for a slowdown in new construction — a big source of city tax income — and much more.
Cast as a showdown with “Dr. Evil” Amazon, the tax passed last year would have affected nearly 600 businesses, giving them incentives to move across the lake or stop hiring in the city. Under popular opposition, the City Council hastily repealed it. But it remains a zombie idea on the left.
I’m all for a state income tax, perhaps even a city one. But taxing jobs would be a gut punch to the local economy.
The report spends time on the consequences of climate change, including this tidbit: “ … air-conditioning demand has become a factor in Seattle’s competitive rental market. Before the 2010s, 6% of Seattle rentals had central AC; responding to rising temperatures, record apartment construction, and demand, that percentage has climbed to over 25%.
Looking nationally, the report offers some of the most interesting reading.
“As this economic cycle entered the history books as the longest in U.S. history, the level of confidence in the real-estate industry has been palpable,” the report reads. “Property veterans see the internal conditions in the business as solid. ‘Real estate will continue to perform,’ one experienced investment manager said. ‘We don’t see oversupply or overleverage.’ ”
Having spent time covering real estate earlier in my career, such statements tempt me to run for the bomb shelter.
Developers are notoriously optimistic and some can resemble lemmings running off cliffs, especially late in the business cycle. This aging expansion is facing numerous threats, from trade wars to attacks on Middle Eastern oil operations. Investors in 10-year Treasurys are pessimistic.
Then, Emerging Trends’ plot thickens: “Reinforcing the optimism about real estate’s ability to withstand a recession is satisfaction that the property sector’s discipline in this recovery means that ‘this time it won’t be our fault’ if the economy falters.”
We shall see.
To be fair, the report admits to the fragility of the expansion. A Congressional Budget Office forecast saw slower growth ahead. “We could be looking at an especially jolting shock to the system,” Emerging Trends warmed. “In the short run, caution is advisable.”
It also reminds us that while coveted West Coast cities are expensive, high housing costs are a national phenomenon.
“We are building 90% of our housing for 10% of our households,” one lender is quoted as saying. The report stated, “Whether we want to look at it or not, housing is a mess and getting worse — not better — over time.”
This “unraveling” began in the 2000s and has many causes, especially median household income growing too slow and construction costs rising faster than inflation.
The report indicates that strong downtowns remain among a city’s best assets, a remarkable turnaround from the decline from the 1950s through the 1980s. Seattle was among the lucky places that never let its downtown die. Others have scrambling to revive theirs.
“Success has a way of spreading, and 24-hour downtowns have provided replicable models that many suburban communities are seeking to emulate,” the report says.
“From dense northeastern cities like Philadelphia, to Sunbelt giants like Atlanta, to boutique markets like Charleston, our interviewees and focus groups have uncovered the desire of suburbs to create their own versions of the live/work/play district.”
“Cool” suburbs closely tied to vibrant center-city downtowns show that the “Edge City” phenomenon doesn’t have to be a zero-sum game.
We’re heading into a crazy year, not least because of the presidential election. Emerging Trends has been a reliable crystal ball through most of its 40 editions. But we live in interesting times, complicating the prediction business.