Closing Out 2010 And Preparing For 2011
By Chris Lee, CEL Associates
As we near the close of 2010, the recession-generated anxiety and uncertainty regarding the economy, personal well-being and national governance felt on January 1 has now shifted to tepid belief and wavering confidence in the recovery’s direction and pace. Over the past year, U.S. public and privately held enterprises and the government have undergone dramatic change, yet limited transformation. The country’s spirit, definition of what constitutes the American Dream, role in the global economy and economic policy have been and continue to be debated, legislated, regulated, mandated and reshaped by personalities, politics and policies.
For some Americans, the uncharted waters of the future seem far more ominous than the experiences they endured during the recent economic downturn. When historical precedents and long-held belief systems are challenged and when one’s vision of what constitutes "true" reality is tested, issues of self-worth, personal confidence and a willingness to take risks become unclear.
Over the past year, the basic foundations upon which the real estate industry and entrepreneurs flourished have been challenged by some and called into question by others, with doubts raised regarding the future.
Confidence can be very fragile and often the difference between success and failure. The good news for the real estate industry is that 2010 was a bottoming-out year. How long before a true recovery is underway? Immediately for some and 18-24 months for most. However, what has and will continue to drive the real estate industry are the leaders, professionals and talent within companies that constitute the industry. The cornerstone of the real estate industry’s future rests with the entrepreneurs who will shape where America lives, works, shops and plays. So what constitutes a true real estate entrepreneur?
Today’s real estate entrepreneurs share the following primary qualities:
-Supreme self-confidence in their visions, ideas, solutions and decisions.
-An unabashed lack of fear teamed with a willingness to take risks.
-A perceptive attribute that enables the recognition of opportunity in advance of others.
-A capacity to get up when unforeseen events have knocked them down.
-Charismatic and collaborative leadership qualities based on an unyielding set of core values.
-A strong belief in the future and a willingness to accept full responsibility for all outcomes.
Give real estate entrepreneurs a problem, and they will solve it. Give them a mountain, and they will climb it. Give them a "can’t-be-done" challenge, and they will find a way to get it done. Combine these six qualities, plus a dose of luck and never-give-up tenacity, and you have the consummate real estate entrepreneur.
However, 2010 placed in doubt what it means to be a real estate entrepreneur in a tumultuous global and domestic economic and financial marketplace with increasing government involvement. Real estate leaders, senior management teams and professionals at all levels felt their role and link in the destiny of their profession was under siege by forces outside the business.
During 2010 the foundations of real estate entrepreneurs and the industry have been shaken, dismantled, maligned, challenged and put in doubt by those seeking to blame someone. The single-family home meltdown...must have been caused by overzealous homebuilders and lenders. Failed banks...surely caused by aggressive real estate borrowers. Too much commercial space...undoubtedly caused by developers. Even some environmental problems must have been a result of insensitive real estate owners and operators. If one listens to enough self-proclaimed experts, "If it weren’t for the real estate industry...all would be well today." This statement is so detached from reality that any response brings credibility to an otherwise falsehood.
So it is no coincidence that as we prepare for 2011, the morale within and the outlook for the real estate industry is at its lowest level in over 20 years. The psychology and structural foundations of the real estate industry shifted from survival to survivor mode in 2010. Yet the entrepreneurial spirit still lives! It is time to shift from a survivor to a creator of value.
The rebuilding of America to compete more successfully in a global economy starts and ends with the real estate industry. The revitalization of our urban areas and communities will be driven by real estate entrepreneurs. The real estate industry has the potential and opportunity to lead the country out of this economic and job-creating abyss. We can do little to change the past, but we can do everything to create the future.
2011...A Year Of Possibilities
In January 2011, I will be writing my annual economic and real estate outlook for the upcoming year. This issue of Strategic Advantage, however, is intended to stimulate discussion and consideration of the emerging near-term opportunities. From my perspective, 2011 will be a year of incredible possibilities for those who are willing to move beyond yesterday and engage a transforming tomorrow.
As regular readers of Strategic Advantage know, we predicted five years ago that this real estate cycle’s "bottoming out" would occur in 2010, and that 2011 and 2012 would be the transitionary recovery period leading into the growth years. During this transition period, these next 24 months could be the best opportunity since 1991-92 to create future wealth and capture sustainable market and customer share.
In a little more than 700 days from now, that window of opportunity will begin to close. While opportunities will continue through 2017, there will be a crowd mentality, and "great" opportunities will be rare. History suggests that in a transition period moving from one real estate cycle to the next, real estate leaders and companies will look toward and engage the future with a new attitude of personal realism, determination and a vibrant "can do" spirit. The burden of the 2007 – 2009 recession is now lifting, the unknown future is now coming into sight and a new redemptive movement to demonstrate triumph over adversity is about to begin. When compared to the last 36 months..."It Will Feel Like Heaven in 2011."
As the forces of recovery begin and the new realities of political change increase, the personal exhaustion of the past three years will be replaced by the energy created by this upcoming Year of Possibilities! It will not be easy...nothing is easy in our New Abnormal economy...but there will be many opportunities for those who seek a future beyond today.
Multifamily Will Lead The Recovery
Currently 20.3 million adults ages 18 – 34 live with their parents. According to a May 2010 Harris survey, 76% of U.S. adults deemed renting to be a more favorable option than owning a home. Only 12% of renters have plans to buy a new home. Nearly one-third of Americans could not qualify for a home mortgage due to low credit scores, according to a Zillow survey. The $6.1 trillion loss in home equity has taken away "Mom and Dad" money for assisting with the purchase of a new home for their children. Homeownership continues to decline from its peak of 69.2% to now 66.9%...and is likely to go lower before stabilizing. Young people (18 years and older) are delaying marriage, and the age of women having their first child has increased nearly two years.
In today’s jobless recovery, young people want the flexibility and mobility to "go where the jobs are," easily made possible by renting instead of owning. I expect multifamily starts (5+ units) to jump from around 100,000 units in 2010 to potentially over 200,000 units in 2011. The pent-up demand will accelerate. By 2014, I expect multifamily starts to jump to around 350,000 or more units. Reed Construction Data is projecting overall apartment construction activity to be $21.3 billion in 2011, increasing to $31.1 billion in 2013.
The growth in Assisted Living, Senior Housing and Affordable Housing sectors in 2011 will be significant. While the Independent Living sector will languish a bit over the next year, I expect Assisted Living properties, for example, to exhibit historically high occupancy levels, and the construction delays due to financing issues will dissipate. The overall construction pipeline for Senior Housing is slowing, and as a result 2011 could bring a better supply/demand balance to this sector.
A study just released by The Rockefeller Foundation highlighted the issue of travel time between a worker’s home and place of employment. The need for more urban-based housing options and more effective land use planning would reduce unnecessary drive times. The worst areas (no surprise here) are Los Angeles, Washington, DC/Northern Virginia, Houston and the San Francisco Bay Area, and they are likely to see a rise in the demand for "closer-in" housing options.
Another emerging trend highlighting the 2011 growth in multifamily is the decline in marriage and a rise in new non-traditional household characteristics. According to a new study by Pew Research, in 1960 two-thirds (68%) of 20-somethings were married. By 2008 that number had dwindled to 26%. A decline in marriage generally results in a higher demand for rental housing.
Healthcare Properties On The Cusp Of Growth
According to McGraw-Hill, in 2011 76.7 million square feet of hospitals, clinics and nursing homes will be built. The overall value of healthcare and clinic construction in 2011 is expected to be over $19.5 billion. Reed Construction Data projects the 2011 total at $20.5 billion. Although the national debate on healthcare reform is not over, the rise in the aging population and the provisions of healthcare services to the uninsured could add tens of millions of square feet in new facilities.
Fast Facts
-In 1980 healthcare spending was 9% of GDP...today it is 16% and rising.
-The average annual growth in healthcare expenditures is expected to be 6.3%.
-Total U.S. national health expenditures are expected to be slightly over $2.7 trillion in 2011.
-There will be 70 million Americans over the age of 65 by 2030.
-Analysts project over the next decade the number of new healthcare workers will top 4.3 million. There will be a need for 13,000 primary care physicians.
Like shelter and food, taking care of one’s health (emergency and ongoing) continues through and tends to become greater after a recession. While growth will be modest in 2011, the dramatic surge will begin in 2013, so now is the time to position for the future.
"Greening"...A Fad That Has Become An Industry
An April 2010 study by the U.S. Department of Commerce indicates that green products and services now represent 1%-2% of the total private-sector industry.
Fast Facts
-Green service jobs now total around 2 million.
-U.S. buildings consume around 40% of all U.S. energy and account for 72% of all U.S. electricity consumption.
-Less than 2% of all commercial buildings are LEED certified.
-Nearly 500 state and local governments have adopted policies to improve efficiency and pursue LEED certification.
-The green building industry is expected to grow to $42 billion by 2015.
-Today there are over 142,000 Accredited LEED professionals.
The Federal government (e.g., GSA) and Corporate America are requiring new leases in green buildings, green building designs and operations, green leases, green policies and energy conservation.
For many real estate firms, the opportunity to "become green" will be a reality in 2011. No real estate firm will be exempt from the green movement or green business practices. The year 2011 will be the acceleration of this fad into mainstream reality.
Conclusion
While the psyche of real estate entrepreneurs, leaders and professionals "took a hit" in 2010, the good news is that the real estate industry is bottoming out and in select cases is on its way to recovery. The real estate industry has always been a national and community force and voice for the "can do" spirit. It is time we remembered our roots, focused on the basics and took advantage of the energy of the "Year of Possibilities."
If you’d like to share your comments, insights or ideas with me, please email them to newsletter@celassociates.com.