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Rebuilding solid foundations: the state of the real estate industry

State of real estate2016 is marking a welcome return to normal for real estate, but the 2017 outlook is even better. Pent-up demand for dispositions on the sell side and an appetite for diverse assets on the buy side will create a positive outlook.

The U.S. real estate industry is rebuilding a foundation for a solid future based on three trends:

  1. Abundant capital will be attracted by a strong economy, industry fundamentals and supportive legislation.
  2. Technology will help the industry become more agile and competitive.
  3. Urbanization will create growth opportunities.

Buoyant capital is flowing
The U.S. solidified its credentials as a haven for international capital thanks to geopolitical tensions in the Middle East and uncertainty in Europe after the UK’s vote to leave the European Union. Real estate players should prioritize their strategies to attract and retain capital. Those with access to the most attractive assets and pricing will lead the market. And those that understand regulatory and legislative changes will also capitalize on opportunities.

Capital is being raised at a pace that shows the commercial real estate industry is still growing. In the first half of 2016, $36.1 billion of equity was raised, up 15.2% from the same period last year. Debt funds totaled $13.8 billion in the same period and are set to beat 2014’s record level. A burgeoning supply of capital, though, means investors need to look outside their comfort zone for yield opportunities.

“Many of the prime targets have been bought up and are trading at very high prices,” said Ron Messenger, an Audit partner at Grant Thornton LLP. “So institutional money is starting to flow into the secondary and tertiary markets, including cities such as Austin, Dallas and Seattle.”

Technology innovations needed for competitive advantage
Some real estate companies are still operating with outdated and disparate IT systems. But data has to be part of real estate’s solid foundations, and technology plays a vital part.

“Large real estate companies are always looking at how to streamline their operations, how to leverage technology better, how service providers can help them reduce their costs and their headcount,” said Chris Amato, principal, Business Advisory Services at Grant Thornton LLP.

Using technology on the operations side is crucial for fast-moving, complex businesses. A large global shopping mall real estate investment trust may have tens of thousands of leases worldwide. Automating its lease administration and tenant billing systems, for example, could substantially reduce its costs.

Urbanization creates growth opportunities
Growing U.S. cities create enormous demand for housing, retail, office and other property sectors. Aging boomers want flexible options such as active living communities and dedicated health care services. Millennials drive demand for real estate that provides flexible work and on-demand space needs.

As the needs of key demographic groups change, real estate companies will have to adapt their commercial and residential offerings. Keeping abreast of evolving tenant needs also requires smart use of technology and social media to engage in ways that customers prefer.

Building for the future
The real estate industry has no shortage of global investors looking for their share in its success. The challenges are to allocate capital efficiently, and make technology integration a priority and respond quickly to changing types of demand.