Austin, Dallas/Fort Worth Top ULI List for Real Estate Development
The city built by J.R. offered some good ole Lone Star hospitality for the Urban Land Institute Fall Meeting in October, but it’s no coincidence that Dallas/Fort Worth and Austin got some top billing.
The cities capped the Top 10 list of markets for real estate development and investment at ULI’s 38th edition of the Emerging Trends in Real Estate 2017 for 18-hour cities known for their vibrant economies, relative affordability, and authentic neighborhoods. The report was one highlight of the four-day event that attracted more than 6,000 real estate professionals to Dallas’ Kay Bailey Hutchison Convention Center.
Many got up-close looks at the Metroplex via a number of special outings in urban and suburban areas of North Texas. A big draw was a walking tour of Dallas’ Uptown district, a trendy spot on the edge of downtown with roots tied to multifamily that is now the city’s most expensive office and mixed-use market. Other tours included Fort Worth’s Alliance area, Klyde Warren Park in Dallas and H. Ross Perot’s Legacy West.
A tale of two cities: one ‘hip’ and the other becoming a core primary market
Austin, No. 1 on ULI’s list, has caught the eyes of investors in part because of the “undeniable ‘hip’ factor” that makes the city attractive to the millennial-dominated workforce, according to the report.
While leaders agreed Austin brings a lot of the real estate market, Trammell Crow Co. CEO Matt Khourie cautioned investors who lack a foothold already in the city known for high wages and innovation. He said the city, which topped ULI’s list, is on the edge of being overbuilt. Tom Arnold, who heads America’s real estate at Abu Dhabi Investment, said that Austin may be “getting too hot”.
Dallas/Fort Worth is “rapidly approaching the level where it is considered as a core primary market,” ULI says. “The economy survived the global financial crisis better than most other U.S. markets, and real estate fundamentals continue to avoid the boom/bust behavior that has plagued the market in the past.”
The report identified other trends: rising construction costs caused by labor shortages and difficulty obtaining financing; the rise of “optionality,” or multiple uses − such as offices, pop-up retail, and event space − on the same piece of real estate; and growing housing affordability challenges for middle-income households.
Multifamily ranks second among top property types for investment
ULI’s property type outlook noted that investors are “increasingly jittery about uncertainties in the market,” and that the industrial market once again provides the safest harbor, with multifamily following behind.
One participant in a northern New Jersey focus group said that industrial has become the darling investment type over multifamily. “Advantages of industrial include continued strong demand drivers, restrained construction, and lower perceived risk,” the survey said.
New and existing apartments, which have had a long run of success, ranked second. ULI said the strength of multifamily is fueled by Millennials. Also, home-buying fears among consumers, compounded by student debt and tightened mortgage requirements, plus general consumer preference to have flexible lifestyles are drivers.
However, an executive of a major life insurance company noted that a good thing doesn’t last forever, and one real estate economist predicted apartment downturns in the tech markets “a year or two from now.” Also, some are concerned that as Millennials age they are going to be more likely to buy houses and start families.
The survey says that net additions of apartments will continue to highlight U.S. investor portfolios but probably not at the level of past years. “A pullback by lenders for new construction is likely to correct any imbalance fairly quickly.”
ULI launches energy savings program
ULI has debuted a program that offers office tenants a 10-step construction and design process to reduce energy consumption and operating costs. The Tenant Energy Optimization Program, which was born out a major “greening” makeover of the Empire State Building, integrates energy efficiency into tenant space design and construction to deliver returns through energy conservation. The process focuses on working directly with sub-metered tenants, their architects, and designers to conserve energy.
Ten companies that have implemented the program and expect significant energy savings. Among them, Cushman & Wakefield, Inc., projects $88,000 in energy cost savings over a 10-year lease at One World Trade Center in New York City at a two-year payback. At the Empire State Building, more than $716,000 in energy expenditures are expected over 17 years at a 330-percent return on investment, with a three-year payback.
Ray Quartararo − the head of global planning, design, and construction with Global Real Estate at JPMorgan Chase – said the success of the program will be measured by the buy-in early in the design phase of commercial space.
“This is synonymous with good design,” he said. “We want to design with this is mind. We don’t want it to happen by accident or midway through the process.”
The program applies only to commercial space. ULI did not say how soon, if at all, a program would be developed for multifamily.
Drones, parking, and 3D printing are trendy issues
The conference also delved into trendy issues and their impacts in not only commercial but multifamily spaces that included drones, driverless vehicles, and 3D printing.
Green Street Advisors Managing Director Dave Bragg said that autonomous vehicles and ride-handling through services like Uber and Lyft will ultimately provide the real estate industry with more prime land to develop as parking lots are slimmed down or eliminated.
“For multifamily, there is an opportunity to think about the needs of a five-story parking deck today declining to four stories,” he said.
R. Platt Boyd, IV, Founder and CEO of Branch Technology, said the use of 3D construction will essentially allow builders to cut and carve new buildings and create unique designs. An advantage is the elimination of onsite construction waste by creating pre-fab components that are shipped to the site. Plus, designers will be able to design outside the box.
“It frustrates architects that they are constricted to cookie-cutter boxes because of budgets,” he said. “3D printing begins to address some of that.”