Each year, The Counselors of Real Estate, a real estate professionals organization established in 1953, unveils its top 10 issues affecting real estate. Members contribute to development of the issues by participating in the CRE External Affairs (Issues and Trends) initiative.
On its release, HOTEL MANAGEMENT discussed the 2017-18 list with Warren Marr, managing director at PwC, who was instrumental in putting it together. While some of the trends and issues on the list were repeat winners, others are new to the scene. One of those, Marr said, is "Political Polarization and Global Uncertainty," which clocked in at No. 1 on the list and though new, is not surprising given today's climate. "It's of heightened importance," Marr said, and impacting decision-making at every level, domestic and foreign.
As the CRE report wrote, its "negative implications on real estate are immediate. Uncertainty about changes to trade, travel and immigration policy threaten cross-border investing, hospitality properties, retail, and manufacturing supply chains, among other effects."
The "Technology Boom" (No. 2) is also having rampant impact on real estate, as CRE points out. The tech start-up boom is "revolutionizing real estate operations across the board," CRE wrote. "One of the biggest changes this year is not a killer app, but an unprecedented wave of commercial real estate technology innovations that are expected to change the way real estate is bought, sold and managed."
In 2016, according to CRE, commercial real estate tech start-ups investment reached $2.7 billion. MIT’s real estate innovation lab has identified 1,600 real estate tech start-ups worldwide.
Rise of the Machines
In the hospitality space, it's robotic/machine learning, wherein robots and computers can acquire new skills and adapt to their environment, that has accelerated and grown, bringing with it more automation and less human contact. (Remember the robot hotel in Japan?)
Robotics, as Marr sees it, will have a tremendous impact on hotels near and especially far term. They rambled the halls at the Americas Lodging Investment Summit, earlier this year in Los Angeles, displaying the ability to perform human functions. Marr sees this and other forms of automation just as the start of something bigger, especially with regard to hotel staffing. "Checking in without a front desk is a foregone conclusion," he said. He also predicts more automaton in housekeeping, even the idea of robots vacuuming rooms (see Roomba).
"When you can sit on a train or at an airport, get a hotel notification, pick the room you want to be in by simply pushing a button, then your phone works as your key [that's the future]" Marr continued. "It just needs acceptance by the consumer. Boomers may not adapt as quickly as millennials."
CRE also points to a July 2016 study of automation by McKinsey & Company that suggests that 47 percent of a retail salesperson’s activities have the technical potential to be automated.
But automation and robotics speak to something bigger: higher labor costs. "Labor is a huge area in hospitality," Marr said, citing a 4.3-percent unemployment rate, which is "affecting the lodging sectors ability to find talent without paying a premium for it.
"It's a big thing that impacts the ability to attract for entry-level positions," he continued.
Other trends on the CRE list have been yearly themes, such as "Infrastructure Investment" (No. 5). "It's getting to a boiling point," Marr said, citing such commuter nightmares as New York's Penn Station, which is just now beginning repairs on aging tracks that will lead to what The New York Times wrote is shaping up to be the 'Summer of Hell.'
CRE writes of infrastructure: "How the infrastructure challenge is met—or not met as the case may be—will have major real estate implications. Reliance on public-private investment means projects must have strong revenue-generating capacity to be funded."
Impacts on Investment
Global uncertainty is also putting a strain on cross-border investment, which reached fever pitch in 2015, but has since waned. With China being one of the biggest buyers of U.S. hotels, and more recently shifting their investments into companies, how Beijing deals with flight capital will be something to watch closely. Last year, Beijing began cracking down on outbound investments in an attempt to preserve deteriorating foreign reserves.
"What will happen with China?" Marr asked, citing that year-to-date through June, cross-border investment is down some 40 percent. Marr said the bid-ask spread has narrowed, but is still not where it needs to be to have a robust transactions market.
He also alludes to geo-political risks that make it difficult for investors, especially foreign investors, to get a good read on where to deploy capital. "Foreign buyers are trying to figure out whats going on in the U.S.," he said.
Still, the U.S. remains one of the safer global havens for real estate investment. And as many trophy assets become less available, some investors are taking notice of other asset classes farther down the chain scale. "There is interest in cash-on-cash returns," Marr noted. "As the pool of luxury assets dwindles, you start to see more buying of select-service assets. Smarter private-equity funds have moved into that space and that suggests credibility to the cash-on-cash model. And, the U.S. still is the best country to park your money."
Consider China Life's large investment late last year in a Starwood Capital-owned select-service portfolio as evidence.
The upshot: Investors are more readily acquiring assets based on generating returns out of the operating business rather than residual value at exit.
Here is a complete list of CRE's 2017-18 top 10 issues impacting real estate, here with color:
- Political Polarization and Global Uncertainty
- The Technology Boom
- General Disruption
- Retail Disruption
- Infrastructure Investment
- Housing: The Big Mismatch
- Lost Decades of the Middle Class
- Real Estate's Emerging Role in Health Care
- Climate Change