The most important thing to remember in the recently released report entitled “Expectations & Realities in Real Estate in 2019” co-authored by George Rativ, Director of Housing and Commercial Real Estate with the National Association of REALTORS® (NAR), Mathew Kimmel, Deloitte Transactions and Business Analyst and Ken Riggs, President and Global Head of Situs RERC, is that housing and real estate investment are NOT the same.

In Part I of Expectations & Realities in Real Estate in 2019, we offered both a summary of these experts’ views on the economy/global trends and the specifics of their views on housing in 2019. In this post, Expectations and Realities in Real Estate in 2019 Part II, we look at the specifics of real estate investment.

Reemphasizing that Millennials are projected to create +25M households over the next 5-8 years and that the number of Gen Zers is expected to overtake Millennials shortly, long-term homeownership rates are expected to come close to the long-term homeownership rate of 65% in 2019 BUT NOT COME CLOSE TO OR SURPASS the historic peak of 69.2% in Q4 2004.

According to Situs RERC, these two “coming-of-homeownership-age” demographic groups will benefit the apartment sector, single-family rentals and communal-style living the most. These rental sectors actually mirror on-demand platforms such as Craigslist and Airbnb plus on-demand spaces such as WeWork.

Essentially, the thinking goes pretty much like this…who wants to buy and/or create one’s own work environment when one can simply rent one for as long or as short as one needs/wants? The same is becoming true, according to these experts, when it comes to one’s own living space.

Deloitte recommends investing in real estate business models that reflect the changing nature of work, living and tenant preferences. Pioneering business models such as Common and WeLive will offer more affordability (no down payments and no forever and a day mortgage payments/insurance/taxes) and convenience (no repair/maintenance costs) to Millennials, Gen Zers and to Boomers as well as they age into apartment rental units.

This report encourages real estate investors to look at

  • Properties that offer flexible/variable leasing options and flexible spaces
  • Mixed use properties for data centers, senior housing and mobile towers
  • Properties that focus on the “tenant experience” – properties and that use platforms to interact with tenants, predictive tech to anticipate tenant needs and retention platforms
  • Multi-family properties
  • Industrial/warehouse properties – predicted to be the best performing sector in 2019

As used in housing, the expert authors of this report broke down 2019 real estate investment into three discreet scenarios:

Lower Case Scenario

  • Returns fall to approximately 2% by the end of 2019, as capital appreciation turns negative.
  • Sales volumes and property prices significantly decline amid slowing global economy and uncertainty about the length of the real estate cycle.
  • Capital declines as more tenants default
  • Interest rates begin to increase across all property types

Base Case Scenario

  • Returns reach 6%.
  • Positive economic conditions and low unemployment enables more room for rent growth.
  • Solid property fundamentals underlie strong valuations and support prices.
  • Transaction volumes edge downward slightly due to elevated prices, rising interest rates and mediocre product

Higher Case Scenario

– Returns jump +8% due to jump in capital appreciation

– Strong economy buoys demand and prices for real estate investment properties

– Price jumps boost redevelopment and new construction projects.