ULI Emerging Trends in Real Estate – Highlights

The Urban Land Institute hosted real-estate analyst Jonathan Miller, the writer for ULI’s popular annual forecast, this morning (Nov 3) at its networking breakfast.  He likes the outlook in Canada, Vancouver in particular – a lot.

“It’s nice to be in a place with some confidence,” he began, as he had noted in his Trendczar blog:

…  it’s striking the differences in the condition of the financial and real estate markets between this culturally conservative nation and the United States. While the U.S. continues to stagger through unremitting doldrums, Canada has been an island in the storm of global economic meltdown.

Why?

The basics: robust banking, a fiscally sound government that has regulated the financial sector, abundant natural resources and steady immigration.  As one of those he surveyed said: “We’re hedged against most bad outcomes. It’s hard to blow it (in Canada).

“Not a single mortgage over $10 million has defaulted,” he noted – something you’d find on every block in Dallas – thanks to our credit culture of rigorous underwriting.  There’s more condo activity than in many large American cities combined.

Vancouver is rated 6.61 out of 9, second only to Toronto in Canada, and fifth in North America.  Here, there’s more money than product. 

And then, perhaps cautious about delivering too much good news, Miller said he believes “there’s a slowdown underway which will impact next year.”  Get set for a tempering, a more muted period .  Expect a light correction, but no crash. 

Most interesting of all for me was Miller’s enthusiasm for “unbound urbanization” – and his dismissal of the suburban retail and office market.  It’s a theme he has reiterated before, for which he gives several reasons:  People moving back in to the centres (Gen Y looking for action, their parents looking for convenience); government interest in discouraging sprawl – “even in Calgary”; companies wanting to be in city centres to attract young qualified employees and to avoid the traffic morass.  Investors, consequently, are looking at cities with “great rapid transit.”

Unlike the U.S., Canada is not over-retailed (18 square feet per capita here versus 24 sq ft in the States) – and we could use more stores downtown, even ‘big boxes’.  (But with a different mix than in the past.  The Internet has kicked in, and many stores are more showrooms than places for the storage of goods to sell.)

In both countries, he says, apartments (not just condos) are a best bet, given the essential need for people to live somewhere.  But in Canada, office buildings are also very strong. Even with major new towers expected in Vancouver, the floorspace will be absorbed without difficulty.  (Office buildings, he noted, have got to go green – new technologies are delivering energy efficiencies and buyers demand it.) *

Hotels, however, are the weakest category, given that tourism is down and our dollar is strong vis-a-vis the American greenback.

In short, hold on to those trophy properties, expect a tempering in the condo market – and buy and hold. 

But watch out for China.  If it can’t continue to rev its engine, if the Asian flow of money and people falls off, things could change quickly.   

Meanwhile, it was pretty much doom-and-gloom in the United States, where they’re facing “a long hard grind.”  The demand drivers don’t exist, fundamentals need to catch up, other asset classes like stocks are ‘dead on arrival’ and only a few ‘wealth islands’ like the San Francisco Bay Area and Washington, D.C. have any upside appeal.  

The list of obstacles is long and depressing: global jobs arbitrage (not just manufacturing, now anything can be shifted offshore); huge personal and government debt loads; an aging population with more medical needs and less pensions; the global financial morass ; governments in disarray; “financial industry recalibration”; ebbing expectation of returns but higher interest rates; and a recovery already stunted.

This is an era of less, he quotes from his survey.  “This time it is different.”

[For more on ULI British Columbia, click here.]

* Ross Moore picked up this qualifying observation from Miller’s report:

The vaunted corporate gains from technology-enabled productivity enhancements may help fatten company bottom lines—many firms sit on cash, “waiting out uncertainty”—but the advances lead to reductions in hiring and demand for space. Mobile communications devices and wireless internet links eliminate old-line, bedrock office jobs—from secretaries and travel agents to file clerks and messengers.

More employees can work from home or in the field, reducing the need for leased office space, and even computers take up less room. Hulking mainframes and workstations get replaced by microchips and tablets.