Home » OPINION » Columns » LAW ELEVATED — Trends driving real estate development in 2016: millennials, 18-hour cities, investment capital

LAW ELEVATED — Trends driving real estate development in 2016: millennials, 18-hour cities, investment capital

Don Cannada

DON CANNADA

THOMAS WATSON

THOMAS WATSON

From interest rates to investment returns, numbers remain an important tool for planning and predicting in the real estate world. Three key numbers highlight and explain some important current trends shaping the commercial real estate markets – 80 (as in $80 million), 18 (as in 18 hours) and two (as in two sources of investment capital).

For decades, baby boomers (those born between 1946 and 1964) dominated or shaped the cultural and economic landscape in which we live. With baby boomers beginning to retire in larger numbers, and to shrink in number as they age, there is a new economic driver at play – millennials. With more than 80 million people in the U.S. born between 1982 and 2000, developers must understand key economic influences and lifestyle characteristics of the millennial generation to determine where and how real estate development should take place.

The recession of 2008 adversely impacted this generation’s economic standing. While they may be employed, they likely make far less than previous generations made at a comparable age, and many carry significant student loan debt. Millennials also get married at a later age and delay having children. This generation is also choosing to rent where they live, rather than purchase a house – a fact reflected by the hot market for multi-family housing developments and by a recent U.S. Census Bureau report stating that nationally, the median asking rent for residential properties rose from $761 in 2014 to $814 in 2015.

Broadly speaking, millennials are a socially connected, environmentally conscious group. They value individuality within the larger society but also want their choices in life to positively impact the world around them. Members of this socially active generation want to live close to where they work and play. Unlike their Baby Boomer parents, whose love affair with automobiles and suburbs defined their generation, millennials are less likely to get a driver’s license, own a car or take long road trips. Instead, they are more likely to use alternative means of transportation, including public transportation, ride sharing programs like Uber or biking.

In the real estate context, these characteristics indicate that mixed-use development – projects incorporating retail, office and residential options into one compact area or building – will continue to trend upward as developers cater to millennials’ lifestyles and desires. Moreover, developments will continue to appeal to millennials’ sense of individuality by providing unique amenities as a way of differentiating from other real estate offerings.

In the Metro Jackson area, for example, mixed-use developments such as The District at Eastover, located at the site of the former Mississippi School for the Blind, and the Meridian at Fondren, across Lakeland Drive from University Medical Center, demonstrate these principles at work. Both of these developments, and several others in the state, offer ground-floor retail combined with apartments or lofts above. The District advertises it will have a rooftop pool and a cabana with a coffee and wine bar, and the Meridian plans a gated dog park and outdoor kitchen. Future mixed-use developments will likely also offer amenities unique to the area as a way to generate interest from millennials.

The second major trend to watch is the rise of “18-hour cities.” This trend focuses on the increased development of urban centers, rather than their surrounding suburbs. This is often described as the “shrinking donut,” and is closely connected to the changing lifestyles generated by millennials. This trend also reflects the desire of aging Baby Boomers to trade their large suburban homes for smaller living spaces that are closer to shopping, medical services and other amenities. Downtowns have obvious advantages over the suburbs in this regard. Dallas, Washington D.C. and Nashville demonstrate this urban development phenomenon at work. Even in smaller cities closer to home like Montgomery and Baton Rouge, these trends are impacting the real estate markets. New York may be the city that never sleeps, but increasingly, smaller urban centers are becoming 18-hour cities – restaurants, retail, and housing are keeping people downtown long after the typical work-day ends. The recent debate in Jackson regarding the establishment of resort status for several downtown restaurants and bars and the attempts to develop the Farish Street entertainment district recognizes a demand that needs to be supplied.

These 18-hour cities will reward developers who focus on preexisting infrastructure as a way of luring tenants and renters. Often, the history, location, or architectural details of a downtown building provide the amenities and sense of place millennials seek. Although lagging behind many other cities of its size, downtown Jackson is no exception. Apartments in the King Edward, Standard Life and Electric 308 buildings are in strong demand. Similar downtown residential developments are under construction or in the planning phases. The use of preexisting infrastructure will allow developers to highlight the unique attributes of their projects, and thereby appeal to future tenants’ desire for the places where they live and work to reflect a distinctive lifestyle.

The third major trend impacting real estate development is the flood of investment capital into the U.S. market from two sources – foreign investment and crowd funding. According to data from Real Capital Analytics, Inc., a commercial real estate data and analytics firm, foreign investment in U.S. real estate totaled nearly $80 billion in 2015. Both foreign and U.S. investors increasingly see real estate in the U.S. as a relatively safe and profitable vehicle in which to place their money. Compared to other markets, the U.S. economy is strong. As long as interest rates remain low and rents and real estate cap rates remain steady, alternative investments to real estate, such as bonds, commercial paper and certificates of deposit, are less attractive.

Most foreign real estate investment has been concentrated in the major U.S. metropolitan markets, but as foreign investment money continues to pour into the U.S., smaller real estate markets are beginning to see an influx of capital. Recent federal legislation changing the income tax treatment of U.S. real estate investments by non-U.S. persons under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) only strengthens this trend. These factors indicate a continued upward trajectory for foreign investment in U.S. real estate.

Additionally, developers are now able to tap into an increasingly large pool of investors through crowd funding. In October 2015, the Securities and Exchange Commission (SEC) approved new crowd-funding measures that were a part of the JOBS Act of 2012. Prior to these new measures, businesses were required to register an offer of equity with the SEC, a lengthy and arduous process. However, if such offers were made to “accredited investors” – those with a net worth of more than $1 million, excluding the value of their homes, or annual income of $200,000 – then the security did not need to be registered. Consequently, most equity investment in real estate investment trusts and real estate development deals was limited to a relatively small number of institutional investors and high-net-worth individuals.

With the SEC’s approval of new crowd funding regulations, private companies may now offer equity to anyone, subject to certain caps based on annual income or net worth, as long as those offerings are made through registered “funding portals.” Registering through these funding portals is quicker and easier for businesses than under the prior system. Thus, the pool of potential investors in real estate development has grown much larger. Moreover, through websites such as Kickstarter.com and GoFundMe.com, people (especially Millennials) have become accustomed to the idea of crowd funding product development and charitable projects. Such familiarity will likely carry over into real estate investment at an increasing rate.

The numbers discussed here are good prediction of trends that will shape the national and local real estate markets in 2016 and beyond.

» Law Elevated explores the latest trends, issues and perspectives facing the legal industry and is written by the attorneys of Butler | Snow. For more information, visit www.butlersnow.com or follow Butler | Snow on Twitter @Butler_Snow.  by Don Cannada and Thomas Watson Butler Snow Business Services Group.

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