Kevin Thorpe kicked off the discussion in Letterman style with a Top 10 comparing 1997 to 2017.
10. The Cloud: ’97 – held rain; ’17 – hold data. Cloud computing has impacted real estate such as flexible work environments, and the explosion of data centers, which host 70% of internet traffic in Northern Virginia.
9. Millennials: ’97 – no one cared about them; ’17 – 75 million in the United States and the largest demographic in the workforce.
8. Internet: ’97 – Clinton elected to 2nd term, Trump wrote The Art of the Comeback, and Gore invented the internet. Clinton only set 2 emails his entire presidency.
7. E-Commerce: ’97 – was not part of GDP and Amazon was an on-line bookstore; ’17 – a $400 billion industry, and fueling the greatest industrial boom.
6. Music Industry: ’97 – had to buy an album from the store to play the #1 song (which was Candle in the Wind). ’17 – can buy one song from your phone.
5. Interest Rates: ’97 – 6.36% treasury yield; ’17 – gradually declined almost every year for the next 20 years.
4. Internet Users: ’97 – 121 million, today – 3.4 billion. Many companies created, but also many jobs destroyed.
3. Auto Industry Evolution: Was led by the electric car, but today is focused on the driverless car.
2. Office Space Evolution: Went from 250 SF to 170 SF per person.
1. DC Evolution: The gross regional product went from $215B to $430B, which is explosive growth.
Andy Florence reflected that one of their first large purchases was a 5 megabyte hard drive for $10K, and he drove to Delaware to avoid paying taxes. Millennials are a major driver for growth in the region. We have had the worst job growth, but the problem is not solely driven by the Federal Government. DC was the only city with negative absorption in 2014/2015. Today, offices have the highest vacancy rates in two decades. DC was the strongest city for growth, and now it is one of the highest for reduction. Migration has been flat. The educated workforce is leaving, but they are required for attracting technologies companies, which the City has always struggled to attract. Household creation is coming from renters, not owners. The vacancy rate is at significant lows for multifamily. Rent growth has outpaced income growth. The highest incomes have kept pace with rent growth, but for the lowest incomes, workforce housing is difficult to find. The City’s solution of shelters does not solve the problem. In the past three years, CoStar has created 1500 jobs outside of the region, because it is more affordable to live elsewhere. An example is that in DC, a single person has $9544 left after expenses, where in Richmond, they have $35,712. The region’s housing and transportation issues may have made us miss the current expansion. Office leases in real terms are less expensive today than they were 20 years ago. The biggest impact going forward will be autonomous vehicles.
Patrick Phillips noted that Federal procurement peaked in 2010. DC came out of the Great Recession strongly because of the Federal Government, but then the economy slowed as the rest of the nation picked up. The current job growth is coming from low wages that do not drive the economy. Housing affordability and mobility are hurting the region. In DC, you have to pay someone $115,000, when in Richmond, you can pay the same person $60,000. Today, you can get an ultra-high speed network in the middle of nowhere. The autonomous car becomes the poor man’s jet. These combined are fueling the expansion to secondary markets.
Driverless cars will make a significant impact in real estate. The autonomous car is similar to an elevator turned on its side. The elevator started with an operator, and eventually people got comfortable with the technology. More road surface will be utilized, and each car will be better utilized.
Walkability is in a great cycle with an economic advantage being given to property value, and new development being created with more density. But the 65% of office inventory in the region being in the suburbs will continue to be an issue.
Technology will continue to impact the real estate market. Virtual reality is allowing people buy real estate without visiting in person. An example of machine learning can be seen in the Tesla that rapidly learns about the environment. Apartment.com has one billion searches per year, so now they have very accurate rent data.
Real estate in DC has become more globalized. Today there is a symbiotic relationship with the local players providing the knowledge about the local development rules and the global players providing capital and risk management. DC still is creating a new generation of developers that understand neighborhood solutions. Digitized real estate will slowly begin to impact the rest of the world.
The panel was asked to make some bold predictions. Kevin predicts that interest rates will increase this year to 3% and there will be increased inflation. He thinks there will be corporate and individual tax cuts in 2018. Patrick predicts that the Washington Capitals hockey team will take the series in five games. He sees the region starting to want to work together across state lines such as in funding the Metro. Every other global region is working better than we are, and we need to demand that this region work together. Andy thinks that in 2018/2019, we will look back at 2017 as the turn of the cycle nationally.
To view a video recording of this, please click here.
Kevin Thorpe, Chief Economist, Cushman &Wakefield
Patrick Phillips, Global Chief Executive Officer, Urban Land Institute
Andrew Florance, President and CEO, CoStar Group
Recap Written by Beth Resetco, Southland Industries