CityView's Cisneros on Mega Trends: What is ‘Normal'?

In the wake of the recent economic downturn, there are significant trends moving beneath the foundation of the real estate industry that are creating a "new normal" for the decade ahead. For the first time in history, more people in the world live in urban areas than in rural communities. In the United States, this means that America's metropolitan areas are the true centers for population and economic growth. At the same time, the sources and flows of global capital have experienced major shifts, reconfiguring funding sources to achieve goals.

The new American economy is more city-friendly than any economic environment since the Second World War. We have critical new industries rising to leverage the value of our great American cities-higher education, health care, new media, professional services and international trade. These industries are driving the adaptive reuse and clearing of old structures, which are remnants from an era driven by manufacturing. These industries are also attracting new demographics to the cities-certainly the creative class, and as the cities continue to redevelop, also immigrants and empty nesters, who are seeking the thriving cultural pulse of an evolving metropolis.

Add to that the newly entrepreneurial role of city governments, where we have mayors convening groups of both private and public sector leaders to drive change and accomplish major goals. There are a number of positive trends at work today in America's cities; the recession did slow down some of these initiatives, but all of these trends are converging again as the recovery takes hold.

We are seeing these trends impact the multifamily development marketplace, which is experiencing a promising resurgence. Of all real estate sectors, multifamily rental seems to be leading the pack in recovery. The CoStar Group, a leading provider of commercial real estate research and information services, predicts a sharp spike in new units for 2012, with more than 22,000 units forecast for 2011. CoStar anticipates that number to jump to more than 94,000 units in 2012 and just over 109,000 units in 2013.

Multifamily is also attracting investment attention thanks to new demographics and increased demand. U.S. Census projections for 2010-15 indicate four million renters are projected to enter the market as home ownership rates decline; at the same time, an additional four million "echo boomers" will benefit from expected job growth, enabling them to seek independent residences. They are expected to primarily seek rental properties.

"Clearly there is a demographic shift with echo boomers coming of age-aged 20 to 34, echo boomers are renters 60 percent of the time," says Jeff Courtwright, executive vice president for the southwest U.S. for Lincoln Property Company. "As baby boomers are retiring and downsizing, they are another large demographic to target. Both should increase multi-family demand for the near term."

As the growth of cities becomes a predominant driver for cultural and economic change, real estate development will need to seek opportunities for adaptive reuse and urban infill, offering attractive locations for the echo boomer demographic segment. People are rapidly realizing the benefits of transit-oriented development as a way to reduce congestion and pollution, so we will see more and more developers identify and leverage these sites. As one example, an independent study by Zipcar Inc. found that nearly half of drivers aged 18 to 34 said they have consciously made an effort to reduce their driving. This trend points toward transit-oriented development, a need that urban areas are almost exclusively positioned to fill. Transit-oriented projects will almost always include multifamily developments and therefore will attract echo boomers, who prefer to rent as they begin their professional lives.

Our CityView team is currently raising capital for urban projects, and, therefore, see many proposals for apartment funds also seeking investors. Overall, we see more investment fund interest for multifamily development than for any other segment, to such a degree that some analysts have cautioned about the near-term risk for oversaturation of the marketplace as investors flock to this growing and attractive segment of the real estate industry.

We are going to see a wide range of traditional investment sources available for this urban surge. For example, residential development is most likely to be funded by equity financing from public companies, but also commercial bank debt. We also believe we will see continued interest from institutional capitol and private equity. There's a wide variety of capital available in our society, ranging from high net worth individuals and REITs to private equity and institutional capital, to debt in several categories.

Traditionally, investment has come primarily from institutional sources such as REITs, pension funds, insurance companies, endowments, high net worth individuals, and family offices. These investors appreciate the steady revenue streams available from investment in rental properties. Increasingly, there is interest from foreign investors in the U.S. real estate market. Both the dollar and real estate values in the U.S. are currently down, making for an attractive value proposition as the market begins its climb back upward. A recent survey by the Association of Foreign Investors in Real Estate (AFIRE) found that foreign investors plan to boost capital allocations for U.S. assets, with projected increases of 62 percent for equity investments and 83 percent for debt above 2009 levels. Much of that foreign capital will be invested in creative multifamily projects. There will be countries, such as Canada and China, that view the United States as a good place to invest in comparison with other parts of the world. The same AFIRE studies also found that more than half of its nearly 200 members believe the U.S. real estate market offers the best opportunity for long-term capital appreciation and plan to invest here. I think we'll see even higher levels of foreign investment once this recovery is complete.

As the biggest sources of economic growth in this new economy, cities are ideal places for leading the charge toward new and better green construction and development. In fact, I believe cities must be major contributors in solving the environmental challenges of our time.

According to an excellent report titled "Reinventing the City," published by the World Wide Fund for Nature, cities will generate half the total allowable emissions for 90 years within the next 30 years or one-half the total of emissions in one third the time. Worldwide over those next 30 years, cities will spend about $350 trillion on the construction, operation and maintenance of urban infrastructure.

At the same time, our U.S. population is going to grow from the present 306 million to about 410 million by 2050; that is, we will grow by more than 100 million people over the next 40 years. The Brookings Institution reported that we must add 171 billion square feet of new built space in the United States between now and 2050. When we add replacement structures to the new space needed for growth, the sum comes to 213 billion square feet of buildings to be constructed.

The juxtaposition of the scale of that forthcoming investment and the urgency of the environmental problem in urban areas makes clear that cities will be planning advanced infrastructure that promotes environmental sustainability.

Clearly cities must lead in deploying new sustainability policies, new urban planning, new infrastructure, new communities and homes, new building materials, new technologies, and new financing.