Curious about what 2019 holds for the world of real estate development? Or what the predictions mean for developers, renters, and buyers? With whispers of another recession on the horizon, so are we. So earlier this week, we peered into the Urban Land Institute’s (ULI) renowned annual report to get a prediction on this year’s trends.
While the majority of people surveyed by the ULI felt the market would be “Good to Excellent” this year, a closer look indicates the market is transitioning, which, for many, means that growth will slow and profitability will plateau.
The Bad News
Nationally, there’s a decline in demand for real estate. The reasons are pretty straightforward. The fertility rate in the U.S. has been declining for years and is both at an all time low and way below population replacement. Immigrants have historically filled the population gap. But due to increasingly strict immigration policies, our population is growing old and steadily declining.
Furthermore, the same generations that aren’t reproducing fast enough are the ones innovating the tech industry and disrupting, among many markets, real estate. Data transparency and accessibility have transformed the way people garner information and make decisions. Transactions are easier, faster, and there is more, keener competition. Building costs are increasing, and there’s a disconnect between industry jobs available and the number and caliber of workers to fill the needs. #makeconstructiongreatagain ?
The Good News
So-called “18-hour cities,” or ones that are hubs of activity all day and into the night but not ALL night, seem to be experiencing less of a slump. These cities often offer the same amenities and urban feel of a big metropolis but are smaller, more affordable, and economically diverse enough to be more stable during an economic shift - qualities that millennials value and that aren’t changing any time soon. Thus, steady growth is predicted over the next few years in these cities where people can live, work, and play.
So what does this mean locally? Does Chattanooga have what it takes to be an 18-hour city?
For Local Developers
Developers seem to have misjudged the rate of growth over the past several years as well as the demographics and needs of those incoming. Now Chattanooga’s urban core is left with an abundance of apartment units and not enough of the right type to suit those looking.
Chattanoogans apparently still have an optimistic outlook, as nearly three fourths of the developers, investors, and private, public, and non-profit stakeholders at the ULI presentation raised hands in expressed expectation that the market will be “Good-Excellent” this year. The only person who seemed aware of the fact that Chattanooga missed its mark was local developer, John Clark - who was a panelist at the presentation. He caught everyone’s attention with his remarks, “Our market isn’t as good as we think. We aren’t absorbing units as fast as we are building them, yet we continue to build the same types of projects at the same rate.” Clark suggested that while we wait for the demand to catch up to supply, we ought to be focusing more on boutique projects, such as housing for seniors or other, smaller-scale and site-specific projects.
Clark is right. There’s a missing market. But his recommendation isn’t novel. In 2016 Chattanooga Neighborhood Enterprise hosted a two-day workshop by the Incremental Development Alliance on small scale development to bring attention to this missing middle and to encourage local developers to consider building at a more human scale. The mid-size structures provide a variety of housing types while building density. Renters tend to be long-term tenants because the smaller building increases opportunity for residents to interact, facilitating relationships and enticing people to stay and invest in the community. Incremental development also creates a walkable environment, supporting more independent businesses and neighborhood investment.
A November Times Free Press article reported that rental rates jumped five times that of wages in 2017. Consequently, it has been cheaper to invest in owning a home. Fortunately for renters, we’ve reached a point in which the supply of units outweighs the demand. Multiple apartment developments downtown are suffering vacancies and are having to offer free rent for the first month. It won’t be long before a lack of demand drives rates down, meaning those who currently cannot afford to live downtown may soon be able to afford it.
For Buyers and Sellers
Because rental rates inflated significantly in recent years and interest rates remained low, homeownership has been a more affordable option than renting. However, prices have also been driven up by outside investors who are buying up multiple homes at a time and flipping them. By proxy, interest rates and property taxes are going back up and are also pricing out first time buyers. Some local developers are having to come down on prices in order to sell their newly constructed homes. With an over-saturated rental market and exorbitantly priced homes, we may see prices level out in the next year.
The two main ULI-outlined concerns this year are job growth and quality of labor, and they say attracting talent will be the key to elevating productivity, profits, and urban vitality. Chattanooga has done a great job of attracting talent, continues to attract new jobs, and has a lot to offer in terms of play and living spaces, so we may just meet enough of the 18-hour city criteria to continue to grow through this transition. However, until the demand of rentals catches up with supply and housing prices reach a ceiling and/or drop, our approach to development will have to be rethought in order to be sustainable.