It is an understatement to say that real estate is a massive part of the economy. Contributing to around 11 percent annual GDP in the U.S. and $90 trillion of total worldwide output, you cannot escape the omnipresence of the industry in its various residential, commercial and industrial incarnations. The sheer importance of real estate, however, is best reflected in the number of resources that it uses. In the US alone, up to 40 percent of raw materials go into real estate construction and maintenance, which is responsible for 20 percent of the country’s greenhouse gas emissions. After the 2007-08 financial crisis, the world learned the daunting impact that real estate has on the global markets as one of the factors that precipitated the Great Recession.
The real estate industry is expected to experience significant changes in the next decade and beyond. Due in large part to increasing technological integration, a growing population and an evolving real estate workforce, the industry is, undoubtedly, headed into formerly uncharted waters.
While technology has led to a wide-scale disruption of the status quo in many industries in the past decade, real estate has only recently felt the effects. In residential real estate, companies like Zillow and Trulia have changed the relationship between homebuyers and real estate agents and brokers through their real estate search engines that simplify the home buying, renting or lending processes. Real estate agents and brokers have capitalized on websites like Zillow and Loopnet, a similar search engine specifically used for commercial spaces. Brokers see these companies as an advertising tool that shortens the barrier between buyers and sellers.
Unlike how the introduction of the search engine made the travel agent industry crumble rapidly, real estate agents in the U.S. have not declined. In 2001, 69 percent of homebuyers purchased a home through an agent. More recently, in 2015, 87 percent of homebuyers used an agent. Much of this difference is due in part to the changing role of the agent, which is seen more as a price negotiator and market expert in particular neighborhoods. Additionally, on a more human level, agents serve as guides that can help buyers and sellers with the significant mental burden that is inherent to large life decisions like real estate transactions.
On the other hand, brokers are not too fond of these real estate tech companies. While the brokers reap short-term benefits from these websites because they act as advertising tools, the future employment of brokers is expected to drop. In the coming years, experts predict a tech-broker model will soon replace the traditional broker model of today. That simply means homeowners will sell their properties by themselves via the Internet and not through a broker. It is uncertain how this tech-broker model will affect the price and stability of the housing market. Overall, the Internet has benefited the consumer experience and is a positive for agents and brokers in the short run, but it poses a threat to their professions in the future.
Real estate is not only under pressure internally, but the Internet age also affects the demand for physical commercial space.
Because of the interconnectedness that real estate has with other sectors of the economy, the technological revolution that has had drastic impacts on the retail industry has also affected commercial real estate. Currently, the changing retail landscape has more companies turning toward online shopping as their major marketplace, which, in turn, has decreased the need for physical space. A classic example of this is the decline of the video rental store. The once ubiquitous Blockbuster, with thousands of locations across the country, has been replaced and forced to the brink of insolvency by online streaming services like Netflix and Amazon Prime.
This is no direct cause for panic. Not every brick and mortar store is on its way out, but the growing popularity of online shopping is crunching the demand for physical locations.
However, retailers are adapting in ways that continue to prioritize the demand for physical spaces. For example, Restoration Hardware, a high-end home goods company, opened a restaurant space in Chicago, dubbed the Three Arts Club, to showcase its products to potential customers in a way that cannot be replicated online.
While the growing dependency on technology may lower the demand for commercial real estate space, global factors, such as continued urbanization, will likely offset these trends. In every continent, more people are living in cities. This migration presents many opportunities that the real estate industry has the potential to capitalize on, and private real estate developers are poised to profit from increasing urbanization. PricewaterhouseCoopers projects that the global construction output will double to $15 trillion, and 60 percent of the construction by 2025 is expected to be in emerging markets.
Even though rising prices are ideal for real estate developers and owners, the case is not the same for the renting masses, who demand affordable housing. To meet the need, developers have innovated ways to push prices of apartments down. One way is through microapartments, which are one-room living spaces that meet all the basic needs of a home compressed into a 100 square foot space. Beginning in cities known for their expensive real estate, like New York City, Hong Kong and Boston, these spaces have become increasingly popular. While not every apartment complex in major urban areas will be micro-sized in the next couple years, it is certain that residential units will continue to become smaller as urbanization continues.
While developers feel pressure to build affordable housing or office spaces, the industry is also compelled to build more eco-efficiently and add more sustainable elements to their properties. Since buildings account for 20 percent of all greenhouse gasses, policymakers and activists point to real estate as an effective approach help fight climate change. Implemented in 2010, all new buildings have to meet the standard qualifications of the International Green Construction Code. The regulation on construction sites applies to all commercial, industrial, mixed-used and almost all residential and industrial properties. The IGCC’s goal is to reduce energy consumption by regulating pollution and inefficiencies in building materials, water usage and heating and cooling systems.
While regulations like the IGCC increase sustainability, they also increase construction costs. A construction company that chooses building materials that are eco-friendly may produce a building with an excellent rating by LEED, a green building certification organization. However, the process may be longer with a more complicated construction period and, ultimately, higher costs.
The higher costs of a green building may dissuade developers and construction companies at first, but they can get their money’s worth in the long run. Eco-friendly buildings with gold and platinum ratings by LEED may have cheaper operating costs and can receive tax credits in some states and countries. The Providence Newberg Medical Center in Newberg, Oregon is a perfect example of a green building that had higher construction costs at first but eventually became more cost effective as the sustainable water irrigation system used less water and the energy efficient HVAC systems lowered operating costs. Oregon then granted the hospital $393,000 in tax credits since it met certain green building qualifications. More developers and construction companies are implementing more sustainable HVAC systems and sustainable water irrigation because they could save money during a building’s life of 50 or more years.
While technology, urbanization and sustainability are major factors disrupting the real estate sector, there is a lesser-known trend that could pose a headwind to the industry: the decline in appraisers. A real estate appraiser values all types of buildings and land for people willing to lend, sell, buy, lease or refinance their properties. In 2015, there were 78,500 real estate appraisers in the U.S., which was a 20 percent decrease from 2007 numbers, and improvement is dim with continued, annual decreases of three percent projected for the next decade.
Although this is good for appraisal firms because the decreasing supply of appraisers gives them a reason to increase their prices, it ultimately reduces the efficiency of their transactions. First, residential appraisals will likely take longer which could result in mortgage rate locks, which means borrowers may have to pay a higher interest to make up for the time delayed. Also, the shortage will lead to more out-of-state appraisers valuing residential and commercial properties in markets they are not as knowledgeable about, which would create unfair and inaccurate valuations. The industry may not feel dire effects from this decline in appraisers anytime soon. However, if the decline continues, it is possible that an increase in inaccurate valuations could lead to millions of dollars lost in sales or, in the absolute worst-case scenario, another “bubble.”
Between the impact of technology and the future growth in developments, the real estate industry is expected to evolve over the next few decades. Many of these trends will force real estate leaders to adapt while other real estate shifts create opportunities they can capitalize on. Overall, the industry is veering into new territories.