Every year, the Urban Land Institute examines an important element of the market for readers of Houston Agent magazine: the intersection of American cities and real estate. Their Emerging Trends in Real Estate report offers a forecast of what exactly municipalities have going for them, and where possible threats lurk in the near future.

Who’s driving the bus?

One important element of economic forecasting is understanding where both growth and potential instability will come from in the near and far terms. At an economic forecast event held in Chicago dedicated to dissecting the report, Mark Eppli, director of the James A. Graaskamp Center at the University of Wisconsin-Madison predicted that GDP will slow over the next year, but that much of the decrease in activity will come from cautious business investors, not worried consumers.

“GDP will migrate from 2 per to 1 percent across 2020,” he said. “Business investment will remain narrowly negative… [but] I don’t see a trigger that will have consumers pull back.”

Eppli noted that business owners had a golden opportunity to demonstrate optimism with the most recent tax reform bill. “They have the money. What did they do with the money? …They end up buying back their own shares,” he said. “Their actions indicate that they aren’t that confident” in the economy.

Instead of being driven by the business world, Eppli noted that the economy is running on high consumer sentiment. While the business community is focused on political instability, he said, “That’s just noise to most consumers.”

But how the public is feeling is not a great measure of future growth, because it’s more of a lagging indicator than a leading one. “Consumer sentiment changes like that,” Eppli added.

The local POV

Houston ranked 42 out of 80 in terms of overall real estate prospects, which puts it between the “strong” and “average” categories. However, when it comes to homebuilding prospects, the city made it all the way up to No. 3.

ULI pointed out a number of strengths that are particular to Houston, including population, growth rate, diversity and levels of real estate investment. Researchers noted that in addition to the fact that the area has seen a 10.7 percent population gain since 2010, it’s predicted to see annual population gains over the next five years in the 1.6 percent range. “Houston has become not only more diverse, but also more cosmopolitan over the years,” the ULI report noted, adding that the city “is exercising bragging rights as it is proclaimed ‘the most diverse city in America,’ edging out Jersey City and New York City for top honors.”

Still, Houston’s dependence on the energy sector was noted as a point of volatility. “While celebrating 2019’s pace of job change (about 80,000 added jobs on a year-over-year basis), the memory of 2016 (when job growth was flat to negative) is still vivid,” researchers noted. 

But overall, the fact that investments in the multifamily sector in 2018 and early 2019 totaled $10.8 billion, and that the office sector, retail and industrial sectors saw transactions exceeding $3 billion apiece over the past 18 months, demonstrates that “investors are flashing a signal of confidence in further growth potential.”

Looming problems in the residential sector

Despite an overall positive economic outlook, affordability problems threaten the residential market. The ULI report referred to residential real estate as “the great unraveling” and noted that “housing is a mess and getting worse.”

The researchers noted that the high cost of housing is causing municipalities and states to look for solutions. Some are turning to partnerships with large employers to create workforce housing, while others are looking at rent control as a solution. “Politics? Sure. But the politics only arise as a result of the market conditions,” the report quipped. Still, researchers noted that many cash-strapped residents in high-cost areas can’t wait for such fixes and are exploring avenues such as co-living as a solution.

Whatever the case, ULI’s study maintained a sunny disposition when it comes to the ability of the industry to evolve to meet market needs. “If we are at a critical moment for housing, perhaps that is not entirely such a bad thing,” researchers said. “The real estate industry can be counted on to adapt, and the trend in housing is almost assuredly not the ‘same old’ extension of the direction taken in the decade just past.”