On October 10th 2018, PwC and the Urban Land Institute (ULI) released their “Emerging Trends in Real Estate 2019 Report.” According to PwC leaders, the annual report looks forward to the year ahead, unlike most reports that look back at the last quarter or year. The report was compiled from surveys and interviews of over 1,630 real estate executives, investors, developers and market experts. To summarize the consensus of the “Emerging Trends” 2019 survey respondents, “We are coming off a peak” seems to be a theme.  However, coming off peak does not automatically mean a sharp correction. “Plateau” is a word often used regarding expectations.

All indications are that 2019 will be a turning point year.  We know that a capital markets correction is coming.  We have been used to easy money and very low rates for so long.  Now it’s the time to harvest, to hedge, and to be cautious.  Even those who see expansion continuing to 2020 and beyond stress elements of change.  The key word for real estate’s future performance is “transformation” – in technology, in generational choices, in a reconfiguration of preferences by geography and by property type, and in the potential for new investors in the asset class.

Transformation, therefore, encompasses change in threshold investment criteria, in asset allocation, and in the development of technologies that can help identify investment opportunities or enhance the risk/return profile.

It may be a surprise to some that millennials and the suburbs may well be a key to investors’ increasing confidence in 18-hour cities.  By definition, “18-hour city” most often refers to a secondary real estate market that offers services, amenities and job opportunities comparable to those in the big six gateway markets but without operating on a 24-hour basis.  Emerging Trends has previously identified the success of 18-hour cities in developing urban amenities that have led to economic growth.  The market still appreciates the urban opportunities in these markets, but interest in suburban submarkets is being mentioned as a benefit as well.  In the Emerging Trends survey, respondents continued to express their confidence in the performance of these nongateway markets.  Nine of the top ten markets and 17 in the top 20 markets in this year’s rankings fall into these categories.

No one will argue that urban revitalization received a tremendous boost from the influx of millennials into urban cores around the United States.  In fact, survey respondents felt that the urbanization trend is one of the most significant real estate developments of the last 40 years.  Now, at least some of the 80 million-plus millennial generation could be turning their attention to the suburbs.  Emerging Trends in Real Estate® has been discussing what could happen if millennials finally started behaving in ways similar to previous generations, and it appears that it may now be happening.

With the oldest now in their mid-to-late 30s, millennials are forming family units, having children, and making decisions about the future.  One of those decisions is where to live, and an increasing number are looking to the suburbs.  The U.S. Census Bureau reports that over 2.6 million people a year have moved from principal cities within metropolitan areas to the suburbs in 2016 and 2017.  It isn’t just the suburbs around gateway cities that are seeing this migration; 18-hour cities also are seeing the benefits.  The 18-hour markets that made the top 20 in this year’s survey saw an average 55 percent of their new residents locate in the suburbs over the last five years.  A real estate developer remarked, “When you start looking at moving to the suburbs, people also begin to look at the opportunity of suburbs in other markets, particularly when affordability is factored into the decision.”

The traditional attractions of the suburbs – larger homes, good schools, and lots of green space – have not changed.  What is different is that amenities now in demand include access to mass transit and walkable neighborhoods in proximity to shopping and entertainment.

Economic growth also appears to be on the side of 18-hour cities.  While the prior trend laid out a future where the economy could experience slower average growth in the future, those 17 markets at the top of this year’s survey appear to be clearly ahead of the national average when it comes to growth.  The projected average annual population growth over the next five years in the 17 markets is 1.3 percent compared with 0.7 percent for the United States as a whole, while projected five-year annual employment growth is 1.2 percent compared with 0.6 percent for the United States.

This could be giving more investors the confidence to invest in 18-hour cities.  Growth is not the only positive trend in these markets.  An increase in economic stability in 18-hour cities also is influencing investment choices.  A senior researcher with a U.S.-focused investment fund observed, “These economies used to be far less diversified.  It seemed like each one had a heavy concentration in a single industry.  A higher rate of diversification makes us much more comfortable that the economies in these markets are more protected from an isolated event disrupting their economy.”

Such potential is giving investors the confidence to move out on the risk spectrum in nongateway markets in search of higher returns.  These markets have developed desirable urban neighborhoods, which was part of the reason behind the Emerging Trends designation as 18-hour cities and could also get a boost due to their number of attractive suburban markets.

Once again, the South Atlantic remains popular with the survey respondents in 2019.  All eleven markets that make up the region are ranked as good potential for investment and development.  Opportunities are expected to be readily available in Raleigh/Durham, Charlotte, and Atlanta.  The region reflects several trends respondents have been following for the past several years: the continuing attractiveness of non-primary markets such as Raleigh/Durham, Charlotte, and Charleston.

With the search for qualified labor intensifying, markets that can attract new residents have a definite advantage.  Strong net migration over the last five years has existed in the Atlanta, Charlotte, Raleigh/Durham, Charleston, Greenville, and Richmond markets.  Most of these markets are projecting 2019 unemployment rates less than the national average.

Atlanta, Charlotte, Charleston, Virginia Beach/Norfolk, and Raleigh/Durham all have a higher percentage of their population under the age of 44.  Focus groups in Charlotte, Atlanta, Raleigh/Durham, and Richmond all point to the attractiveness of the market to younger residents.  Raleigh/Durham has the advantage of having a high percentage of their population with a post-secondary degree.

Florida markets have also been well received by the 2019 survey respondents.  They have fully rebounded from the disruption caused by the global financial crisis.  Demographic growth, a friendly business climate, and an attractive cost structure are factors contributing to the positive outlook for Florida.  All of the markets in Florida have benefitted from the availability of both debt and equity capital during this cycle.

The 2019 population growth rate is projected to once again be well above the national rate.  Seven of the Florida markets are expecting population growth rates that are at least 85 percent higher than the national average, with Orlando and Jacksonville experiencing population growth rates over twice the national rate.  Tampa Bay/St. Petersburg and Orlando have benefitted from strong annual net migration over the past five years.  Most of these markets also have a higher percentage of residents between the ages of 25 and 44 than the U.S. average.

Last but not least in the South: Central East, Nashville continues to attract capital from all over the world.  Outside money is willing to pay higher prices than local capital.  Nashville has become a perennial top-ten market in the survey and continues to outperform the national average in a number of demographic and economic measures.  The attractive cost of living was cited in the recent relocation of a major financial services firm to Nashville.  Population growth and net migration are important to the markets in the region to support economic growth.  Nashville’s employment growth is well above the U.S. rate.

As to the “office” sector, long-term suburban office investors point to positive suburban trends such as limited new supply, positive absorption, movement of younger workers to the suburbs as they reach childbearing age, and movement of workers to lower-cost, more suburban/secondary markets.  In fact, Tampa and Raleigh topped the office “buy” list in the 2019 survey.  Job growth is big.  Science, technology, engineering, and math (STEM) jobs are projected to grow at a rate 73 percent faster than the broader job market through 2026.  With more emphasis on amenities, sustainability, and wellness in urban markets, value-add repositioning or expansionary submarkets are also favored.

For the past five years, industrial has been the top-ranked property sector in the “Emerging Trends” survey and it remains so for the year ahead.  Logistics real estate remains the consensus overweight among investors thanks to a compelling story of cyclical and structural factors that have united to deliver superior returns.

On the supply side, scarce land, regulatory barriers, and rapidly increasing replacement cost have kept new space contained compared with prior cycles.  This combination of strong demand and limited new supply has brought pricing power to landlords.  Rents have been reaching new peaks in most markets across the United States.  Rapid income growth has attracted capital to the sector and a wave of capital seeking to increase allocations to industrial has contributed to push cap rates to new lows.

“Emerging Trends” survey results reveal a strong preference for infill and secondary and tertiary markets as many investors are searching for upside on rental rates or higher yields.  Industrial’s strong fundamentals have not gone unnoticed.  One of the primary challenges in navigating today’s market is the sourcing of deals.  Pricing is at new peaks and development is more difficult than ever.  Buyer pools remain deep, particularly for high-quality assets.  Evidence exists that more investors are venturing out on the risk spectrum.  Cap rates in secondary and tertiary markets compressed significantly in early 2018; the spread between Class A and Class B/C product is narrowing, and more investors are focused on opportunistic value-add development opportunities.  For most assets, the gap between in-place and market rents remains at a historically wide level.  This embedded net operating income <NOI> growth will be harvested through the near term, maintaining positive momentum for asset values.

In a speech on May 17, 2018, Dr. Lawrence Yun, the chief economist of the National Association of Realtors, reported that CRE fundamentals are on the upswing in both office and industrial for the following reasons:


  • Office demand strong, due to rising employment
  • Mobile workforce; increased telecommuting
  • Flexible space layouts
  • Moderate supply leading to 13% vacancy


  • Increased trade and rising e-commerce place industrial sector on a hot streak
  • “Last mile” distribution plus Intermodal logistics
  • Panama Canal; East Coast ports
  • Net absorption remains strong
  • Net rent growth reaches record high

Dr. Yun’s presentation included a chart, which listed the ten strongest job markets in the last three years.  Four of the ten were in the Southeast U.S. with Orlando at #2, Nashville #6, Charlotte #7 and Jacksonville #9.

According to CBRE Research’s 2018 Southeast U.S. Real Estate Market Outlook report, developers are now responding to several years of strong office absorption by delivering new product but are still expected to fall short of anticipated rates of absorption, resulting in further declining vacancies.  The region’s mid-sized markets are seeing the most development traction.  Nashville, Charlotte and Raleigh will account for more than half of the region’s development activity over the next two years.  Office asking rates continue to rise, with Charlotte and Nashville witnessing increases of 30% or more over the last five years.

The latest “Beige Book” report, issued by the Federal Reserve Board January 16, 2019, based on information collected on or before January 7, 2019, suggests that a majority of Federal Reserve Districts reported modest to moderate growth since the previous report on December 5, 2018.

In Richmond’s Fifth District, the economy expanded at a moderate rate since our previous Beige Book. On the whole, commercial real estate leasing rose moderately in recent weeks, as brokers reported strong demand for office and industrial space.  Vacancy rates remained low across all sub-markets. Rental rates were stable to increasing modestly across the District.  District brokers continued to report low vacancy rates and strong absorption rates.

Aggregate business activity in Philadelphia’s Third District continued at a modest pace of growth during the current Beige Book period.  On balance, commercial real estate construction continued to decline slightly off high levels.  Contacts noted ongoing strength in industrial/warehouse properties.

In Atlanta’s Sixth District, which includes Nashville, TN, Tampa, and Jacksonville, FL, commercial real estate leasing and sales activity remained steady during the reporting period.  On average, vacancy rates in most District markets continued to trend downward modestly.  Strength continued in the industrial sector where contacts reported momentum that continued to outpace the levels of new supply.  Office market contacts reported overall continued strength.

Updated 1/17/19