Low Labor-Force Participation Could Spell Trouble

SAN DIEGO—Fewer people in the workforce could mean the US won't have the skills necessary to compete in the global marketplace, which could lead to economic crisis, PricewaterhouseCoopers partner and real estate advisory leader Mitch Roschelle told attendees at Friday's “Breakfast at the BMC” event “Emerging Trends in Real Estate.” Roschelle summarized the results of his firm's annual report on the subject, now in its 38^th year, discussing where to invest, which sectors and markets offer the best prospects and which trends in the capital markets will affect real estate in the coming year.

Roschelle said the report's survey respondents—a wide range of executives in all facets of the real estate industry—characterized the real estate industry in 2017 using some of the following words: cautious, competitive, balanced, growing, overheated, uncertain, neutral and troublesome. He compared the respondents' predicted prospects for profitability in 2006 (86.9%) to those in 2016 (82.9%) and 2017 (81.3%), which could reflect the atmosphere of uncertainty many are feeling with the advent of the Trump administration. Despite this uncertainty, Roschelle said investors are betting on real estate to succeed, calling it “actually the world's oldest profession.” He pointed out that people like hard assets that are income producing, and real estate is both. “There's why the exuberance continues here” and from foreign investors.

He spoke next of demographic shifts, with Millennials being 30% of the population in 2015, the same year the 18-hour city came of age. And next, he got into some of the top emerging trends, which are as follows:

• a kinder, gentler real estate cycle, led by more-prudent decision making, stricter underwriting guidelines and a learned caution about overbuilding. Between 2001 and 2016, supply was added at a rate of .9%, meaning we're no longer adding to the supply of commercial real estate at the same rate we used to do. Demand is stable, but unspectacular, so we're not getting ahead of ourselves, and the banks grew stricter with underwriting as loan-demand dropped.
• optionality, characterized by flexible use of space including swing space for multiple tenants to share, or the same space being utilized for different uses.
• labor scarcity and construction costs increases, caused by labor-force participation projected to settle at a lower rate than in the past. Although Baby Boomers are likely to stay in the workforce in some way after age 64, the labor market is shrinking because more people are turning 64 than 16, and most 16-year-olds are not yet entering the workforce. “We are getting older; there are more people in the older age bracket” than in the past, said Roschelle. The biggest demographic for population growth, he added, is 35-to-44-year-olds. As for construction costs, a construction employment has decreased, costs have increased, causing housing prices to rise faster than income growth—it's simple supply and demand.
• housing affordability decreasing. “We have formed more households than supply, both multifamily and single-family, which makes the business case for apartments,” said Roschelle. He said the new American dream involves a home but it's not necessarily about owning that home. “More people are opting to rent than buy.” In fact, San Diego is one of the top-ranked markets by housing burden, he pointed out. Interestingly, small developers are influencing the market, with 90% of developers having 20 employees or fewer. This “gig economy”—in addition to technology—is one reason why the labor-participation rate is falling, Roschelle said.

Roschelle named several markets to watch for growth, including Austin, Dallas, Portland and Seattle. Austin has had strong growth in both Millennials and empty-nesters.

Best bets, he said, including being a problem solver in the middle of the capital stack, taking advantage of enhancements in construction technology, solving the e-commerce last-mile equation and adjacencies—placing yourself in the shade of the growing tree, because people like to live next to the communities in which they can't afford to live.

During the question-and-answer portion of the program, Roschelle was asked about student-loan debt's impact on the economy. “It's an enormous issue, and it needs to be fixed in our economy,” he responded, adding that not fueling the entrepreneurial sector of our economy is in part to blame—the government is more willing to lend money to go to college than to start a business.

The question of whether having a businessperson versus a career politician in the White House was a good thing, Roschelle agreed that for the most part it was. “Tax reform and lowering the corporate tax rate makes sense. It's driving up the stock market.” He said for the near term, Trump's stance will improve the economy, but he is not sure about for the long run. He also pointed out that these actions are nonpartisan—Reagan and JFK did similar things to boost the economy despite their diverse political views—and added that one negative is that as the US dollar strengthens, there is a correlative drag on multinational corporations.

Regarding a question about low housing affordability in San Diego, Roschelle said the answer is for government and business to work together to come up with solutions. He said he is still bullish on the housing market—both single-family and multifamily—because Gen Z will need housing. Renting with the option to be will become more popular. To a question about transportation, he said the trucking industry should get autonomous—driverless—vehicles first.

One of his main concerns economically is that because the workforce-participation rate is remaining so low, we may not have the skills to compete in the global marketplace. He said more young people need to be taught how to write code, a huge skill that we're not teaching enough.

SAN DIEGO—Fewer people in the workforce could mean the US won't have the skills necessary to compete in the global marketplace, which could lead to economic crisis, PricewaterhouseCoopers partner and real estate advisory leader Mitch Roschelle told attendees at Friday's “Breakfast at the BMC” event “Emerging Trends in Real Estate.” Roschelle summarized the results of his firm's annual report on the subject, now in its 38^th year, discussing where to invest, which sectors and markets offer the best prospects and which trends in the capital markets will affect real estate in the coming year.

Roschelle said the report's survey respondents—a wide range of executives in all facets of the real estate industry—characterized the real estate industry in 2017 using some of the following words: cautious, competitive, balanced, growing, overheated, uncertain, neutral and troublesome. He compared the respondents' predicted prospects for profitability in 2006 (86.9%) to those in 2016 (82.9%) and 2017 (81.3%), which could reflect the atmosphere of uncertainty many are feeling with the advent of the Trump administration. Despite this uncertainty, Roschelle said investors are betting on real estate to succeed, calling it “actually the world's oldest profession.” He pointed out that people like hard assets that are income producing, and real estate is both. “There's why the exuberance continues here” and from foreign investors.

He spoke next of demographic shifts, with Millennials being 30% of the population in 2015, the same year the 18-hour city came of age. And next, he got into some of the top emerging trends, which are as follows:

• a kinder, gentler real estate cycle, led by more-prudent decision making, stricter underwriting guidelines and a learned caution about overbuilding. Between 2001 and 2016, supply was added at a rate of .9%, meaning we're no longer adding to the supply of commercial real estate at the same rate we used to do. Demand is stable, but unspectacular, so we're not getting ahead of ourselves, and the banks grew stricter with underwriting as loan-demand dropped.
• optionality, characterized by flexible use of space including swing space for multiple tenants to share, or the same space being utilized for different uses.
• labor scarcity and construction costs increases, caused by labor-force participation projected to settle at a lower rate than in the past. Although Baby Boomers are likely to stay in the workforce in some way after age 64, the labor market is shrinking because more people are turning 64 than 16, and most 16-year-olds are not yet entering the workforce. “We are getting older; there are more people in the older age bracket” than in the past, said Roschelle. The biggest demographic for population growth, he added, is 35-to-44-year-olds. As for construction costs, a construction employment has decreased, costs have increased, causing housing prices to rise faster than income growth—it's simple supply and demand.
• housing affordability decreasing. “We have formed more households than supply, both multifamily and single-family, which makes the business case for apartments,” said Roschelle. He said the new American dream involves a home but it's not necessarily about owning that home. “More people are opting to rent than buy.” In fact, San Diego is one of the top-ranked markets by housing burden, he pointed out. Interestingly, small developers are influencing the market, with 90% of developers having 20 employees or fewer. This “gig economy”—in addition to technology—is one reason why the labor-participation rate is falling, Roschelle said.

Roschelle named several markets to watch for growth, including Austin, Dallas, Portland and Seattle. Austin has had strong growth in both Millennials and empty-nesters.

Best bets, he said, including being a problem solver in the middle of the capital stack, taking advantage of enhancements in construction technology, solving the e-commerce last-mile equation and adjacencies—placing yourself in the shade of the growing tree, because people like to live next to the communities in which they can't afford to live.

During the question-and-answer portion of the program, Roschelle was asked about student-loan debt's impact on the economy. “It's an enormous issue, and it needs to be fixed in our economy,” he responded, adding that not fueling the entrepreneurial sector of our economy is in part to blame—the government is more willing to lend money to go to college than to start a business.

The question of whether having a businessperson versus a career politician in the White House was a good thing, Roschelle agreed that for the most part it was. “Tax reform and lowering the corporate tax rate makes sense. It's driving up the stock market.” He said for the near term, Trump's stance will improve the economy, but he is not sure about for the long run. He also pointed out that these actions are nonpartisan—Reagan and JFK did similar things to boost the economy despite their diverse political views—and added that one negative is that as the US dollar strengthens, there is a correlative drag on multinational corporations.

Regarding a question about low housing affordability in San Diego, Roschelle said the answer is for government and business to work together to come up with solutions. He said he is still bullish on the housing market—both single-family and multifamily—because Gen Z will need housing. Renting with the option to be will become more popular. To a question about transportation, he said the trucking industry should get autonomous—driverless—vehicles first.

One of his main concerns economically is that because the workforce-participation rate is remaining so low, we may not have the skills to compete in the global marketplace. He said more young people need to be taught how to write code, a huge skill that we're not teaching enough.