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Storms wreaking billions of dollars in damage on a regular basis, the soaring cost of housing and crumbling transportation networks threaten the competitiveness of the U.S. economy and are at the top of private developers’ minds.
But they want public resources to provide a solution.
The Counselors of Real Estate released the findings of its annual survey of top issues for commercial and residential real estate. Infrastructure, housing and climate/weather-related risks took the top three spots, respectively.
The organization includes 1,100 members across more than 50 real estate disciplines, and more than half of those who participated in the survey ranked infrastructure as one of the top issues facing real estate.
“Respondents urged that this not be put on the back burner, even though it is a chronic issue that gets displaced by more hot-button and controversial matters capturing headlines,” Counselors of Real Estate Chair Julie Melander said Wednesday at the National Association of Real Estate Editors conference in Austin, Texas.
Respondents are also pushing for public funds to fix infrastructure, subsidize housing costs and protect against risks from climate change.
The Counselors of Real Estate report showed member exasperation over the Trump administration and Republican Party failing to move forward with Democrats on a $2 trillion infrastructure plan after previously announcing a deal this spring.
The political divide has caused the U.S. to have “wasted a great opportunity” to borrow long-term at low interest rates and make progress in fixing crumbling roads, railways and other infrastructure needs.
With U.S. Treasury rates still at roughly 2.6%, the Counselors of Real Estate report says there is time to come up with an ambitious infrastructure plan with favorable lending conditions — and warns against sustained political stalemates when it comes to funding such a plan.
“Without substantial infrastructure improvements, several large U.S. cities, including New York and Washington, D.C., will become untenable for corporate expansions and top talent,” the report reads.
The report also looks to public resources when it comes to climate change.
Respondents indicated historic performance data is no longer used to predict future returns on real estate development, largely due to weather and climate-related risks.
The frequency and intensity of storms are increasing, and there was a record $300B in U.S. insurance losses in 2017, according to the National Center for Environmental Information. Last year, there were 14 $1B-plus weather and climate-related disasters and cost the U.S. about $91B in damage.
But even after the storm passes, its real estate impact lingers.
A major hurricane decreases property values for all types of real estate by 6% one year after the storm hits, according to analysis by the National Council of Real Estate Fiduciaries and the National Hurricane Center. Two years later, property values were down by 10.5%.
“Our cities will survive Trump, Brexit and even another downturn, but we cannot continue to have [Hurricane Harvey-like] events and pretend like this won’t impact our industry,” the report cites a surveyed member as saying.
The public sector has begun to respond. Thirty-one regions and two states (California and New Jersey) have building laws requiring energy benchmarking, emission reduction or other climate-related goals. Property owners and developers, often due to city ordinances, have moved critical building infrastructure out of basements to higher levels of buildings to avoid potential flooding.
But the report warns more needs to be done at a greater scale, as climate risk has the potential to impact other areas of concern like investor confidence and infrastructure.
In Boston, the public-private debate on who foots the bill on storm resiliency is a daily conversation in planning circles.
Rising sea levels threaten $80B of real estate in Boston, and urban planners have pushed the idea of a publicly funded sea barrier in Boston Harbor to protect the city from storm surges. Cost estimates are vague, but guaranteed to be in the billions, based on previous interviews Bisnow had with climate experts.
The price tag has led to the city looking for land-based solutions that require private landowners and developers to significantly contribute to a climate plan, by building sea walls along their waterfront property or working with city teams to create a living shoreline to divert water.
Boston officials have told Bisnow the measure will only work to increase property values for stakeholders, but Stantec Sustainability Design Leader Blake Jackson said a land-based solution relying only on private resources isn’t the best fix.
“The parcel-by-parcel argument is more of a Band-Aid approach. If we can solve the problem for the city of Boston parcel by parcel, wouldn’t we have already done it?” he said. “If we just miss one, the whole plan will have an Achilles' heel.”
Finding The Right Public Balance
Housing, the second-ranked chief concern by the organization, is in a have-and-have-not income spiral with a flood of expensive supply and a diminishing number of individuals with the ability to pay for places to live near where they work, according to the Counselors' report.
The last recession was driven by a mortgage crisis, and a byproduct of the recovery has been developers favoring higher-end multifamily product. Those developments are more profitable and easier to finance, especially considering rising labor and land costs.
Young professionals, often saddled with student loan debt, are finding it more difficult to rent or buy in a residential development in urban areas close to where they work. While the economy is doing well, the report says significant income growth has been limited to top earners and that 80% of the U.S. labor pool is dealing with rising home prices and diminished wages.
Baby boomers are also having their own form of housing woes, as it is increasingly difficult to sell their homes in suburban areas due to limited liquidity in the market.
“Housing affordability is threatening the stability of the middle class, which will hit other parts of the economy as well,” Melander said.
Many U.S. developers continue to push for improvements to the Low-Income Housing Tax Credit to generate more affordable places to live, but the report cautions against using too much public action to address the housing market.
Counselors found tools to create a more affordable housing environment like rent control were too heavy-handed. The group also took umbrage with provisions in the U.S. Tax Cut and Jobs Act of 2017 that limit the deductibility of state and local property taxes on federal income taxes, which the organization found to be a double penalty that didn’t address what it perceives to be the real problem with housing: supply and demand.
The Private Push
Private developers aren’t entirely placing the burden of finding a solution to these issues on the public sector.
Google’s plan to invest $1B to address the Bay Area’s housing crisis could provide a corporate road map in housing workers closer to the office in pricey markets like San Francisco. But that plan is both unprecedented and far from implementation.
Melander, when asked about the public and private sectors both having a list of demands from the other, said it isn’t unheard of for the private sector to chip in more, especially when it comes to climate risk.
Developers in Miami and Boston have both responded to calls for more storm resiliency by building it into projects through public spaces with sea walls that double as seating areas or raising land elevations out of flood zones.
“They are being asked and are doing the investment to address [climate risk],” Melander said. “That’s a good example of the private sector going ahead and saying, ‘This is impacting our value, and we need to address it.’”