By Nathan Moeder and Tony Pauker
Thursday, July 12, 2012
It has been six years since the real estate market began to decelerate and four years since the financial markets collapsed. Now we are seeing some real signs of recovery.
Sure, we have a long way to still go, but it is time to be optimistic. Things are getting better. The question: Is the economy and, in turn, real estate fundamentally changing? The answer appears to be “yes.”
Looking to the future both the Urban Land Institute and the San Diego Foundation are examining how the past decade (the good and the bad) will re-shape our economic and land use future.
In 2011 ULI published “What’s Next” which examined broad based economic issues. Last week Maureen McAvey, executive vice president of ULI in Washington, D.C., presented excerpts from What’s Next to the local ULI District Council.
In 2010 the San Diego Foundation kicked off an initiative to ask San Diegan’s directly how they envisioned the region in 100 years. Both ULI and the Foundation agree that the future will see profoundly different land use patterns in San Diego.
According to the ULI research, globalization, demographics (read Gen Y) and technology will drive changes that could never have been perceived even five years ago. Innovation is moving faster than people can often adapt to.
Gen Y, also known as the Millennials, represent about 85 million Americans ages 16-33. They are the largest generation in U.S. history. They are more global, willing to travel, and less likely to enter the ownership housing market than their parents. They may also be the first generation to do less-well economically than their parents. Many in this group have only known an economy in recession. Despite the economic concerns, this is a large and motivated group.
The other side of this equation is the baby boom generation at 81 million strong. This demographic is “graying” and nearing retirement, which will create demand for new jobs in the health and meds sector. In addition, the jobs vacated by the boomers will need to be replaced. According to U.S. think tanks, over the next decade this will result in a labor shortage (even though it might be hard to comprehend at a current unemployment rate of 8.2 percent). This will force boomers to delay retirement (because it’s too expensive to retire) or we will need immigration to support the economy. It’s probably a combination of both.
Changing employment base
Similar to the demographic landscape, the jobs of the future will also be very different. Since 1990, U.S. manufacturing has decreased by 26 percent, however business and professional services has jumped 60 percent and health services by 75 percent.
Despite the loss of U.S. manufacturing jobs, there is an increasing trend in “on-shoring” — keeping jobs here at home. This is particularly true for high-tech manufacturing, evidenced by Tim Cook of Apple who is exploring bringing back jobs currently in China.
To meet these changes McAvey describes the future as “Eds and Meds.” Post secondary education and the growth of the health care industry are critical for success.
Looking to 2025, Pew Research believes that 60 percent of domestic jobs will require post-secondary education although San Diego is seventh in the nation for attainable degrees per capita
To compete in a global economy we need to focus on education. We need to also work with and support the tech and life science industries that have grown around UCSD and now are throughout our county. Employers should support educational efforts, particularly since state budgets have slashed much needed spending on our public school system.
As a state and nation we are spending too much money to try to create short-term stimulus. Now is the time to be strategic and lay the foundation for the future. McAvey has noted that in many U.S. cities large corporations have started to “adopt” local schools to help improve their prospects for finding local talent as opposed to importing new employees from offshore. The Bill and Melinda Gates commitment to High Tech High in San Diego is a local example.
The other national trend, and pertinent to San Diego, is housing. Since 2007 home ownership rates have fallen from a historic high of 69 percent to 66 percent. Many economists believe this rate will “revert to the historical mean” and dip to 62 percent -63 percent. That means the apartment market will continue to prosper. For San Diego it means many of our established neighborhoods will continue to see more investment.
Further, due to the economy, many Millennials have postponed household formation. Many have boomeranged back to live with their parents, and their adulthood is more “emerging” than immediate. In the short term this may slow residential demand. But in the long term it simply creates more pent up demand. By the time Gen Y establishes itself with careers and families, the usual aspirations of homeownership, stability and good school districts will re-emerge.
The office and retail sectors are also transforming — they are shrinking. A decade ago there was one employee per 250 square feet of office space. Today the metric is less than 150 square feet. Technology has made the work space more efficient. Gen Y will change the working environment as they seek a more collaborative and creative work environment. Retail, and the rise of online sales, has had a similar effect on shopping. Savvy retailers view their sticks and bricks stores as “showrooming” opportunities, but shoppers actually buy much of the product on line, sometimes even on smart phones while in the store.
As we look locally, the county is essentially built out. There are virtually no large undeveloped land holdings left. Economically our long-term prospects are strong. SANDAG estimates the county will grow by a million new residents over the next 20 years. But how we grow will not follow the land use patterns of the past half century. And it is questionable as to what level San Diego’s communities will accept new density and accommodate the next 1 million residents.
ULI, in partnership with the Aspen Institute, is continuing this conversation on Sept. 5-6 with the Global Forum on the Culture of Innovation: Growing More Ideas per Square Foot. This two-day event will bring together thought leaders and top decision-makers in the real estate development industry.
The discussions will focus on ways to harness talent, place, and culture to drive innovation — and real estate value — in the new economy. The conclusions we draw will form the basis of a report on the connections between innovation economies and real estate development, which will set the stage for ULI’s 2013 Spring Meeting in San Diego focused on Real Estate and Innovation.
Nathan Moeder is a principal of San Diego-based The London Group. Tony Pauker is the current chair of the ULI San Diego-Tijuana District Council and vice president of City Ventures.