Mitch Roschelle, Partner at PwC, joined us on the podcast to discuss the emerging trends in real estate as we head into 2019.
Mitch is a Partner at PwC, and currently serves as one of the firm’s Business Development Leaders. He was a founder of PwC’s Real Estate Advisory practice, and has over 30 years of experience serving a wide array of real estate investors, foreign and domestic.
Mitch is a widely-recognized commentator on real estate, housing, business trends, capital markets, the retail industry and the economy. He is a frequent public speaker, and a regular guest and panel member on Fox Business Network, and Bloomberg TV and Radio. Mitch is the creator and co-host of 7DayYield a PwC-sponsored, weekly YouTube program covering trends in the financial services industry. He is the co-publisher of Emerging Trends in Real Estate, a widely-circulated global annual market forecast.
An active proponent of corporate social responsibility, Mitch serves as a trustee of the PwC Charitable Foundation, where he leads its grant-making efforts in youth education and financial literacy. Additionally, Mitch is a member of the Board of Directors of PENCIL.
He resides in Armonk, New York, with his wife Debbie and their teenage twin boys, and their golden retriever Charlie.
- You can follow Mitch on Twitter: @Mitch_Roschelle
- Download PwC's Emerging Trends report: Emerging Trends In Real Estate 2019
Tyler Stewart - All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions, and do not reflect the opinion of RealCrowd. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. To gain a better understanding of the risks associated with commercial real estate investing, please consult your advisors. Hey, listeners, Tyler here. Before we start today's episode, I wanted to quickly remind you to head to realcrowduniversity.com to enroll into our free six-week course on the fundamentals behind commercial real estate investing. That's realcrowduniversity.com. Thanks.
Adam Hooper - Hey, Tyler.
Tyler Stewart - Hey, Adam. How are you today?
Adam Hooper - Tyler, it's not a bad day. It's a good day.
Tyler Stewart - A little foggy, but.
Adam Hooper - A little foggy. Fall is setting in here in Portland. It's nice I think we give our listeners a little taste of the kind of goings on of weather in Portland every...
Tyler Stewart - Sure, yeah, the leaves are starting to turn colors, which is always a beautiful sight.
Adam Hooper - It's always a beautiful sight. And we had another great guest on today.
Tyler Stewart - We did. We had friend of the podcast, Mitch Roschelle, partner at PWC.
Adam Hooper - Mitch heads up PWC's initiative in conjunction with Urban Land Institution, the ULI, to put out their annual Emerging Trends in Real Estate report. Check the show notes here for links to that report. We had Mitch on last time and talked about their 2018, now we got the 2019. Early look.
Tyler Stewart - Definitely download the report. It's a 70-page awesome, just in-depth look at what's happening in commercial real estate. They talk about the new era of commercial real estate and what's happening currently with technology, with 18-hour cities, what millennials are doing.
Adam Hooper - If you haven't looked at them before, again, highly, highly recommend it. There's a ton of great information in there. In our talk today with Mitch, again, we kind of went over the high points. We touched on some very interesting things, going all the way to the actual cost of shipping that retailers have to absorb when they ship packages down to, like you said, 18-hour cities. We talked about total real estate market size. We hit the top 10 markets. We hit the five L's of housing affordability. Whole bunch of stuff.
Tyler Stewart - A lot of great information. Mitch is always funny. He has a great attitude. Told some jokes in there.
Adam Hooper - A couple. Yeah. Again, really good episode. Again, I think it's just kind of understood by now that you should have a pen and pencil ready, some paper, to take notes 'cause there's a lot of good stuff that we covered. Also, in the show notes, you'll find a link to Mitch's Twitter handle. We'll see if we can get him a few more followers here today. Be sure to follow Mitch. See if he's going to be coming to a city near you for a presentation on this report. Send him a tweet, let him know you heard him on the podcast. Maybe we'll get him back on again if we get a good enough turnout. Well, I think that's enough of us going here, so with that, Tyler, let's get to it.
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Adam Hooper - Well, Mitch, thanks for jumping on the podcast with us again. It's an honor to have you back on the show. I know our last episode was very highly listened to, so we're excited to jump in again here today.
Mitch Roschelle - The last time I was on, if I recall, I was locked in my basement because we were under a blizzard warning in New York. Today I'm sitting in my office looking out the window, and it's not snowing.
Adam Hooper - Perfect.
Mitch Roschelle - But it feels cold in New York, that's for sure.
Adam Hooper - Good. Why don't we start with a quick recap of maybe things that have progressed since then. I know last time we talked about the Tax Cuts and Jobs Act bill. I think you were bullish back then. How do we feel many months on from our last episode?
Mitch Roschelle - There's no question there's a linkage between the U.S. economy and the real estate asset class. No matter what vantage point you get into real estate, whether you're on the debt side, the equity side, the operating side, it doesn't matter. There's no question there's linkage. We're pretty late in the cycle. I'm sure we'll talk about it some more. But the Tax Cuts and Job Act was a boost to the U.S. economy. That's exactly what the economy needed at the time, and as a result, what the real estate ecosystem needed at the time. We're bullish on it. More importantly than my view from the cheap seats, or the expensive seats, depending on what StubHub thinks my seats are worth, but the fact of the matter is when you talk to CEOs, their confidence level today is high. When you talk to small business owners, and let's not forget small businesses are the engine that drives the job creation in our economy, their optimism level is high. When you look at the consumer confidence information, that's at almost an all-time high. When you add all of those things up, that's what propels the economy forward, and more importantly, for us listening to this podcast, creates demand for commercial real estate and residential real estate.
Adam Hooper - I know one of the things we spoke about last time was the concern of is this too much, too fast. Would it be too big of a push that would cause the opposite effect? Still have those same concerns? Or are we more comfortable with where growth has been going and the velocity that we're seeing?
Mitch Roschelle - Yeah, I speak to a lot of economists. I'm not one, but when I speak to a lot of economists, many refer to this as a sugar high, or they observe that what we've done is we've pulled forward growth that would have naturally happened in subsequent quarters or subsequent years, and we front-end loaded it. That's why GDP is so high, and that that level of growth isn't sustainable. I'm somewhere in the middle of all of this because I think our metrics are wrong in terms of looking at economic expansions in our country, looking at our history of economic recovery, and somehow thinking that 10 years is the natural cutoff point 'cause we've never had a recovery that's gone that long, and thinking to ourselves, well, we have to be done with this by somewhere in 2019 because that's the magical 120-month mark. If you look at our recovery on a global perspective, and compare ourselves, perhaps, to Australia, their recovery has been going on since 1991. If you look at other countries around the world, there are economic recoveries that are going on considerably longer than ours. Perhaps the metaphor of what inning we're in is the wrong one. Maybe the sport is wrong. Even though the longest baseball game of record back in 1984 was 24 innings, the fact of the matter is maybe cricket's the right metaphor, and those games go on for days.
Adam Hooper - Or maybe like a John Isner match at Wimbledon.
Mitch Roschelle - Fair enough, if you want to keep it with a sport that I understand, 'cause I don't understand cricket. I don't know what's going on. By the way, it was 25 innings, I was mistaken. 25 innings. Took place May 8th, 1984, between the White Sox and the Milwaukee Brewers. The White Sox won, seven to six.
Adam Hooper - There we go. There's your sports knowledge for the day. I think that's definitely something that we hear from our real estate managers that we talk with and work with is, again, we're 10 years into this. I think everybody has this kind of psychological perception that that is the max that a recovery can last. What you're suggesting is maybe within other economies, there is precedent for longer recoveries than a 10 year. That doesn't have to be a hard and fast rule, unless we decide to do things to make it so, right, whether intentionally or otherwise. But it can last longer than that.
Mitch Roschelle - The tension between the White House and the Fed isn't unprecedented, either. It's kind of funny. I've observed on multiple occasions that ya have a White House that has a couple of real estate developers in it, and they're arguing for keeping interest rates lower. That shouldn't be a surprise to anybody listening to this podcast right now. The Fed is, by historical standards, looking at rising inflation as the thing that they use as a metric to calibrate what they continue to do and how much accommodation they provide the economy in the forms of low interest rates. The question really becomes whether or not the inflation metric is the one that's relevant in the modern economy that we have. I think when those parameters were put in place, we had a much different economy than we do today. We have an economy that's heavily dependent globally on service trade, not as dependent upon manufacturing. There are forces at play that influence what the right metrics may be. I think what will be good and healthy for this Fed may be a slow exploration of what the right metrics are and what tools they may want to use should we find ourselves in another recessionary period in the future.
Adam Hooper - One thing I know we want to touch on just briefly, and I know it's still early in what's going on, but recording this late October, we just got the first draft of proposed regs from Treasury for the Opportunity Zone program. I know, again, it's early on. We're still kind of waiting for the final regs to come into play. Haven't seen a ton of activity. But if that program is to roll out as anticipated now, where do you see that playing? Do you see that as something that's going to be a pretty big impact? Or still kind of too early, have to wait and see what the actual impact is?
Mitch Roschelle - I'm going to, and I rarely take a pass on any question, but I think it is a little too early. But what I'll say more broadly is, and when we get into emerging trends in real estate in a little bit, one of the things that's fascinating is if you look at the cities that are in the top 10, they have a variety of things in common. The public sector and the private sector collaborating in an apolitical fashion is something that we see in several cities that has really rebuilt those cities over time. The Opportunity Zone components of the Tax Cuts and Job Act is just another mechanism to get the private sector and the public sector to collaborate. That's really important catalyst for rebuilding components of our cities and country that are in need of rebuilding. Again, little too early to see how it all plays out. However, and the regs came out just recently. When the rubber meets the road here, if done the right way, it could be, again, one more catalyst for economic growth and expansion. There's certainly nothing wrong with that.
Adam Hooper - Okay, so we'll stay tuned.
Mitch Roschelle - Stay tuned. I could have said that in two words, but what fun is that?
Adam Hooper - Right. I know you mentioned the Emerging Trends report, which is what brings us back to the show again here today. You guys recently released the 2019 report in conjunction with ULI. For the listeners out there that might not be familiar with that, why don't you take just 30 seconds and kind of go overview of what that report is. Then we'll start digging into some of the specifics.
Mitch Roschelle - It's in its 40th year. PWC, which is my firm, and the Urban Land Institute have been collaborating on it for a good chunk of those 40 years. This year, we had a record number, 2,400 interviews and online survey respondents. The inputs for the survey basically come from a combination of our clients and ULI's membership from around the globe. The insights I'll be sharing aren't my own, or the findings aren't my own, the insights are. But the outcomes here are based upon that vast group of 2,400 real estate professionals from around the globe.
Adam Hooper - Well, let's just jump right in. You start the report with the new era. One of the first quotes in there is from an unnamed veteran asset manager, who probably will remain unnamed. But made the comment basically that 2019 is a turning point. We've got this upcoming capital markets correction. They're suggesting a harvest hedge caution. What do you take from that, and what are some of those factors that are going into seeing 2019 as a turning point year?
Mitch Roschelle - Well, what's interesting is, and let me just give a little bit of historical perspective. That becomes a pretty good on-ramp for me to go forward. Which is one of the things we've learned in 40 years, and we asked the survey participants what did you learn in 40 years? We got a lot of interesting responses. But when you boil it all down, if you look at the real estate investing world back in 1998, it was sized at just under $250 billion. If you fast forward four decades, the commercial real estate market size is roughly 6.2, or a little over $6 trillion. The thing that's interesting, when you look at the roller coaster ride that has been that 40 years, the one thing that's amazing is how much broader the market became. If you go back to its early days, and Emerging Trends was actually a creature of a life insurance company that had separate accounts, and some general account investing and a few open-ended funds. At that time, I would say commercial real estate investing was an obligation, and not an opportunity. What I mean by that is a portfolio manager or a chief investment officer would say, "X percent needs to go into commercial real estate." Then the pension funds and the like would have the obligation of figuring out how to do that. Today, it's a global opportunity for investing. The turning point really is the fact that, notwithstanding what's going on around the world, in our country, all of the different drivers that influence the opportunities and perils in real estate investing here in the U.S., that we have a global market that has
Mitch Roschelle - been totally democratized. You can invest in a trophy asset side by side with institutional investors through the form of REITs, through crowdfunding. I knew you guys would love to hear me say that.
Adam Hooper - Of course.
Mitch Roschelle - That's a completely different change. The turning point really is what does the next 40 years look like, relative to the past, when we have access to global markets, and the U.S. dollar-denominated income-providing assets, like real estate, are in the eyes of some investors a reserve currency?
Adam Hooper - Great. A lot of what we'll talk about today, I think, is starting to touch on that 40 years, but that's a pretty big time horizon of who the heck knows where we're going to be in 40 years.
Mitch Roschelle - Right.
Adam Hooper - But again, I think generally, that shift of, and that's the level we see in our industry, right, the shift of real estate as something that people have some inherent understanding that's it a good thing and they should have some of it in their portfolio, but they just didn't know how to get to it, they didn't know how to access it. Now it's truly seen as an opportunity versus just a thought experiment or something they'd want to get into. Right now, it is accessible and available at a scale that's never been really there before.
Mitch Roschelle - What's interesting, and I talked about inflation earlier, is that original concept of why portfolio managers invested in real estate was 'cause it was a, quote, unquote, "inflation hedge." That in periods of inflation, rents rise, and that's a way in your portfolio balance to hedge inflation. Well, if we are going to experience inflation in the future, boy, wouldn't they be lining up at the front door to buy real estate?
Adam Hooper - Right. We're in a good spot. We got a lot of good, I think, still continued growth ahead of us in the asset class generally. One of the next things that you guys talked about in the report is the labor force and its impact on real estate. Obviously, that ties in with what you were saying earlier about the economy and job growth and all that good stuff. How are you guys seeing what's going on in the labor force or what you're forecasting to continue in the labor force, and how that'll affect investment real estate?
Mitch Roschelle - Ya have to sort of look at it from a demographics perspective. At the risk of being slightly morbid, excuse me, we are getting older as a nation. We're not, perhaps, repopulating our country at the rate that would make up for the natural change, which is the fact that the death rate is greater than the birth rate. The workforce for the future is going to be impacted by that. What's interesting is we're constantly talking about the risk that we are going to be replaced by robots, and all of these jobs in our country are going to be eliminated. Well, the fact of the matter is we have less workers in our country in the future, so we actually need that innovation to replace jobs because we won't have the workers. We've seen this dramatic falloff in the workforce participation rate over time. The question really becomes what real estate uses will exist in the future for the workforce of the future, which will be considerably different than the workforce today? That's another interesting turning point that we're at. Again, the report's called Emerging Trends in Real Estate. One of the things we pride ourselves in is talking about things before they happen. But we're not ready, and the respondents in the survey aren't ready, to wave the caution flag to say that demand for real estate's going to precipitously dry up, and we'll have empty office buildings all across the country. But if you look at the disruption that technology has created in the retail space, the question is what disruption will take place, as the operation of demographic shifts,
Mitch Roschelle - that will disrupt the demand for other types of real estate? We'll just have to keep an eye on that. But we've talked about demographics in the past in our report. This year, we're taking it to another level, and we're going out, perhaps, another generation and looking at a U.S. population that begins to compress, as opposed to expand.
Adam Hooper - I know you can't talk demographics without talking millennials. I know they also made a small feature in the report, how, as it relates, again, to suburban and urban changes and 18-hour cities. What are you seeing there?
Mitch Roschelle - Yeah, I think our catchy phrase is 18-hour cities 3.0.
Adam Hooper - There we go.
Mitch Roschelle - What's interesting is as the millennials age and begin to start families, the question is where do they want to live? We certainly saw the shift of urbanization taking place with that generation. Don't forget you have Gen Z right behind the millennials, which we could touch on, time permitting. But the millennials looked towards 18-hour cities as a more affordable alternative than the gateway cities that were more expensive by comparison. But as they begin to think about starting a family, where they want to live, interestingly enough, and it's something we talked about several years ago as a prediction in Emerging Trends, but it's happening, they're starting to look for a suburban-like setting, more open space, less condensed, less congested. The one thing that's very important to new families is the education of their children. So what we're seeing is clustering in either a semi-urban setting or a traditional suburban setting, clustering of millennials seeking a live, work, play environment that also has live, work, play, perhaps educate, as it relates to their children. There's a rebirth and a re-characterization of what the suburbs look like, but they're not necessarily the suburbs I grew up in, that were the baby boomers, where they grew up. Interestingly enough, it's not where the millennials grew up because the baby boomers gravitated towards the suburbs, basically raised their kids in very similar environments to the ones that they were raised in.
Adam Hooper - Now just for listeners out there, gateway city versus 18-hour city?
Mitch Roschelle - A gateway city is, one could also call it 24-hour city, just to stick it that way. That's your New York. Some people argue that there are really only a handful of true 24-hour cities, but your New York, your San Francisco, Los Angeles, Boston, are the gateway cities, they're coastal cities. Whereas your Austins, your Nashvilles, your Raleigh-Durhams and Orlando, Tampa, that are in the top 10 this year, are the more 18-hour cities. Not that they're truly open 18 hours a day, but we just were looking for a 24-hour city light. Let's put it that way.
Tyler Stewart - How do you see that change with the clustering with, again, live, work, play, educate. How do you see that actually impacting the use of real estate?
Mitch Roschelle - Well, I think there's some new project development opportunities because if you see millennials making a shift from the downtown core in Austin, Texas, to something more suburban, I'm just picking on Austin for a second, there may not be development, there may not be as much built environment there. Also, what becomes, perhaps, walkable to school becomes important. If ya didn't have kids, you wouldn't care where the nearest public school or the nearest private school or the nearest charter school is. But if you do have children, you begin to care about that because the commute that your child has on the bus or on public transportation begins to matter. It's really a function of where. The anchor there becomes open space, parks, recreation and education. There are development opportunities in those markets.
Adam Hooper - One of the things that we've talked about on the podcast before, we started talking about the Ubers and driverless cars, and how that technology changes this notion of a commute. Do you see that pushing these suburban cores further out? Or are they staying closer into the cities than traditionally? What is just geographically, how's that spread out?
Mitch Roschelle - I guess the question at the end of the day becomes where do people work? The transformation that also may be taking place is greater working from home, or, and get this one, these families are starting, I'm trying not to pin it all on millennials, but if these families are starting in the suburbs and commutation becomes an issue, do the folks, the mothers and dads and the dads and mothers and so forth, do they want to work in the suburbs so they're not so far away? If jobs are truly chasing people, and jobs take place in places like office buildings, is there a rebirth of suburban office as a result? If for no other reason, it's a touchdown point for people to work at home to get out of the house and go plug in someplace else.
Adam Hooper - Right, and then that's interesting, too. There was a definite contraction from suburban office. It was out of favor for quite some time there. It'll be interesting to see how this more modular, WeWork kind of collaborative, smaller-use office space, if that has a second life for suburban office to repurpose some of those assets and take advantage of this new exit from the core into these more suburban markets. It'll be interesting to watch.
Mitch Roschelle - I think, well, I was asked on a panel for my sleeper pick for the year or years ahead in real estate. I went out on a limb and said suburban office.
Adam Hooper - Bold.
Mitch Roschelle - Bold. Well, ya know what? Saying multi-family, really, or industrial, that's easy.
Adam Hooper - I like it. We're taking chances. Technology is something, again, we talk about a lot here on the show. What are some of the big impacts that you see here in 2019 and beyond that will have a. I think there's a lot of stuff we talk about that's further out. There's some ethereal conversations that we'll talk about, AI, robotics and, again, autonomous vehicles and all that stuff. But what are some more near-term, tangible technologies that we'll see have a real impact here in the next year, year 1/2?
Mitch Roschelle - I think it's interesting. I'm going to step back and go with a broader basket, which is the disruptors, how they have disrupted the built environment because I think we tend to focus on what's the app, what's the tool that's going to transform real estate the way rideshare has transformed the taxi/medallion cab business, the way housing share has changed lodging and even apartment use, and how the shared economy has, well, let's talk about how all of that has disrupted real estate. In your office space, do we really have the way to accommodate the fact that workers deliver their packages to the workplace? Does your typical office building have capacity for 25 Uber or Lyft cars pulling up in front of them at the end of the day for people to commute home because that's the way they commute? Does all of the bike share programs that exist in cities? In Los Angeles, I keep seeing these stories about bikes and these scooters being just left all over the place.
Adam Hooper - Everywhere.
Mitch Roschelle - Everywhere. The built environment needs to adapt. I flew down to Atlanta recently. I needed to go pick up my rideshare car. I used to booked a car service to have 'em pick me up. I don't do that anymore. I just take rideshare. I bought the app. I pick one or two apps, and I say whoever gets there first. I had to walk, like, six miles, I'm being melodramatic, but I had to walk six miles from the terminal to go find the rideshare thing. Then through the app, find a way to communicate with the driver to tell them where I was and what I was wearing. But think about how the airport had to adjust their built environment to accommodate something. What's really interesting to me, and by the way, I'm sure everybody listening to this call has had this experience, they've ordered something online. It was received, yet we don't know where it is. It was signed for by somebody, but we still haven't seen the package. Let's just think of the chain of custody of that package. Who's responsible for that? Apartment landlords don't want to deal with it. Office landlords don't want to deal with it. Tenants don't want to deal with it. It's really becoming a big, big problem. To me, the real estate environment, before it gets disrupted by some app that changes everything, let's remember we've already been disrupted by apps.
Adam Hooper - It's kind of the old trope of real estate lagging behind technology, more so than new technologies affecting real estate. The more near-term impact is going to be how does our built environment, how does our current use of real estate, adapt to these changes that have already occurred?
Mitch Roschelle - Yep, how do we cope. If I send one more package to my son who's a freshman at University of Michigan, that I get a note that it was received at eight a.m., and at nine p.m. he still hasn't found it, that's a problem when something really, really valuable gets lost in a workplace. Yes, by the way, just remember this. Online sales are only nine 1/2, 10% of all retail sales. If that kicked up one more percentage point, think about what that is in terms of volume of packages getting delivered to the place where people spend the most time, which is their place of work.
Adam Hooper - Yeah. Again, it's already been a huge disruptor. I think that's one of the things that we talk about in the report is kind of this last mile thing. Another one is the impact of e-commerce and, quote, unquote, "free delivery" that you guys talk about. How are we supposed to fix this logistics problem if we're not expecting to pay a dime for same-day shipping?
Mitch Roschelle - A couple of things. One is we do pride ourselves in Emerging Trends in Real Estate saying things before anybody else says. We coined the term 18-hour cities and all these other things. We talked about millennials and how important they were before they were even called millennials. But back in 2004, we asked the question, how will the increased use of technology by business and the consumer impact demand for real estate? 70% of the folks who responded to the survey said that retail would not be disrupted by technology. We got that wrong, clearly. Clearly. A record number of store closings since then. But what's interesting about retail is we haven't been building it. The long-term average of new additions to retail is about 112 million square feer per annum. Last year, we added a whopping less than 30 million square feet of new retail. The good news is we finally did get the memo. Some cities are doing a better job than others. But let's just talk about free delivery and last mile for a second. On average, it costs $2.90 in input costs to deliver a package. The typical, average online purchase is $82. Think about, as a percentage, that's 3%-plus of that online sale goes to the inputs, the out-of-pocket costs related to shipping. Think about how narrow the margins are. What we're suggesting is that free shipping is not a sustainable model for e-commerce. The other thing to realize, and this comes not from Emerging Trends, but from some separate research that we did at PWC, is of all of the things that people
Mitch Roschelle - would be willing to pay for, in terms of delivery, the thing that they would be willing to pay the most for is same day. If we shift, at some point in the near future, to a model of making people pay for delivery, and the thing that they're willing to pay for the most is same day, then, believe me, that's what we're going to have to happen, that's what's going to have to happen, excuse me, which means we're under-infrastructured, if that's even a word, in last mile. You know what the most common last mile warehouse is? The truck. Trucks get loaded and night, and sit someplace. That's why when you go looking for your package and it says out for delivery, and it's like 11 o'clock at night, and you're like it's not due 'til tomorrow, 'cause they load the trucks at night 'cause they don't have the warehouse facilities for them. This is really kind of the big game changer. We have not figured out last mile.
Adam Hooper - When we started to see, I think was it Walmart closed down some Sam's Clubs, even, to do more nodes for this last mile issue, are you guys seeing anything creative in terms of either infill or repurposing existing structures within the distribution chain to solve last mile?
Mitch Roschelle - Yeah, we're seeing the use of brick and mortar, or as us real estate folk like to call it, stick and brick, retail as the place, as one of the puzzle pieces of the last mile conundrum. It makes sense 'cause that's where people already live. There's some optionality that we may see in the future. For one price, you can go to the shopping center and go to the formerly vacant big-box store, and pick up your thing that you ordered, or go to a locker that it'll be locked in someplace in a parking lot, and then pick it up. You guys are too young to even remember what Fotomat is, but it was like in the middle of a parking lot. Now it's a poorly paved mess in the middle of the parking lot that you get, you dislodge a tire from its rim 'cause you drive over this curb that's been left there from the '80s. But you can go to something there in the middle of the parking lot, and just go to a locker and pick up your stuff. That's one price. The other price is it gets delivered. But where's the distribution hub going to be? It's going to be that. What you're seeing with Sam's and other players, you're going to see more of that. Also, there's a lot of bank branches that could be repurposed into delivery hubs and the like. I think there's a role for the retail landlord to repurpose some of their space. The problem is they can't get the kinds of rents that they would have gotten, plus percentage rents don't work.
Adam Hooper - That kind of breaks the pro forma, at least, certainly for new facilities. Again, in the trend of repurposing older facilities, I think we just mentioned there, could malls become the new distribution centers? I think that's...
Mitch Roschelle - Why not? They got the truck bays. It makes sense. You could fly drones around the atrium of the food court of a dark mall.
Adam Hooper - Plenty of parking.
Mitch Roschelle - Plenty of parking. Terrible ceiling heights, though. You'll find a lot of those old malls try to meet crazy old parking ratios. Their ceiling clearances don't. I literally got an SUV stuck in an old mall.
Adam Hooper - I'm sorry, you got an SUV stuck in an old mall? I feel like there's a story there, Mitch.
Mitch Roschelle - In a parking lot.
Adam Hooper - Oh, in a parking lot, okay.
Mitch Roschelle - I wasn't driving. I wasn't driving through the mall.
Adam Hooper - Okay, there we go. That's better.
Mitch Roschelle - That would have been a hell of a story. But no, I had to actually let the air out of the tires to get out.
Adam Hooper - Jeez.
Mitch Roschelle - There's a lot of infrastructure that just isn't right in the equation. But if it's in the right place, in terms of where people live. We've been talking about this for so long my head hurts, but it's inevitable that that has to happen. The breaking point's going to be when e-commerce refuses to pay $2.90 in input costs for free delivery, and not recover that cost.
Adam Hooper - Right.
Mitch Roschelle - Personally, the real estate people we talked to in this survey think it's going to happen soon.
Tyler Stewart - What happens with the trend of more people using Uber, if online sales increase and everyone wants same-day deliveries, what happens to our roads?
Mitch Roschelle - They are insanely congested. It's funny, I'm working on the road show for Emerging Trends. I just keep downloading pictures of traffic. I just type in Google Images traffic. I find cool pictures. For those of you who are going to see me speak someplace, I'm giving away my jokes in advance. But the fact of the matter is it's a huge problem. Add to that population growth. Look at Austin, look at Nashville, look at Orlando, Florida, which is now in our top 10. The population growth over the next five years, this is Census Bureau estimates, is more than two or three times the national average population growth. More people, more cars, more traffic. By the way, the cars don't necessarily need to be owned by those people, but those people are moving around by car.
Adam Hooper - I think under-infrastructured, like you said. Maybe that's a new term that was just born here today on the podcast, under-infrastructured.
Mitch Roschelle - Right, we're under-infrastructured.
Adam Hooper - Just last thing I want to touch on with the new era section, which is something I think, again, on everyone's mind, is housing affordability and homelessness, and the dynamics of just basically economics of new development don't pencil for more affordable housing. What are some things that you're seeing cities doing, or different municipalities trying to figure out how to solve that issue, either from the real estate side or from the land use or kind of regulatory side?
Mitch Roschelle - I'm going to give ya my five L's as to why it's very difficult to add new supply of housing. This is more so for single family, but in part, it also has a multi-family component, although multi-family has more opportunity to raise rents. The land input, that's my first L. Land prices are just rising almost exponentially if you look at what has happened over the course of 10 years. Lumber prices. A, the commodity's becoming more precious for a variety of reasons, but also some of the trade issues back and forth with Canada early in the year put a spike in lumber prices. Labor costs. This is no shock to anybody, but we're down about a million construction workers from where we were before the financial crisis. While we're creating construction jobs, we're not necessarily filling them. That gap between open jobs of 7.1 million, and the number of workers that are looking for work, big gap in the trades as it relates to construction. The last few are lenders. Lending standards are still very conservative for either construction financing for multi-family or just borrowing money for purchase of a home, but just for home builders, as well. The last one is laws. That's all of the regulations that exist at the municipal level, at the state level, to change land use. What has to happen? If government's going to do anything to help solve this problem, they have to relax the last L, which is laws. They have to deregulate the banks, in terms of lenders, to make it something that there's an incentive for a local bank to lend money for a local project, which is very difficult,
Mitch Roschelle - even by today's standards, even with some of the reforms that exist. Then if I go to my first L, which is land, think about municipalities and the amount of real estate that municipalities own for a variety of different purposes. What if they just started contributing land that they had to some sort of entity for express purpose of building new housing, and they didn't overly restrict it so it became so difficult, they didn't overly politicize it so it became so difficult, but they just made the land available, to take that component out and create something profitable so that there's an incentive to build, and people can get into housing more affordably? But the problem is affordable housing with a capital A, which is the one that the government plays a role into, is so bureaucratic that it just becomes out of reach for so many people. What we need is just housing that people can afford.
Adam Hooper - Right.
Mitch Roschelle - Right. Where they can buy their first home reasonably. Also, we're up a hundred basis points, this is real estate, folks, so I can say basis points as opposed to one percentage point, but we're up about one percentage point virtually year over year in terms of what a 30-year fixed-rate mortgage costs. There's no question that's slowing down the housing market.
Adam Hooper - Right.
Mitch Roschelle - Right.
Adam Hooper - I think of those five categories right, land, lumber, labor, those are all way up in terms of cost. Lenders, like you said, are more restrictive. Financing costs are going up, and laws, again, maybe some municipalities are getting a little more progressive, but overall, I don't see too much of that. Let's kind of switch now. Since you're talking about lenders there, capital markets, you said up a hundred basis points in residential mortgage. What are you seeing in the commercial mortgage space?
Mitch Roschelle - The good news is the economics of commercial real estate continue to improve because we're not creating new supply, the economy's expanding, we're creating demand. Yes, cap rates are compressing, but they won't compress forever. The economics makes sense, so it makes sense for lenders. What it'll be interesting to see in a rising rate environment, what that will do to loan growth. I've been closely following bank earnings, and looking at loan growth as an important metric coming out of bank earnings reports, and their forward guidance on loan growth, because that suggests to me if banks are continuing to lend, they are continuing to fuel the economy, I'm not so concerned with just mortgage finance. I'm looking at lending in general because if they're lending, they're continuing to provide that. Our economy is capital dependent. We continue to need our lending institutions to provide the debt version of that capital to continue to fuel the economy. That's the one metric to look at. If you're a real estate person, look beyond my advice. Look beyond those metrics that are directly related to real estate, like mortgage rates, like spreads, like cap rates, and look to see what lending institutions are doing and what their pattern of behavior is going forward because that's really important to fuel the continued expansion of our economy, on the private side of the equation. We've got fiscal policy, in the terms of tax reform. We've got monetary policy. We've talked about both in terms of the Fed's behavior and central banks' behavior and central banks around the world.
Mitch Roschelle - The thing to remember is how the private sector responds to all of that. The thing to keep an eye on is what banks are doing in terms of loan growths.
Adam Hooper - Okay. Then on the equity side of the capital stack, I think similar continuation of a lot of capital chasing relatively fewer deals.
Mitch Roschelle - Few deals, yeah, and the capital's still coming from global sources. It's interesting, China's not playing as big of a role as it has. The thing that I like to remind people of, 'cause I'm old enough to remember this, is when the cover of the Time magazine was the Japanese flag in the 1980s, and how they were taking over, and how every parent was telling their kids they better learn how to speak Japanese 'cause we'd need it. Then we had this wave where everybody said to their kids, "You better learn how to speak Cantonese or Mandarin "'cause you're going to need it." The fact of the matter is, these waves come and these waves go. But there's always foreign capital that's very interested in U.S. real estate. I don't know if I said this on your podcast before, so I could use this line again, if you go back into the history, only two ways that wealth has been accumulated. It's been accumulated in trading assets, like gold and precious metals back thousands of thousands of years ago in biblical times, and it's been accumulated in real estate, or just land, going back to biblical times. If you look at history, in times of volatility, precious metals will fluctuate in value, but land becomes the way that most wealth has been accumulated over time. When the world is tumultuous, you'll find that investors tend to rotate into real estate when they can. What's better than U.S.-dollar denominated income-producing real estate? It seems like there's always demand on the global stage for real estate in the United States. Capital will remain plentiful. Opportunities to buy those assets
Mitch Roschelle - will become limited. Guess what? That means that cap rates will continue to compress, perhaps regardless of what interest rates are doing.
Adam Hooper - Yeah, I think that's definitely a trend that we're seeing to, just in terms of the capital available. That's one of the things that we're interested, and I know we didn't really touch on, that I think holds some really interesting potential with blockchain and tokenization is the ability to more efficiently tap into that global pool of capital, which, again, isn't really available today at an individual scale. A lot of of the global capital flows are obviously massively institutional in scale, so the huge potential is if you can figure out how to get that down to the individual level. That could be massively, massively impactful for capital flows coming in and going around.
Mitch Roschelle - Yeah, and blockchain is really, really interesting to me. I'll focus more broadly on blockchain than crypto. When you asked about disruption earlier, I didn't bring it up there 'cause I wanted to talk more broadly. The challenge is going to be transparency around who all the folks are on the chain because there are global regulations. Well, there are regulations in the U.S. that impact global movement of funds, like the Foreign Corrupt Practices Act and others. I think regulators are going to want some transparency into where all that money's coming from.
Adam Hooper - Agreed.
Mitch Roschelle - Right now, blockchain's being used for the, like party A and party B know who each other are, but we don't want anybody else knowing who you are. That's going to be the wrinkle is how regulators cope with emerging technologies like that.
Adam Hooper - I guess the good thing is it's kind of funny that blockchain is supposed to be this completely anonymous, untraceable kind of crypto anarchist ethos, but I think a lot of people forget that every transaction lives in perpetuity recorded.
Mitch Roschelle - Yes.
Adam Hooper - That's a very transparent chain within these transactions.
Mitch Roschelle - Whatever evidence is used to execute the transaction, the crypto signature, it's saved on the chain forever.
Adam Hooper - Forever, right.
Mitch Roschelle - Now, now, theoretically, unless the two parties both agree to provide a third party access to it, then no one would ever know. But what happens when there's reasons? Never say never as it relates to the movement of currencies.
Adam Hooper - All right, so switching gears a little bit. You talked a little bit about some of the markets that you guys are seeing or identifying as up and coming or markets to watch. Maybe just take a couple minutes and run through some of the more promising markets that you're seeing out there, and maybe thinking about the why behind those are the ones that you're paying attention to.
Mitch Roschelle - Yeah, so let me give ya the top 10 list in reverse order, David Letterman style. Pay a little homage to my late night talk show...
Adam Hooper - Maybe we'll have Tyler add some sound effects in post-production or something.
Mitch Roschelle - In post, can you put a little Paul Shaffer playing the piano or something?
Tyler Stewart - Absolutely.
Mitch Roschelle - Number 10 is Tampa/St. Pete. Number 9 is Charlotte. Number 8, Denver. 7, Boston, 6, Austin. 5, Nashville. 4, Orlando. 3, Raleigh-Durham. 2, Brooklyn, which was a head scratcher for me for a while, but I can explain it to ya. Number 1, Dallas/Fort Worth. Let's go through the head scratcher, and then the new ones. Brooklyn was a head scratcher because in past years, it was in the 30s. New York was always viewed as being very, very expensive. I talked to ya earlier about gateway cities being out of reach for others. But the real estate investment prospect for Brooklyn, because it's becoming that 2.0, 3.0 place where millennials want to raise families, so there's a lot more real estate development potential there. Also, since folks are living there, they want to work there. They're playing there, but they want to work there. There's office development opportunity. Then lastly, they love to shop, so there's urban infill warehouse opportunities. That's what got it into the top 10. A lot of folks are focusing on that massive concentration of people and realizing what, I said under-infrastructured before, so maybe that's it. But if ya look at all of the cities that are in the top 10, a couple of things stand out. We have cities like Tampa and Boston that spent a lot of money in infrastructure, and are seeing the benefits of it. We have low-tax or no-tax jurisdictions, which is where people want to live. Then most importantly, if you cut across many of them, they have a growing employment base that is also stable.
Mitch Roschelle - The stability in good times and in bad times of their employment base is observable, and the growth in that employment base is observable. That's where real estate investors want to be, where they know that people are, because that's where the jobs are and that's where the demand for real estate.
Adam Hooper - Yeah, that's one of the things we talked about with Jeff Adler from Yardi Matrix when he was on, was the kind of transformational cities, where you go from one historical base of employment to more of this new kind of knowledge base, which I think all of these cities that you listed, I think you could include in that kind of a transformation of that employment base that are going to be taking advantage of these new trends and the new style of employment to keep fueling that job growth.
Mitch Roschelle - Yep, no question. If cities can't keep up with the built environment that they're going to need to accommodate the employers that are coming there in search of the talent that's there, those employers are going to find another city.
Adam Hooper - Okay. Well, I know we've got a hard stop coming up here, so I just want to see if we can touch on the best bets coming up for 2019. I know you went out on a limb and you mentioned suburban office as the bold move, but what else is looking attractive here going into 2019 for investors?
Mitch Roschelle - Industrial. We talked about industrial close to where people live to solve that last mile problem. Senior living. Clearly, with an aging population that I touched on earlier, there's senior living. Then figuring out how to repurpose retail. If we're not creating new retail, as I discussed, there's an opportunity to take what's there and rather than demolish it, find the right use. We're starting to see this more and more, with urgent care centers and the like becoming. The healthcare industry is going through the retail trade trend. We're seeing mergers of healthcare providers and retailers, or folks in the healthcare ecosystem and retailers. I think that's a trend that's going to continue. Trying to figure out what the right use for retail is is going to be an important play in the very near term.
Adam Hooper - Any major indicators or things we should looking out for as potential yellow or red flags?
Mitch Roschelle - I would look at corporate earnings and the forward guidance from companies, not just banks, because the corporate, the growth in corporate earnings this year is following this trend, which is gangbusters. A lot of that is the recognition of the benefits of tax reform. The question will be will our U.S. companies continue to do well going forward? There's two reasons to focus on it, if you were to just focus on the S&P 500, for example. The S&P 500, 40 to 50% of the revenue of the S&P 500 comes from around the globe. Our strong U.S. dollar may have an influence on that going forward, but the corporate America is a tremendous consumer of real estate, and provided so much fuel for our economic engine. I'd look closely at what those companies are saying about the future, and have that be a little bit of a guide. Most real estate people don't look there. I said earlier, most real estate people tend to look where everybody else looks. If I could provide any insight to your amazing audience, I would tell them look where the rest of the capital market players look, as opposed to where all the real estate players look.
Adam Hooper - Perfect. I know, Mitch, you mentioned you're going to be doing a road show around this Emerging Trends report. Any major cities, or I guess you can give us a link to your tour schedule if any of our listeners want to try to come .
Mitch Roschelle - Yeah, the best thing to do is follow me on Twitter. I'm always shamelessly looking for Twitter followers.
Adam Hooper - Where would they go to find you on Twitter, Mitch?
Mitch Roschelle - It's @Mitch_Roschelle, and it R-O-S, like Sam, C-H-E-L-L-E. Let's see how many followers I get after this podcast airs. I always put that out there. I do most of my speaking in conjunction with the Urban Land Institute and local chapters, so check in with the local chapter of ULI. They generally have an Emerging Trends event scheduled somewhere between late October and as late as February. I know I'm going to Los Angeles. I'm going to San Antonio, Texas. I'm going to New Mexico. I'm going to, I don't know, I'm getting a headache even saying this out loud, but I'm going to a lot of 'em. I can't read the scribble on the whiteboard in my office. I'll be in New York City, obviously. Tampa, Indianapolis. A whole bunch of folks, or my colleague Andy Warren, or one of our friends from ULI does it.
Adam Hooper - Perfect.
Mitch Roschelle - Definitely. Follow me on Twitter. If ya tweet at me, I'll respond and tell you when I will be in a city near you.
Adam Hooper - Perfect, well, we'll put a link to your Twitter profile in there. We'll link to the report. I think that's a great spot to wrap it up, Mitch. We really appreciate it.
Mitch Roschelle - Yeah, and one other shameless plug, if I can get it. I appear on the Fox Business Network regularly. Ya follow me on Twitter, you can find me there, as well, in the meantime. Always appreciate all the folks. I have to be honest, guys, when I was speaking in San Diego last year, I couldn't tell ya how many people came up to me and said, Hey, I know you. You were on the podcast. We like the RealCrowd podcast.
Adam Hooper - There we go.
Mitch Roschelle - You were on it.
Adam Hooper - You run into our listeners in the wild. That's a good thing.
Mitch Roschelle - Yeah, listeners in the wild. They were very civilized, I'm not going to lie to ya.
Adam Hooper - That's good. That's good. All right, Mitch, well, again, thank you for coming on again. Amazing report. We'll put a link in the show notes so everybody can have access to that. We really appreciate your time today.
Mitch Roschelle - Thank you, guys. Really appreciate it. It's always fun.
Adam Hooper - All right, thanks. Hey, listeners. Thanks for hanging in there for another episode of the RealCrowd podcast. Wanted to take a minute to update you. We're recording this on October 22nd, and just recently got the first round of regulations from Treasury on the Opportunity Zone regulations. We're going to digest that. We'll have some feedback here shortly for you. You'll see, probably the next couple episodes, two or three episodes, we're going to be doing some deeper dives with some very influential people in the Opportunity Zone space, whether it's from an accounting perspective or people that helped form the legislation. Stay tuned for that. Very, very interesting regulation. Big impact for capital gains reinvestment and opportunities for you as investors. Stay tuned. If you have any questions, please, as always, send us a note to podcast@realcrowd.com. With that, we'll catch ya on the next one.
Tyler Stewart - Hey, listeners. If you enjoyed this episode, be sure to enroll in our free six-week course on the fundamentals of commercial real estate investing. Head to realcrowduniversity.com to enroll for free today. In RealCrowd University, real estate experts will teach you the important fundamentals, like the start with risk approach, how to evaluate real estate sponsors, what to look for in the legal documents and much more. Head to realcrowduniversity.com to enroll for free today. Hope to see you there.
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