Phase 2 - Real Estate 101 (How to or one big idea)

Podcast - Real Estate Outlook

Tyler Stewert
April 5, 2022
Podcast - Real Estate Outlook

Byron Carlock, Real Estate Leader at PwC, joined us on the podcast to discuss PwC's latest Emerging Trends in Real Estate report.

Byron Carlock leads PwC’s U.S. Real Estate Practice. With 28 years of experience serving the industry, Byron brings extensive knowledge of the full real estate life cycle including matters ranging from strategic planning and property transaction advisory to capital formation, and business plan execution. In addition, he has expertise in governance, board matters, mergers and acquisitions and corporate conflict matters. Byron has experience advising major clients including corporate owners and users, developers, hospitality organizations, investors and REITs.

Prior to assuming his current role, Byron served as the CEO and President of CNL Lifestyle Properties, Inc for seven years and served CNL as President of two other REITs over his 11-year tenure there. His resume also includes three years as Executive Vice President and Chief Investment Officer of Post Properties and nine years as Managing Director for Crow Holdings International.

Byron is a CPA, currently a governor of the Urban Land Institute (ULI), a member of Real Estate Roundtable, NAREIT and AFIRE. He is also a board member of Harvard Club of Dallas and a board member emeritus of Harvard Business School.

Byron earned his BBA at Harding University and also participated in the International Asian Studies Program at The Chinese University of Hong Kong, where he was a Rotary Scholar. Byron also earned his MBA at Harvard Business School. Byron has been extensively featured in media such as Fox Business News, and The New York Times, and writes a regular monthly column for National Real Estate Investor.


2021 Emerging Trends in Real Estate
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RealCrowd (00:00:00):
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.

Byron Carlock (00:00:22):
… you start with supply and demand, and the supply and demand of most product categories was in check going into the pandemic and the need for the real estate still exists. But more importantly, the capital markets behind that real estate have maintained some resiliency and some help.

Adam Hooper (00:00:46):
Hey, Tyler.

Tyler Stewart (00:00:47):
Hey, Adam. How are you today?

Adam Hooper (00:00:49):
Tyler, I'm doing well, and I am super, super excited about this episode that we have for all of our listeners today.

Tyler Stewart (00:00:56):
Yeah. We had an awesome guest, and Byron Carlock who leads PWC's US real estate practice.

Adam Hooper (00:01:02):
Yeah. So we've had Mitch on the show a couple of times before to talk about PWC and ULI's annual emerging trends report. Byron joined us today to go, not as deep as I would've liked in this report, but that probably would have taken about a day. So we had an hour of his time. There is so much information in this report. It is so jam packed with just amazing insights and very pointed in timely things for our industry right now. So if you have the ability to download that report, check the show notes and make sure you have it available with you as you listen to this episode. Because again, we just barely skimmed the surface of the very, just incredibly interesting things that they're going on in this report.

Tyler Stewart (00:01:44):
Yeah. It was an amazing podcast, amazing report. We talked about the biggest trends in real estate today. We talked about what markets to look out for here in 2021. And we also talked about the outlook for different property types. We covered a lot, and there's still more to cover, which you can find in the report that's linked in our show notes.

Adam Hooper (00:02:03):
Yup. Just a fantastic episode. Again, I wish we had more time with him. We'll hopefully get them back on the show before not too long, great guest. But I think, Tyler, that's enough of us talking. Let's just get to the good stuff. So listeners, as always, if you have any comments or feedback, please send us a note to Go download that report. And with that, Tyler, let's get to it.

Adam Hooper (00:02:31):
Byron, thank you so much for joining us today here to talk about the PWC ULI emerging trends report for 2021. For long time listeners of the show, they're going to hear a new voice from the PWC representation here today. So thank you for coming on.

Byron Carlock (00:02:47):
It's my pleasure. Thank you so much.

Adam Hooper (00:02:50):
Before we get started, we were just talking, there is so much in this report that absolutely, listeners, if you have the chance, go to the show notes, download this report, search it on Google. There is way more information that we're going to be able to cover in this one conversation. So definitely habit to read along as you're listening to this, that would be great. But Byron, want you to tell us a little bit about your background, how you got into real estate and what you're up to today with PWC?

Byron Carlock (00:03:15):
Absolutely. Well, thank you so much for having me today. I began in the real estate industry out of business school with the [Trammell 00:03:23] Crow Company and served the Crow family in various capacities for the first half of my career. Before leaving to go into leadership in the REIT industry, I was a chief investment officer at Post Properties in Atlanta, and then ran three REITs for CNL or Reed sponsoring in Florida before joining the firm in 2012. So having left industry to come into professional services, I have the privilege of leading the practice across our various lines of service. And this is one of the things we do every year. This is the 42nd year of this publication. We do it in concert with the Urban Land Institute. It's a great way to really assess the pulse of the industry as we look forward to the coming year.

Adam Hooper (00:04:12):
And boy, do we have a lot of pulse to check as we look forward to the coming year? You start the report with dealing with a certain uncertainties. Oftentimes the saying is, we don't know what we don't know. It seems like this report, maybe we have a better idea of what we don't know and what those uncertainties might be.

Byron Carlock (00:04:34):
Well, this year is one for the history books For sure. I think one of the most important things to look at this year is, whereas this report has historically looked at products and markets to determine where the best investment opportunities are for the coming year, this year it's really driven by themes. And these themes jump out as really overriding context to the complexity that we're facing. Everything from urban Exodus to accelerated transformation, to what is the future of how we use space? I think this year we really spent a lot of time looking at some of the major issues that the industry is going to have to face and even resolve in certain cases like social issues. I think this report's a very important one, certainly coming off of a historically unprecedented year.

Adam Hooper (00:05:31):
Yeah. And we're recording this in mid November, we're seeing COVID cases counts starting to skyrocket. A lot of this is focused around the pandemic. It's a lot of what we've talked about on the show over the course of this year and the accelerant that that has been for some of these underlying trends. So maybe let's start with, what have you seen during this current crisis that's maybe different from some of the past market disruptions and how did that inform, or maybe even change some of the topics that you guys likely had to scramble to rewrite, I'm assuming a lot of this content for the report?

Byron Carlock (00:06:08):
Sure. Well, it's global in nature. It's a forced recession. It was certainly not a recession that was planned or that we were moving into naturally. The forced shutdown really caused everything to essentially stop, but it did show us that some trends that had already begun were accelerated. So as a firm, for example, we began allowing people to work from home seven years ago. And we saw that productivity went up and associate satisfaction went up because they had flexibility and people love the flexibility. This pandemic with everyone having to work from home because they were required to, probably means that work from home is going to be a phenomenal we're going to have for years to come, but it's not something we want to do all the time. So I think we're learning the good and the bad of that flexibility.

Byron Carlock (00:07:03):
We're now beginning to see the social cost on the organization of not having face-to-face collaboration, the difficulty around product launches, strategic planning, budgeting, cultural inculcation. I think what it's going to teach us is, work from home is one solution for your workforce engagement, and then an engaged office environment, depending on how you want to use it, is critical for making sure that when you're in the office, it's a special time for meeting with colleagues, planning the growth of your business, having healthy social interaction, and that there is a need for office. So I think it's both and not either or. That's one of the things. I don't think I can ever think of another recession where everything just shut down and people had to stay at home. That is certainly the case with this one.

Byron Carlock (00:07:56):
This is a different recession though, in that this is a recession where there's plenty of capital. The banks are healthy, there's nearly $400 billion of undeployed dry powder in the industry. And the investment thesis for many product types is still very, very healthy. Supply and demand was very, very healthy going into this downturn. Hospitality and retail is going to have to now be totally transformed, restructured, and basically re-introduced when the economy opens up again. But industrial is serving the eCommerce business that really accelerated during the pandemic and we need more industrial space. Housing, we need more housing. So there's a lot to talk about in each of the product types and the pandemic accelerated the trends, needs and analysis for each of those.

Adam Hooper (00:08:51):
Again, that's one of the themes that we've been covering. Are there any unforeseen, or maybe more transformational changes that you've seen from this crisis that were maybe less accelerant and more just flat out new developments or longer-term permanent changes that you think this might impact? I know that's a pretty loaded question. There's a [crosstalk 00:09:13] there.

Byron Carlock (00:09:15):
As you're saying it, my mind goes to hospitality, travel and leisure. Well, who knows how long it will be before we are having conferences, conventions and group meetings again. I can't think of another time in recent history where that has been a phenomenon that may take three or four years to return. That's probably one that stands out is as uniquely effected.

Adam Hooper (00:09:47):
Okay. And then I'm sure there's some more that we'll get through here and maybe we can just start digging into the meat of the report. You already touched on the first part, which is, and again, I love your titles for all these sections. First was, are we home yet? Some of the interesting survey questions in there overwhelmingly, I think it was 95% of your respondents agreed that there will be more work from home in the future, which would in one sense, and we've talked about this before, indicate maybe less of a demand for office space. But also, it was overwhelmingly agreed that there's going to be more square foot per person. This densification trend that we've been seeing for the last decade starting to reverse. That's one of those questions that I think is still one of those big uncertainties, is how will those two forces balance out? This remote workforce combined with more square footage. What does that net effect to office demand? So maybe we can talk about how the work from home experiment has gone and is going and maybe where you guys see that continuing.

Byron Carlock (00:10:46):
Sure. Well, if you think about everyone's moods back in March and April, you had CFOs saying we don't need offices anymore. And in our poll survey of our CFOs across various industries that we serve in the firm, 67% of CFOs said they would be shrinking their office footprint. But then you fast forward to August and September, and folks began to say, wait, wait, wait, 51% of those folks that we may actually need more space. I think over the last 15 years, we may have overdensified. We went from 250 to 400 square feet per person down to probably 150, 175 in many urban office settings. That's probably too much. And as we think about social distancing and spreading out and the need for different types of workspaces in offices today, I think you'll see about half the folks try to shrink and about half the folks try to grow.

Byron Carlock (00:11:39):
I think it gets back to rethinking the way we use collaborative space in an office environment. You think about our fathers and grandfathers, if they were in a professional services environment, they had a large, probably 10 by 10, 10 by 20 office with mahogany walls. It was a status symbol to have a closed door and plant, that was your status of arrival. And then all of a sudden the walls came down and all the colors became white and the art became bright and the space became open and we overdensified with work carols and work tables, and that may have been too much. I think we're going to go back to something probably in between where there are the larger spaces between workers, return to some private offices, different types of collaborative space with high-tech AV equipment for communication with those folks that are calling in from home. Lots of whiteboards, lots of conference rooms with big tables for social distancing but still having meetings, new sanitation requirements, new air quality requirements. I think that's probably what's ahead.

Adam Hooper (00:12:57):
Yeah. It's fascinating, as you mentioned, the way in which we use the office is, I think going to go under a big transformation as Brian Chesky at Dropbox was saying recently, how they're completely reimagining their entire use of office and calling it their Dropbox labs. So it's more of, again, that collaborative space where people can come in and have those interactions for group time, but independent solo focus work is probably not going to be done in the office. That's going to be done more remote, more work from home, and the office is going to be more of that social fabric. I think it's going to be really fascinating to see how some of these different models of what that space utilization becomes. Again, tech industry has a generally a quicker time adapting to some of these changes. So have you seen that throughout more of the traditional again, your professional service firms, how are they adapting maybe relative to what you've seen in some of the more quicker adopting tech industry environments?

Byron Carlock (00:13:56):
Well, I think the obvious is technology like Zoom and WebEx that have just been meteorically adopted by everyone. I think people are doing the very best they can to stay in touch, to maintain a meeting schedule, to maintain interaction through technology. But there's just something that's missing when it comes to hiring and retaining talent, spending quality time and having deep discussions, strategic planning, sharing cultural values. I just think that argues that we can get by with technology, and that's what we've been doing for now almost nine months, but we also need face-to-face time. I think that's what's convincing everyone that even with the advances in technology, there's nothing like face-to-face relational activity that advances the cause of company culture.

Adam Hooper (00:14:54):
Yeah. Technology can enhance it, but it's certainly not going to replace that face. Again, we're social beings. I don't think office is going to go away. But yeah, fascinating to see how that plays out. Okay. So moving on, second one, the great American move, this notion of an out-migration from more dense urban areas into Suburbans. You guys talked about the new boom towns in there. So what are we seeing with migration patterns?

Byron Carlock (00:15:20):
Well, I think that you have to start by looking at New York, Chicago, and San Francisco. Those are the ones with the big outflows. The New York Exodus has been interesting. It looks like by tracking address changes, U-Haul subscriptions, United Van Lines and other sources. It looks like about 5,000 households a week have been leaving the five boroughs of Manhattan since July. But 80% of those are going to the outer suburbs with, once things normalize, they've still got access to the city. In San Francisco, the diaspora has been broader. It's been a lot to Austin, Salt Lake. LA's gone to Scottsdale and Phoenix. San Francisco has also gone to Boise, Idaho, which has been a surprise. I think you're now seeing asking rents for multi-family in New York and San Francisco down 12% to 20% in some neighborhoods, which we've not seen in years. Which makes you wonder, will that bring some people back?

Byron Carlock (00:16:25):
But the fact is, those cities have experienced an Exodus. A lot of it is folks that had the opportunity to leave and work remotely said, "I'm going to get out from under this cost burden of being here. I've got the flexibility to come back if I want to." But some will say, "I don't need to, I'll continue to work remotely and go in when I'm called." I think that that is a phenomenon that I can't remember that we've seen any time recently. The urban attractiveness of the cultural infrastructure has allowed those cities to flourish in the past, but cost and taxation, and in some cases, even business unfriendliness is causing people to rethink their location to the benefit of 18 hour cities, mostly in the smile States, and certainly in the business friendly States, some of which have no state income tax.

Adam Hooper (00:17:30):
Again, do you see this as a shorter-term reaction to the health crisis, or is this a longer term fundamental shift in how some of those market dynamics are going to look going forward?

Byron Carlock (00:17:42):
Some of the corporate relocation activity had begun pre-pandemic, and it was a cost exercise. So you had a lot of corporate relocation out of California in order to save on the tax burden. You had continued growth, especially in the Texas cities, Nashville, the Florida cities. And Florida has been a huge beneficiary of the New York Exodus in this cycle.

Adam Hooper (00:18:12):
So again, an accelerant of some of these underlying trends that are probably more fundamental shifts than just a snap reaction to the health crisis.

Byron Carlock (00:18:22):
I think so. Now, that's not to say there won't be some boomerang. I do believe there will be some folks that go back. You just simply cannot recreate the cultural infrastructure of a New York, San Francisco or a London for that matter, that has had that cultural infrastructure develop over nearly 200 years. You can't do that quickly. The 18 hour cities will take years to have those same kind of offerings, but the 18 hour cities that have been benefiting, and Nashville is a great example, Dallas is a great example, are working very hard to improve quality of life for the citizenry. They're also relatively affordable compared to those more dense urban options. But let's face it. There are still not a New York or San Francisco.

Adam Hooper (00:19:12):
Your third bullet point was, or the topic was reinventing cities post COVID. When we're looking at more urban, again, these established urban markets versus maybe some of these more quicker growing recipients of that exodus, what are you seeing with how the cities and municipalities are reacting to that change? And what does that look like for users or investors of real estate going forward?

Byron Carlock (00:19:39):
I think you're seeing quality of life attributes trump the issues of pure job growth and job attractiveness. It's workforce readiness, affordable housing, green space, walkability, healthcare, security and safety. I think this pandemic and the social unrest in the streets has awakened some folks to say, "I'm not going to live in a city where I don't feel safe." You look at Seattle, for example, after what they've been through downtown, 882,000 square feet of vacancy moved out to Bellevue where employers felt that their people might feel more safe going to their office environment. I think those quality of life attributes are really trumping some of the traditional metrics.

Byron Carlock (00:20:33):
I think we're also rethinking the way we plan our cities. I think suburban sprawl, we can now admit was probably a post World War II failure. The idea of rethinking urban green space, dog parks, back to the walkability, trails, biking, hiking, walking, are becoming very important attributes of city planning as they rethink mistakes of the past. I'm intrigued by that because I think it makes our neighborhoods more vibrant. It also begins to address some of the racial inequities of our neighborhoods in our cities and try to add inclusiveness as opposed to exclusiveness. I think that's also a healthy attribute of the new styles of planning and thinking.

Adam Hooper (00:21:28):
Those are some pretty big trends to try to turn the ship around on. If you're talking about built environment in an urban area, just finding land for green space. You can densify suburbs, but it's hard to create, I guess, less density and more amenities lifestyle components in some of the urban areas. Are you seeing anything innovative or anything interesting there and how some of the cities are tackling that?

Byron Carlock (00:21:56):
Sure. There's a lobbying group in DC called Up for Growth, that is really trying to help cities rethink some basic city planning issues around zoning, variances, density, green space, realizing that in some cases, a Fannie, Freddie VA or HUD foreclosure may be best dealt with by tearing it down as opposed to trying to remodel it. And in those cases, maybe put two or three houses where there was one and re-enlivening what I call hamlet development, which is envisioning neighborhoods around green space and the [inaudible 00:22:40] walls of England, for example. Detroit has tried in many ways to do this and has done well tearing down derelict structures and rethinking what goes there and the green space around it. I think we're learning that some municipalities may need to rethink the way they dealt with zoning and neighborhood restrictions in order to allow everything from new types of modular housing, new types of construction, tiny house villages, and more mandated green space than parking spaces.

Adam Hooper (00:23:20):
Yeah. I think it's going to be again, another one of those. This seems like this is more than any time in the 15 years I've been in this industry, there's just so many fascinating things that are coming together right now that are going to be transformational in terms of how we think about how we use space, how we plan for things, how we interact with that space. I think that's one of them that's going to be just very, very interesting to see how that continues to play out over the next five, 10, 15 years. So forth topic there, accelerating the retail transformation. Retail has been one of the bigger topics of this crisis in terms of, again, lock down, stores shutting down, restaurants, smaller retailers having a really challenging time with some of the regulatory issues that are going on. How does the rise of eCommerce play in with that? Again, a trend that was already in place. Tell us a little bit what you guys are seeing on the retail side.

Byron Carlock (00:24:21):
Sure. Well, so retail was already growing online, 25% compounded per annum, but stores still matter. Pre-pandemic, around 90% of all acquisitions were still made in store, and that's now down to 85%. The stores are still very important. We're 70% consumer driven economy, but the role of the store and the amount of store brick and mortar locations for most retailers is probably needing to shrink. We have about 26 square feet of retail per person in the US. That's more than double the next level. I think Canada's in the 13 to 15 square feet per person. Germany's down to three retail square feet per person. We've over retailed, we've under demolished and we need to repurpose some of the boxes that have been used for retail. I think that as we think about going forward, the relevant word is going to be experience.

Byron Carlock (00:25:25):
If you go into a store, it needs to be a special experience where you learn something, you see something you haven't seen, you get a service level that you can't get online. The whole view of omni-channel is going to blossom. I think the discussions that you're seeing with the major mall owners with eCommerce vendors to turn some malls into fulfillment centers plays into that. Order online, pickup in store, almost always results in additional sales. That's a nice combo of bricks and mortar and online coming together to create a unique and convenient experience that brings someone in to do those things in-store, but they still are starting their experience online. I think that some of the less relevant retail will probably have to be repurposed for other uses or even demolished. That's not a bad thing. Suburban sprawl led us to believe if we created a new intersection, we had to put four shopping centers on the various corners. That was probably too much. So it's time to rethink that. But those four corners were probably well located serving an interesting demographic and that location could probably be used for housing or something else.

Adam Hooper (00:26:44):
Recently we've been hearing more about repurposing malls, whether it's for mixed use or actually into affordable housing plays. We've seen some news about that lately. What do you think the reality of converting some of this older stock of retail into more mixed use housing? Is there an opportunity there to maybe kill two birds with one stone, solve this over retailing and maybe have an impact on the affordable housing issues?

Byron Carlock (00:27:12):
It certainly could. The 11th commandment is real estate naturally goes to its highest and best use. I think that perhaps the retail use has met its zenith and it's time to consider using that space for something else, perhaps more dense with the opportunity to add housing. Many retail centers were built with five parking spaces per 1,000 square feet of retail space. That's a lot of parking space, so that land can be repurposed. I think you're onto something. You're already seeing malls being repurposed into everything from libraries to healthcare centers, to education centers, to expansions of colleges and junior colleges and university health centers. So there's a lot of use for those various structures. Who's to say that housing wouldn't be one of the best ones?

Adam Hooper (00:28:13):
Yeah. And I guess that jumping back up to one of your exhibits in the report, if we're talking about redevelopment, the most important issues for real estate in 2021, construction labor costs, construction material costs, construction labor availability were the top three real estate and development related issues that are going to impact us going forward. So there's some challenges with redevelopment that we're seeing in terms of just construction issues and cost and labor availability. Right?

Byron Carlock (00:28:43):
Indeed. And you're seeing the construction industry respond with new technologies, panelized building, zero waste, more carbon neutral materials being used, easier assembly on site. I think we'll see the construction industry respond with new innovations that help that process. I think that's an important step forward for the construction industry and for the cost they're in. We do have a labor shortage. I think that our immigration issues over the last few years have exacerbated those. Hopefully we'll see some solutions there.

Adam Hooper (00:29:28):
Next topic, [inaudible 00:29:29] getting back into the infrastructure and logistics side of things from just-in-time to just-in-case. As I mentioned, here in Oregon, we're entering into another restricted time. I was at the grocery store the other day and of course, all the paper products are gone. Just without question, everywhere you go, they're gone. This has been a huge shock to the supply chain and just logistics of goods. What are you guys seeing there and how is that going to impact industrial, and I guess that tie in with the retail environment too, I suppose?

Byron Carlock (00:30:06):
Well, industrial has been the darling for several years because of eCommerce. One thing that just-in-time manufacturing had done was reduce on-site warehousing of goods and component parts, and the supply chain disruption that became obvious during the pandemic has reminded manufacturers and retailers that they were probably running too thin on inventory. So a lot of the absorption in industrial this year was enhanced by manufacturers and retailers realizing they needed more storage space so that they could meet demand when it was called upon. So just-in-time manufacturing that has been a growing phenomenon in the manufacturing world for the last 20 years is a very efficient way to move goods through the supply chain until those goods aren't available. I think a lot of manufacturers probably had forgotten how much they had outsourced component parts that might get assembled in the US or component parts that could come to them easily. This pandemic has reminded them that raw materials and component parts probably need to be on hand in case they are not readily available from their foreign sources, offshoring, et cetera. And we're seeing a resurgence of on-shoring so that the supply chain is more accessible.

Adam Hooper (00:31:35):
Oh, that's got to have a pretty reverberating impact through balance sheets and financial performance of companies. It's a lot more profitable to not retain huge inventories. So if we start seeing that, I'm curious how that's going to reverberate through just the operating financials. A lot of these companies, if they have to start bringing back massive, or not massive, but certainly a larger amount of inventory than they would typically been carrying.

Byron Carlock (00:32:01):
Sure. I think the cost of carry will have to be factored into the price obviously, but probably paying that higher price is better than not having it at all.

Adam Hooper (00:32:10):
Yeah, that's a good point. Next one, location, location safety. This is something that I think the whole ESG awareness within our industry is starting to come around. It's certainly lagging some of the other financial industries out there. Safety and health and wellness, and how we interact with the built environment is definitely becoming more of an issue. What are you guys seeing in terms of how that's going to transform things or do we generally as humans have very short memories and we'll go back to what it was as soon as we forget what we just went through this year?

Byron Carlock (00:32:50):
That's a great question. How short will the memory be once the vaccine comes out? I think regardless, it's probably taught us that we need to adopt some practices from the healthcare and hospitality industries for a safer environment. Check-in procedures, tracking and tracing, monitoring the health of our employees, monitoring the health of our workspace environment. It had already begun with ESG and the lead certification for low VOC paint and carpet. Now you're seeing the Merck air quality become a new standard. All of these issues for making sure that employers and landlords are providing a safe environment is, I think probably new table stakes.

Byron Carlock (00:33:33):
I'm impressed that Japan and Korea has so quickly encourage people to get back on rapid transit. We have not done that in the US. So there's a lot to be done there to look at improved mass transit sanitation so that people feel safe getting back there. And then translating those practices into convention centers, arenas, sports facilities so that folks begin to feel comfortable congregating again. We've lost that as well. The real estate is not just about the location, it's also about the safety of that location. And I would add that of the streets or the feeling of safety in a particular city. I think we're seeing exodus from those cities that have lost some of that feeling of safety. That's a reminder to leadership that radical thoughts like defunding the police doesn't do anything to enhance safety.

Adam Hooper (00:34:34):
I think, again, there are so many factors that are coming together right now that this is going to be a really crucial time in how these municipalities respond to that. I know you mentioned that in the survey responses that how city leadership responds to some of these challenges is certainly going to weigh into the decision making factor for managers that are out acquiring assets in markets. Right?

Byron Carlock (00:34:57):
Exactly. Yes.

Adam Hooper (00:34:59):
The next one, which I think sums up a lot of what we've been trying to figure out is, you have an economy that's certainly having some challenges, but you've got real estate in certain areas that's holding up surprisingly well, relative to where we thought it might've been back in March and April. Obviously sectors in the real estate space have been impacted differently, but by and large, real estate as an asset class has held up, I think a lot better than most of us would have expected. How are you guys making sense of that dichotomy of the economy versus how real estate has performed through this crisis?

Byron Carlock (00:35:36):
Well, I think you start with supply and demand. And the supply and demand of most product categories was in check going into the pandemic, and the need for the real estate still exists. But more importantly, the capital markets behind that real estate have maintained some resiliency and some health. Thanks to the fed stepping in and keeping the securitization industry alive, the banks were healthy going into the pandemic and are still healthy. This is not a big burden on the banks, which has historically, the banks have historically been badly affected by downturns in real estate, but their books are healthy in this particular cycle. I'm 58 and have been through four or five of these cycles now, and I think this is the only one where we've seen supply and demand healthy.

Byron Carlock (00:36:28):
There wasn't oversupply that caused a price crash. The banks were healthy, the securitization markets are functioning and there's plenty of equity for new investment. In addition to the equity that is undeployed right now, and looking for opportunities, there are even new funds being raised as you think about the opportunities that this may provide for growth in certain product types, like need for new housing that we discussed, need for more industrial which we've discussed, and then new product types like data centers and the life sciences centers that are responsive real estate needs to this environment. I think we have an opportunity if we don't have a double or triple dip of this downturn because of the slowness in deploying a vaccine. I think real estate is going to be okay.

Adam Hooper (00:37:17):
Yeah. We saw a lot of capital earlier on gearing up for more opportunistic distress opportunities, which by and large, we haven't seen materialized just yet. Earlier on, I think we were anticipating maybe by Q4 or early Q1 of '21, we'd start seeing some of those distressed opportunities that certainly hasn't materialized yet, at least not at the scale that we were anticipating. Do you see that coming or is the banking environment, and again, those fundamentals of how real estate entered this crisis and with all this capital inside, will that prevent some of those deeper distress that we saw certainly in the global financial crisis and maybe what we would expect from a shock to the economy like we've seen?

Byron Carlock (00:38:01):
I think that we're still going to see that the hospitality and the retail sectors are going to have major distress and require a lot of workout and some rescue capital and some recapitalization. I think those areas in particular. Then if you look at all the real estate associated with hospitality, travel and leisure, which includes public infrastructure, convention centers, airports, additional infrastructure that needs to be built, improved or rebuilt, there's opportunity for public private partnership activity that's probably going to create investment opportunities there. I think that capital will be deployed and I think it will be deployed well. I think it will be across the product spectrum, but with a lot of it going to hospitality and retail related activity.

Adam Hooper (00:38:58):
Last trend that we want to cover before we start talking about some of the markets and property type outlooks the great fiscal challenge, a lot of the activity that we've seen over the last several months, it has and will continue to cause a pretty big tax burden on municipalities and cities in terms of a shortfall of tax revenue. How should that be measured in terms of acquisitions and investment activity? Do we have to assume there's going to be an increase in taxes to cover for some of the shortfall that we've seen in the last several months?

Byron Carlock (00:39:32):
It has to be inevitable, I'm afraid. I think you look at some cities that are really, really hurting, especially New York or Chicago or San Francisco. You had mentioned in the report that in New York, 1% of households account for over 40% of the city's income tax and so many of those are leaving. So you look at the burden on keeping the service levels up, keeping the employees in place, that's going to be really problematic. The States that are no state income tax States and are property tax sensitive seem to be fairing the best right now. They're also targets for in migration, namely, Florida and Texas. But the cities that are driven by sales tax, hospitality revenue and income tax are really, really hurting.

Adam Hooper (00:40:35):
Before we get to the markets, there was a section in there about climate risk and migration here in Oregon, we lived through that in 2020, one of the worst years for wildfires. We'd seen California was getting crushed, hurricanes down in the Southeast and floods in the Midwest. How was that being addressed? Is that something that's starting to weigh more into decision-making for investors as they look at how they structured their real estate portfolio?

Byron Carlock (00:41:05):
I'm hearing more and more asset managers think about rebalancing their ownership between the coastal cities and interior, what we call the 18 hour cities. I think that's a logical response. If you think about the history of major dollar investment in the US, it's been concentrated in what we call the sexy six cities of Boston, New York, DC, Miami, San Francisco and LA. Subtly, there's been a shift to balance those portfolios, still having investment there, but also moving to the interiors. There are some wonderful cities that are worthy of institutional investment that are benefiting from that because we can't deny the reality of climate risk and sea levels are rising. The Seaport and the big dig in Boston were the result of one of the most magnanimous public infrastructure projects in East Coast history. But the sea level continues to rise there.

Byron Carlock (00:42:05):
What is the history of the Seaport? Sunlight flooding in Miami and Charleston, you can't deny that it's happening. So we have to be aware. One of our colleagues at Urban Land Institute worked with Heitman, Mary Legend, who did a report last year on the effects of climate change on real estate. It's a very instructive piece that rising sea levels do affect the value or the diminuation of value in the future if we don't get it under control for trillions of dollars of real estate that are sitting in those coastal cities.

Adam Hooper (00:42:48):
Yeah. And we'll put a link in the show notes to that report. Again, very instructive material in there for sure. As we switch to the markets, new this year, I believe, is a new categorization of markets. You've got magnet markets, established niche and backbone markets. I think that's a new classification for this year. Is that right?

Byron Carlock (00:43:09):
It is. Yeah, I think it's just really a way of trying to look at how the various cities are responding to opportunities as they look at people moving their businesses that are finding them attractive. I think it also plays into some of the business clustering that professor Michael Porter at Harvard has been talking about for years, how certain cities become magnets for certain types of industries. But I think I liked the idea of the super Sunbelt and the 18 hour cities and the sunshine state looking at those as magnets, very interesting. The super Sunbelt has been absorbing most of the in migration with new employment opportunities in Atlanta, Dallas, Houston, Phoenix, San Antonio, Tampa St. Pete. Tampa St. Pete's really grown as a important back office to New York financial services.

Byron Carlock (00:44:03):
I think in the 18 hour city category, as you know, this year, Raleigh Durham was number one. The very deliberate work that Raleigh Durham research triangle has done by bringing education institutions together alongside business, especially in life sciences and pharma and research and development is impressive. It desperately wants to be a Bay Area of the East, if you will. Florida's attractiveness as a no state income tax state has brought people that have, they may have business in New York, but they've chosen to move their residency to Florida. And it's added to the business vibrancy of that state, as well as its deeper connection to New York.

Adam Hooper (00:44:44):
The magnet markets, again, just high level, those are markets that you identified that are growing quicker than the US average, and largely because they have those qualities of life that we talked about before. They have interesting job economy sectors that are pulling people in. A lot of those are pulling from the established markets that we were talking about before, the bigger boys out there, the New York, San Francisco, Los Angeles that are established. What are you seeing in terms of anything different with the established markets, anything different than what we've already gone over with the more your traditional big markets that you think of when you look at the US?

Byron Carlock (00:45:23):
Well, I think the establishment markets are really, if you look at Boston, continuing to redefine itself as really one of the educational meccas in North America, and really the headquarters of the life sciences business. The only other city that comes close would be San Diego for life sciences. So the establishment market of Boston, which historically would have been fund management and education, has now really taken center stage with life sciences and research. And then specialized economies, we know that the tech industry is headquartered in the Bay Area. They've really claimed that niche, but the cost of living there is causing that migration, and Raleigh Durham would be an example of a beneficiary move for some of that activity to the East Coast.

Byron Carlock (00:46:14):
Then I think the suburbs ascending in the establishment is a relief valve to the cost of being in that urban core. So if you look at the HQ2 for Amazon in DC, Northern Virginia and Maryland, that whole suburb ascending phenomena plays out very well there because it allows Amazon to have its concentration there, but its people have the opportunity to live in the suburbs in all three of those areas, DC, Northern Virginia and Maryland. So the suburbs become important feeders.

Adam Hooper (00:46:48):
Yep. And then with the niche markets, those are markets that have some unique economic driver. And in some of the categories you call out are the boutique markets, Eds and Meds, visitor's convention centers. I'm curious, visitors convention centers, how you see those going forward relative to some of these other markets, but tell us a little bit about what you're seeing in some of those dynamics?

Byron Carlock (00:47:10):
I think the niches are just what you said. There's something that makes them unique there that has attracted people or industry. Boise has been the surprise there as an outlet for the Bay Area. Chattanooga, because of its internet high-speed, because of the TVA capabilities there, very fascinating that they've capitalized on that. The Eds and Meds, what Johns Hopkins has done is redefined Baltimore as a research hub. That's taking advantage of its strengths, very important. Memphis with FedEx and distribution, capitalizing on its strength. The visitor and convention question is a hard one to answer because everyone, or not say everyone, consensus is that it's going to take to 2023 or 2024 to see conventions become part of our lifestyle again. That's going to be very hard on places like Orlando and Las Vegas and even Honolulu. So you worry about that. Those are big, big infrastructure investments that those cities have made to make their cities attractive for big meetings. And it's going to be a while before that returns.

Adam Hooper (00:48:30):
Again, that's one of those longer-term trends that we talked about before, of very largely on confidence in health of this recovery and vaccines. Hopefully we'll get those going and maybe that'll return with our short memories. We'll see. And then finally, the backbone markets, I think those are super interesting. Those are ones that are maybe flying a little under the radar, affordable, dependable, steady growth markets, right?

Byron Carlock (00:48:58):
They are, but also with some reinvention going on. Sacramento has been a relief valve to the Bay Area. That was another surprise in this year's report. I think Birmingham is truly trying to differentiate itself as a important medical center. I think if you look at Buffalo trying to move into tech is very fascinating. Elon Musk chose Buffalo for the launch of his solar shingles project, which really has accelerated its position in the tech world. So each one of those is doing interesting things to remake themselves. Detroit, if you look at what Rock Holdings and Dan Gilbert have done to try to remake that city. And as you look at Rocket Mortgages, an important employer there coming out of its years. As the automotive capitol and Motown capitol of the world, it's really remaking itself. They've been steady, but a lot of them have a lot of work to do. What's going to happen with the Hartford, what's going to happen with the St. Louis? Each of those cities has their challenges to rise to the new expectations of a fourth industrial revolution economy.

Adam Hooper (00:50:20):
And outside of the Boise, which we've talked about a little bit a couple of times here, were there any other bigger surprises that you guys came across when you were looking at markets?

Byron Carlock (00:50:30):
I think more of a continuance that state policy and business friendliness seems to be a real driver in economic attractiveness for relocation and expansion. So it's really given States like Texas and Tennessee and Florida and Utah a leg up, and it doesn't look like that growth that a newest to their benefit is going to be stopping anytime soon.

Adam Hooper (00:50:57):
Really quick, we can touch on some property type outlooks again, as we mentioned, there's a half a day's worth of stuff that we could talk about in this report. So we're trying to condense as much as we can here. So, listeners, definitely download this report, read through all those markets to watch. There's just a ton of absolutely fascinating information in there. So property types, we've touched on a lot of them. Maybe we can just get the high level bullet points here. Industrial logistics, data centers has been hot, will continue to be hot.

Byron Carlock (00:51:25):
I would add life sciences to that.

Adam Hooper (00:51:27):

Byron Carlock (00:51:27):
And then I would add that housing in all forms. If we think about housing stock, I think industrial clearly at the top, and then underneath that, the data centers in life sciences growth as well. And then single family housing, both for rent and for ownership. Then more multifamily. You look in some cities and go, my gosh, how could we possibly need more apartments? We've still got, I think, 28 million millennials living at home. So household formation has another run in it. I think a lot of that run will be for rental housing as folks decide what kind of life they want, where they want to live. Transients is going to be important.

Byron Carlock (00:52:17):
I think we don't know how long people are going to be working from home. But they're going to at least want the flexibility to have a place to live. So we need more housing of all types. We've not talked about the social issues around housing. I think this movement, everything from opportunity zones to focus on racial equity and neighborhoods, to improving inclusivity as opposed to exclusivity is also changing the nature of our neighborhoods and our cities. That will come about as a result of different types of housing, different types of neighborhoods, and we need more of that as well.

Adam Hooper (00:53:01):
Now, one area, or I guess maybe two sub areas of housing, senior housing, assisted living and senior care and student housing. What are you seeing in those two sectors?

Byron Carlock (00:53:12):
Well, the demographics would suggest we still will need senior housing for sure. Student housing is going to depend on the strength of the colleges that it's serving. I think we're sadly going to see a bifurcation between the haves and have nots between colleges and universities that are able to make it and those that aren't. But the student population needs new and relevant housing. And in the markets where the colleges that they're supporting are going to survive, that trend will continue. In those where it's questionable, there will obviously be housing stock that's going to have to be repurposed or used for something else.

Byron Carlock (00:53:50):
On the seniors piece, I think we're seeing a growth in the need for independent living with a delay in moving into assisted living. So the idea of aging in place and independent living, moving to assisted, moving to memory care, moving to skilled nursing, those campuses seem to be doing quite well. The pandemic has really put a strain on the ability to admit, hopefully that's beginning to improve now. But I think the seniors housing space and the medical office space is going to continue going through its rebirth, if you will, with new and more relevant product types and different service offerings that meet the demographics probably at later ages.

Adam Hooper (00:54:45):
Okay. How about office? We've talked about office, maybe still some question marks there, any reaction to urban versus suburban office, any difference in how those might look going forward?

Byron Carlock (00:54:58):
Good point. Five years ago, everyone was saying the suburbs were dead. Suburban leasing during the pandemic has really spiked as people have created hub and spoke locations. I think it'll be both and, I think that the hub and spoke locational idea will accommodate some people's fear of getting on mass transit and having drive to locations. I'm not ready to put the nail in the coffin on suburban office. I think it will still have a place at the table. I don't think we're at any risk for it being overbuilt, but I think it will have a place at the table.

Adam Hooper (00:55:39):
Okay. And then hotels, retail, talk a little bit about those, but any quick takes on outlook for either of those?

Byron Carlock (00:55:48):
Sure. I think on hospitality, we're already seeing some adaptive reuse of limited service hotels into COVID recovery centers, homeless shelters for affordable housing. That stock can be repurposed. I think something like 92% of the deals in workout today are either hospitality or retail. The whole industry will have reverberations of restructuring for the next several years. But it will find a happy ending, I believe, either through restructure a rescue capital or a sale, but it's going to be a slow recovery, sadly.

Adam Hooper (00:56:34):
Yeah. All right. So we can get you out of here on time, final three questions. What is keeping Byron Carlock up at night?

Byron Carlock (00:56:42):
I think maintaining the attractiveness of the industry to the global capital markets. As we look at real estate as an important asset class in any portfolio, the pandemic has slowed the appreciation for continued diversification. There's not much yield available in bonds. Interest rates are at all time lows, capital flows are continuing to accumulate and moving into alternative investment strategies, which is mostly PE and real estate. So I want to make sure that everyone knows that the real estate industry is still an attractive place to place capital. You just have to decide where you're willing to take your risk and how much return you're looking for in light of that risk. I spend a lot of time with global investors, a lot of time with domestic investors rebalancing their portfolios, but I'm still bullish on real estate.

Adam Hooper (00:57:44):
And is that conversation more of a, not a talking off of the cliff, but just reiterating the fundamentals of why we love real estate as an asset class, as an investment?

Byron Carlock (00:57:56):
Yeah, I think it is. It's a new appreciation for what attracted us to the asset or the asset class to start with, what has changed and then how we adapt to that change.

Adam Hooper (00:58:10):
Lots of adaptations going on and in our future for sure. We've talked a little bit too about opportunities. There's going to be some interesting contrarian plays in hospitality and retail right now. We'll maybe see some of that distress playing out. Looking forward into 2021 and beyond, where do you see some of the more interesting opportunities for investors that are listening to the show?

Byron Carlock (00:58:35):
I think you have to put industrial at the top of the list. ECommerce is changing our lives, it's changing the game and it requires a lot of warehouse space. I think we have to put that at the top. I'm very bullish on rethinking the way we live and the housing product that we're building. I'm hoping that it really recharacterized as our cities and neighborhoods. I'm very bullish on the idea of racial inclusion and changing the nature and the face of our neighborhoods and the product that it takes to do that. Front porch living, sidewalks, green space, dog parks, community gardens, I'm very excited about what I think we're going to see happening in some of our cities and towns as we address that trend.

Adam Hooper (00:59:25):
Getting back to the Pattern Language, fascinating read if anybody out there wants to pick that up.

Byron Carlock (00:59:29):
Oh my God. Why did we not talk about it? That's my favorite book. I love that book. Yes, exactly. That is the book. We all want to live in Mayberry, and Pattern Language reminds us of that.

Adam Hooper (00:59:41):
Yup. And again, I think it's interesting. This has been just a phenomenal year for learning for me in terms of just all these, again, putting my student hat back on and really digging into conversations like this, and there's way more information than I'm sure we want to chat about, but it always gets back to some of those just fundamentals of, again, why we like this as an asset class, what real estate can do for portfolios and just how we use that space. What those fundamentals are. I think it'll be interesting to see how we react to that, and maybe how those start creeping back in versus some of the trends that we've seen over the last 20 to 50 years.

Byron Carlock (01:00:20):
Agreed. Yup.

Adam Hooper (01:00:21):
Perfect. Well, Byron, this is, again, just a jam packed report. There is so much in here that we could talk about. We'll have links in the show notes, but how can listeners learn more about what you're up to, what PWC is doing with ULI and get more information about this just fantastic stuff you guys are putting out?

Byron Carlock (01:00:39):
Well, you know what, if you're a real estate fan and have a place in the industry, join ULI. I really think the Urban Land Institute is really trying to change the nature of our land use around the world, and this is a great organization for that. As for me, follow me on LinkedIn or Twitter. I'm publishing quite a bit and I'm very passionate about our industry. I think real estate is at the heart of our existence with respect to beautiful places to live and work, and environments within which we can walk and enjoy everything from nature to the built environment. I'm just honored to have a seat at the table to make a difference.

Adam Hooper (01:01:26):
Perfect. Well, we're honored to have you on the show today. Thank you again so much for coming and spending an hour with us. fascinating conversation, and really appreciate your time.

Byron Carlock (01:01:35):
Thank you so much.

Adam Hooper (01:01:37):
All right, listeners, that's all we've got. Hopefully your pen still has some ink in it. I know mine almost ran out taking notes there. As always, if you have any questions or comments, send us a note to And with that, we'll catch you on the next one.

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