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Industry icons point to infrastructure investment as sector to watch

Two icons of the commercial real estate industry continue to be very optimistic about the U.S. economy, telling their fellow industry leaders that even secondary and tertiary markets have reason to view the future with confidence.

Dr Raymond Torto
Dr Raymond Torto

Ray Torto, Ph.D., CRE, the Harvard University lecturer who recently retired as global chief economist of CBRE, and Doug Poutasse, CRE, EVP, head of strategy and research at Bentall Kennedy, made the remarks to the audience of Counselors of Real Estate at the organization’s annual convention in Boston.

Torto said that while there is chatter about overpricing, that should not be an issue because the U.S. is experiencing a stable, growing economy. He also noted that foreign investors continue to look favorably at the U.S.

“They are taking a longer view, a more than the traditional five-to-seven year outlook,” he said.

Poutasse noted, “When looking at major markets, I don’t worry so much about price, either – New York is not going to overbuild its apartment market any time soon.” He cautioned, however, about potential overbuilding in the luxury housing market – at price points of three to $20 million.

Workforce housing continues to be both a need and a driver in many markets, according to Poutasse.

He said he defines this simply as housing built near employment that can be affordable for employees.

Torto concurred, noting that in Cleveland, housing built near important medical centers such as the Cleveland Clinic have great potential to not only boost the local economy but significantly reduce workers’ commutes.

Poutasse cited Austin, Texas as another market where housing built near workplaces in the tech industry is driving real estate growth.

Both agreed that younger workers are attracted to locations which may have seemed out of the mainstream a few years ago, but are developing into work/live/play environments that do not require extended commutes — or in some cases, even owning a car.

Another effect of increased housing development is that while renters or condo buyers gravitating toward newly constructed, more upscale apartments will be paying higher rents, the older housing stock will become more affordable due to rising overall supply.

This opens up opportunities for neighborhoods to attract moderate-income workers who may have previously struggled to afford the rents when those properties commanded higher prices.

Poutasse observed that one coming trend in institutional investment is infrastructure. He said that the U.S. has under-invested in infrastructure, noting that this area is critical to the economy and today’s technology should make it easier to build large-scale infrastructure.

The U.S. has under-invested in infrastructure. That could be about to change.

Combined with lower capital costs, he explained, this is a sector to watch.

As an explanation, he said that in the U.S., infrastructure costs have typically been funded by municipal bonds — but in some non-U.S. countries, infrastructure is privately funded and owned.

In a dialogue with other economists and top practitioners from more than 50 real estate specialties who comprised The Counselors of Real Estate convention audience, both speakers revealed other insights.

Torto said secondary cities which may experience growth are those with airports that offer direct flights to major cities, both in the U.S. and abroad.

“International airports bring in capital,” he said, citing that investors from abroad are more likely to invest in cities they can easily fly to themselves.

Poutasse noted that real estate follows jobs. He said to predict where real estate growth will be, “track the cities experiencing job growth.”

As for the retail sector, Poutasse said distribution is key to retail growth, with new opportunities in same day delivery, which requires innovative warehousing close to population clusters.

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