ECONOMIC FORCES SHAPING REAL ESTATE

While challenges face commercial real estate markets, Realtors® specializing in the sector should have confidence that growth will continue. That’s according to speakers at a commercial economic issues and trends forum.

NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets; the panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.

George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. “During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue,” he said.

Unemployment has declined to 4.4 percent and consumer confidence is at its highest point in 15 years. As the economy improves, the commercial real estate market has continued to improve as well, said Yun. “A rising interest rate environment is likely to halt commercial price growth or even cause a minor decline; that outlook is supported by the expanding economy and the over 2 million jobs gained in the past year,” he said.

Looking at the global market, Ratiu explained that global commercial investors have hit the pause button on investments, which in the first quarter of 2017 decreased nearly 20 percent year-over-year; however, certain U.S. markets are seeing good global cash flow with $76 billion flowing to the U.S. “Overall global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains,” he said.

With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the U.S. market this year. “Over the past five years, a near majority of Realtors® experienced an increase in the number of international clients. We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market’s gradual recovery,” said Yun.

One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.

“Realtors® are seeing evidence of markets being impacted by regulators’ increased scrutiny of banks’ balance sheet allocations to commercial real estate loans,” said Ratiu. “Considering that 64 percent of Realtor® clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37 percent of Realtors®’ markets, a four percent increase from last year.”

John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors. “Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend,” he said.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.

When the housing bubble burst years ago many homeowners found themselves underwater in their mortgages. This was certainly bad news for those homeowners, but what no one realized at the time was that there would be repercussions for years to come.

Today those homeowners are just starting to dig their way out of mortgages that kept them in homes they had long outgrown. Equity has been slow to build. As a result, people are staying in their homes longer out of fear or because of lack of capital. This means fewer starter homes on the market for first time home buyers.

Millennials are struggling to buy homes even though they surprisingly want to do so. Their savings are practically if not literally nonexistent, and they are often saddled with student loan debt. Millennials associate home ownership with the American Dream more so than previous generations, so lack of savings and escalating credit standards are grinding the housing market to a halt.

Modern comfort comes at a price, and keeping all those air conditioners, refrigerators, chargers, and water heaters going makes household energy very expensive. Here’s what uses the most energy in your home:

Cooling and heating: 47% of energy use

Water heater: 14% of energy use

Washer and dryer: 13% of energy use

Lighting: 12% of energy use

Refrigerator: 4% of energy use

Electric oven: 3-4% of energy use

TV, DVD, cable box: 3% of energy use

Dishwasher: 2% of energy use

Computer: 1% of energy use

One of the easiest ways to reduce wasted energy and money? Shut off vampire electronics, devices that suck power even when they are turned off.  A penny saved is a penny earned, and being more efficient with your energy use is good for your pocketbook and the environment.

Architecture should be more than an intersection of art and commerce.  Architecture is almost a political work. There is a condemnation of architecture’s passivity and its inability and unwillingness to confront or resolve the socio-political complexities of urban life.

While there are many talents working in the field today, there are very few people who you can name around the world who manage to combine extraordinary inventiveness and innovation in their design work and who are also at the very center of contemporary thought, engaged with contemporary issues.

We are in a radically divided world in which architecture is not dealing with those political issues in a really sophisticated way. Both the art world and the architecture world are clearly dedicated to political correctness and therefore are pretty intolerant in terms of engaging with political worlds beyond Western democracies.

One of architecture rarely questioned self-mythologizing pretensions has been that architectural work is less ego-driven and less author-driven, and therefore architects convince themselves all their buildings are completely different and don’t look like each other, something reminiscent of collectivity. A generic architectural style does not offer an escape from the extravagance of individual architecture.

Within a decade, our living spaces will be enhanced by a host of new devices and technologies, performing a range of household functions and redefining what it means to feel at home.

The promise of devices that not only meet our household needs but anticipate them as well has been around for decades. To date, that promise remains largely unfulfilled. Advances such as the Nest thermostat by Alphabet (parent company to Google) and Amazon’s Alexa personal assistant are notable, but the home-technology market as a whole remains fragmented, and the potential for a truly smart home is still unrealized.

A tipping point may be at hand. Increased computing power, advanced big data analytics, and the emergence of artificial intelligence (AI) are starting to change the way we go about our busy lives. The vision we present may seem out there, but it simply represents the confluence of those technological developments and realization of existing trends. Those trends, along with what’s just on the horizon, according to our research, suggest to us that within a decade, many of us will live in smart homes that will feature an intelligent and coordinated ecosystem of software and devices, or homebots, which will manage and perform household tasks and even establish emotional connections with us.

A smart home will be akin to a human central nervous system. A central platform, or brain, will be at the core. Individual homebots of different computing power will radiate out from this platform and perform a wide variety of tasks, including supervising other bots. Homebots can be as diverse as their roles: big, small, invisible (such as the software that runs systems or products), shared, and personal. Some homebots will be companions or assistants, others wealth planners and accountants. We will have homebots as coaches, window washers, and household managers, throughout our home.

We are already entering this new era. In two years, we expect to see more items in our living space become interconnected—the formative first stage of a new home ecosystem. In five years, numerous tools and devices in the home will be affected. And in ten years, smart homes will become commonplace and will regularly feature devices and systems with independent intelligence and apparent emotion.

That level of home improvement presents significant opportunities, threats, and changes for appliances and devices that have been part of our home life for generations. The new home will be built on a foundation of platforms and ecosystems, whose producers will need to establish new levels of trust with their customers. Competition will take place not just for the consumers who inhabit the smart home, but for the interactions between consumers and homebots that increasingly will shape buying behavior. It’s not too early for a wide range of players to start laying the groundwork for success in the home of the future.

Platforms will provide the foundation to integrate different devices while providing a consistent interface for the consumer. Frontrunners include Amazon, Apple, Google, and Samsung; start-ups at various points in the development cycle will be part of the mix, as well. The winners will deliver omnipresence though ubiquitous connectivity and go-anywhere hardware, as well as integration, with bots collaborating among each other and linking to third parties’ products and services. If the recent past is any indication, it’s likely that multiple platform standards will evolve. That will present complexities both for consumers and businesses but will foster new, niche opportunities, as well.

Developers will create bots that plug into the new and various platforms. In short order, this combination of platforms and bots will mature into an ecosystem of products and services. Platform companies are likely to develop their own AI-driven bots (the descendants of Amazon’s Alexa and Apple’s Siri, for example). Many other creators will develop unique homebots that integrate into different platforms, much as the apps of today have been developed for Android and iOS, which support the impressive mobile-device ecosystems we see now.

Likely, too, a hierarchy will emerge: we can expect a master bot that acts as general manager, juggling many services; service bots that handle a set of functions related to a more complex task such as managing media; and niche bots that perform single tasks, such as window cleaning. For now, put aside grand visions of a single, Jetsons-style Rosie the Robot replacing a human maid in toto; think instead of multiple bots performing separable, specific tasks. Well-defined scope presents much less risk of error. If you have a robot at home, you can’t have it run into your furniture too many times. You don’t want it to put your cat in the dishwasher even once.

To better understand the homebot opportunity and potential obstacles to its realization, we conducted in-home and mobile diary studies in Japan and the United States with dozens of consumers who are already using AI products or services where they live. We found that satisfaction with individual smart devices runs high. Today, people are quite willing to invite homebots into their lives to address a broad array of specific use cases: from doing individual chores to completing a more complex set of tasks to managing even certain elements of child and elder care.

But we also found there’s a crucial variable that will determine the speed and extent to which consumers truly embrace smart homes managed by homebots. The overwhelmingly determinative factor for consumer acceptance that emerged from our research was trust. Trust is initially based on the bot’s ability to perform its task, as might be expected. That does not always go as planned. But once trust is established, people are willing to cede more responsibilities to devices and systems powered by AI. One key to creating that trust will be creating bots that are more than mere automatons. After all, humans are wired for emotions. Our research confirmed that consumers are satisfied when a bot gets a task done, but they are delighted when there is a more personal, emotional element to how the bot does it.

At the same time as competitors in the smart-home space are figuring out how to create trust, they also must learn how to compete in a new landscape where the winners are influencing the homebots themselves. As consumer–bot interactions become a new nexus of competition, a variety of players will need new skills in designing bots, marketing products and services to them, and building business models that exploit their position at the center of the home.

Increasingly, designers will tap into and even advance data science to develop solutions that go beyond addressing static insights. Likely, that will entail solutions that are at least in part AI-driven, in order to react instantly and evolve constantly for the needs of customers. By understanding customers through a variety of approaches including ethnographic research and AI-generated insights, designers can help guide businesses through the complicated tangle of interactions and diverse engagement models. We expect solutions will migrate from screen-dominated interfaces to more physical and even atmospheric interactions. Companies that have more compelling and intuitive engagement models between bots and consumers—and can achieve significant market penetration first—will hold the competitive advantage.

To become machines that are truly integral to peoples’ home lives and to establish genuine trust, bots will need to connect with and relate to humans. That’s hard, and it goes beyond AI to the realms of artificial emotion (AE). AE encompasses attributes such as tone, attitude, and gestures that communicate feelings and build an emotional connection. Consider Alexa. Several of our interview subjects told us that they think of Alexa as a friend. That doesn’t develop from merely providing the train schedule when asked. It comes because Alexa evokes a sense of support, through its sensitive omnipresence and nuanced voice interaction. Interacting with Alexa really is like talking to a friend.

As consumers trust bots more and in turn cede to bots more control over their home management, people will become less involved in the active decision making that goes on in daily home life. For providers of home goods and services, this means that bots will increasingly become the customer— or at least an important intermediary between a selling business and a human purchaser.

Marketing for bots certainly gives new meaning to the term robocalls. But it also poses a serious challenge: How can businesses position their products and services to a bot so the human consumer will passively allow, or actively ensure, a purchase? We expect that the marketer’s mission will be comparable to the steps one takes to rank one’s product or service at the top of an Internet search result. Just as companies focus on search-engine optimization, they will need to develop metadata and tagging systems that are optimized for homebots.

Given the simplicity of automated purchases and refills for many household products, sellers will need to focus on getting into a homebot’s consideration set and optimize features to win the likely comparisons embedded in a purchase-decision algorithm. That calls for an approach that is much harder than one and done. Given the speed and reach of AI, providers will have to monitor bot purchasing behaviors continuously and be vigilant in tracking competitors’ moves going forward.

The stakes are real; a shift in AI preference toward a competing product could reduce demand to zero. The once all-powerful intangible power of a brand may now be reduced to a tangible sum of its parts. As AI gathers inputs across consumer networks, unpleasant consumer experiences or negative feedback could have near immediate impact on bot purchasing preferences. As a result, analytics and marketing will need to be rapid, responsive, and agile. Consumers who can’t be bothered to search for the right purchase or are overwhelmed by the complexity of choice can have a homebot scan constantly based on variable individual preferences (such as cost, appearance, and durability).

We expect that a wide range of homebot business models and use cases will emerge. Not only could homebots be purchased or rented for a specific task, people may share or rent them out to others. It’s conceivable that networked bots will work together across households, for example, to increase processing power, share expenses, or even partake in buyer co-ops to benefit from bulk pricing. Each of these models creates opportunities for new revenue streams.

The greatest source of value may come from the data. Bots will acquire and generate reams of information, and these data points will be critical for increasingly data-driven projects and services. Data will be sources of insight and even products in their own right. And understanding the implications, opportunities, and information about the smart home won’t be someone’s part-time job. It will require a dedicated team to parse the data, develop strategies, manage partnerships, and drive experiments that will become integral to creating value.

Businesses that seek to compete in the smart home can begin their housework early. A network of functioning bots is, in effect, an ecosystem of capabilities. Each bot will need to follow standard protocols to communicate with one another. But while a house may be bounded by four walls, a homebot ecosystem extends into the ether; it has to, as bots will need to interact with markets and networks around the world. Smart cars, wearables, and mobile devices are but a few examples. How all those systems talk to one another will be the core IT challenge for the foreseeable future.

On the technical side, mastery demands an intimate understanding of AI technologies and how they work with one another. On the strategic front, it’s worth the effort to identify what your company’s competitive advantages are or may become and then imagine how these advantages could align with the homebot value opportunities that are likely to emerge. Remember: the smart home will require different parties to work together. It’s not too soon to take note of players developing complementary—or potentially competitive—capabilities, and consider opportunities for potential partnerships. Most important, keep in mind that the success of homebots and smart homes is not wholly about technology. Rather, smart homes and bots are about how technology makes us feel. The objective is to meet the needs of human consumers and to make a house feel like home.

Real-estate developers should accept that business as they have known it is changing. By adopting new construction technologies, they can improve delivery and affordability. Imagine if people could design and develop their dream homes simply by going online to find the solution that best suits their means and lifestyle. Imagine being able to pick from a menu of standard base designs and being able to customize fittings, furnishings, and smart equipment. Then imagine being able to use a digital interface to obtain quotes from vetted contractors for everything from surveying the plot to assembling the house. And the pieces of the house itself arrive in the form of prebuilt panels and modules in a container from a centralized robotic factory. This is what is meant by “industrialized delivery systems”—and these will play a crucial role in the future of the real-estate and construction sectors.

In reality, early versions of this future already exist, with several venture-funded home builders in the United States aspiring to channel the customer-experience revolution pioneered by consumer-goods companies into the residential-property space. We are likely to see the creation of standardized home-building platforms, with developers working with an ecosystem of companies providing an array of fittings, furnishings, and equipment solutions. The result is a seamless customer experience and a more sustainable end product.

Skeptics may argue that such industrialized delivery innovations will focus on the lower-priced segments of the market, while the construction of high-end real estate will remain unchanged. Early evidence suggests, however, that this will not be the case. Industrialized delivery systems are poised to disrupt the real-estate sector across all asset classes and price points.

There is little doubt that the construction process adopted today badly needs innovation, mainly to improve the speed of delivery and reduce the dependence on manual interventions. A key enabler for this transformation is modular design, geared for production and assembly rather than field-based on-site work.

We are already seeing progress toward this future. Three technologies that already exist are of particular interest.

Virtual design and construction (VDC). Digital platforms, such as 5-D building-information modeling (BIM), enable the creation of a “virtual twin” of physical projects. This not only allows design optimization—in the form of more precise estimates, value engineering, constructability, and interface checks—but also provides transparency and project-management oversight over the life cycle of the project. Coupled with emerging industry trends, such as integrated project-delivery contracts, VDC is a powerful tool to help finish projects on budget, on time, and on spec.

To realize the full benefit of using 5-D BIM for projects, developers and contractors must fundamentally rewire their design, estimation, and project-management processes. That means contractors and clients must work closely together, backed up by clear contracts, to share both risks and gains.

Prefabricated, prefinished volumetric construction (PPVC). PPVC involves the factory construction of interlocking building modules, each equipped with internal finishes, fixtures, and fittings. These elements are then transported to the site for assembly and installation.

PPVC is slowly but steadily gaining popularity because it accelerates the construction process, with productivity gains of as much as 30 to 50 percent, according to case examples in Singapore. PPVC works particularly well for less-complicated and standardized designs. Other benefits include higher, more consistent quality; less waste; and better health, safety, and environmental performance because of the shift from chaotic field sites to a more controlled factory environment.

Singapore is one of the leaders in the use of PPVC. The city-state’s Building and Construction Authority encourages deployment of this approach—not just for hotels, hostels, dormitories, and industrial facilities but also for middle- to high-end residential developments. The technique can accommodate both concrete and dry walls. It is also corrosion free and fire safe. So far, it has been used in buildings as high as 25 stories.

Deploying PPVC implies changing design standards, assumptions, and processes to adopt the Design for Manufacturing and Assembly approach. It also requires better production-planning, supply-chain, and logistics-management capabilities, given that modules need to be produced remotely and regularly shipped from factories to sites. These are areas in which many contractors are lacking. Few in the sector have anticipated this shift from construction to production, let alone budgeted and provided resources for it.

3-D printing. While 3-D printing has not yet been widely applied in construction, developers and contractors should keep an eye out for innovations here. 3-D printing will likely be an important part of the shift from the field to the factory. Experts believe that one core application of 3-D printing could be in realizing complex, iconic facades and architectural features previously thought too expensive or time consuming to produce.

3-D innovators are scaling up this technology, by developing printers and design methodologies to create building units up to 200 square meters in size in less than a day. Significant R&D efforts are also under way in universities to print individual structural components and architectural features.

The construction industry is poised for big cultural and technological shifts as it embraces digitization across design and delivery processes. The real-estate industry is set to gain from these developments, not just as the result of efficiency and productivity gains but also by providing a richer and more satisfactory customer experience.

The larger benefits could be profound. By cutting costs, speeding up construction, and improving quality, industrialized delivery systems can also help provide the decent, affordable homes that families around the world need.

Limiting foreclosure will make mortgage-backed securities riskier and banks lend less. During the U.S. subprime crisis, many homeowners struggled with their mortgage repayments and foreclosures became rampant. Banks and mortgage servicers are often criticized for taking a tough stance in foreclosing mortgages. One determining factor in whether a mortgage was foreclosed or renegotiated during the crisis was if that mortgage was privately securitized by investment banks. The U.S. government provided monetary subsidies to mortgage servicers to encourage them to renegotiate delinquent mortgages instead of foreclosing. On the surface, this is good for homeowners.

But trying to limit foreclosures makes it more difficult for banks to securitize these mortgages in the first place, which in turn, makes it more difficult for them to lend to more prospective homeowners. In other words, foreclosures, even if they create losses for homeowners and investors, are playing a positive role in facilitating securitization.

Mortgages are illiquid assets that are paid off over many years. Traditionally, banks have to hold the mortgages on their balance sheets until full repayment. Securitization, a process in which securities backed by the cash flow from mortgages are sold to investors, allows banks to raise fresh capital to lend to more prospective borrowers. That is, securitization supports liquefying of assets and thus, lending and investing.

Similar to the problem of lemons in the used car market, investing in mortgage-backed securities (MBS) is risky because banks know more about the true quality of mortgage pools than investors do. Banks therefore have to find ways to reassure buyers that they are buying into securities backed by strong mortgages and that if homeowners do default, they will be able to recoup part of their investments. When banks pre-commit to a tough foreclosure stance they send a signal of confidence to outside investors that the bank has a pool of high-quality, low-risk mortgages.

When a homeowner defaults on a mortgage, the banks typically have two options: to modify the terms of the mortgage in order to keep it alive or to foreclose it and reclaim the property for sale. Modification entails risks that the homeowner might re-default if the economy continues to deteriorate whereas foreclosure is a quick but costly way to recoup cash. Poviding safe cash flow in bad times is particularly valuable to MBS investors, precisely because they were unsure about the quality of the mortgage pools in the first place. By committing to excessive foreclosure policies, banks reassure MBS investors and can attract more capital from them.

If the government prevents excessive foreclosure, the bank’s securitization process is hindered. Government policies that try to limit foreclosures can also reduce incentives for banks to screen mortgages diligently, leading to low-quality mortgages inclusion in MBS. This increases risks for investors and makes securitization more difficult.

Securitization is an important part of the financial market and crucial to the smooth functioning of bank lending. It is also being touted as a solution to broaden funding bases in Europe and USA, notably for SMEs, currently starved of liquidity to grow. Policies limiting foreclosure will inadvertently limit the scale that the banks can securitize and hence limit the scale in which banks can lend to the real estate sector. This translates into a loss for homeowners, small businesses, and the economy overall.

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