We’ve reached our cruising altitude. That’s the message from the 2018 Emerging Trends in Real Estate, an annual joint venture from the Urban Land Institute and PricewaterhouseCoopers.

The real estate market tends to be cyclical with a series of booms and busts, but the report indicates the market is not yet approaching what traditional scenarios indicate should be a pending downturn. Because the recovery period after the Great Recession did not follow traditional "boom" characteristics, analysts believe real estate might eventually have a soft landing in this cycle rather than a hard "bust."

The lengthy report is in its 39th year and is created based on information gathered from focus groups, real estate data and surveys from about 1,600 top real estate professionals. It examines trends and recommendations for real estate and land use, but also demographics and other factors that affect development in cities.

So what’s hot for 2018? Smaller cities, the Internet of Things and Generation Z.

Hot spots

The survey highlights areas that rank high for investor interest, and 2018 appears to be the year of smaller cities. The primary markets that have proven to be traditional investment hubs — such as New York, Los Angeles and Chicago — ranked lower than secondary markets consisting of mid- and small-sized cities. Primary markets have become so competitive that many investors are turning to secondary markets for growth potential.

Seattle earned the top-ranked spot on the list of markets to watch, up from number four last year. The full top 20 list is:

Seattle
Austin, TX 
Salt Lake City, UT
Raleigh/Durham, NC
Dallas/Ft. Worth, TX
Fort Lauderdale, FL
Los Angeles
San Jose, CA
Nashville, TN
Boston
Miami
Charlotte, NC
Portland, OR
Charleston, SC
Northern Virginia
Orlando, FL
Atlanta
San Antonio, TX
Tampa/St. Petersburg, FL
Oakland, CA

Investors increasingly are realizing the cost-of-living and business advantages that secondary markets can offer. Those cities have great potential for economic development because the cost of doing business is about 16% lower than in large cities. Labor and energy costs also tend to be lower.

The cost of living is one of the most important factors driving migration to cities. Generally speaking, large cities have higher costs of living than smaller cities, which is partially driving the move toward secondary markets. Nashville, for example, is experiencing a boom that has led to an 11% population bump over the past five years. But Chicago has lost residents over the past several years, reflecting a national pattern of slower urban growth in the country’s largest cities.

Seattle jumped to number one on the list despite its high cost of living in part because of its plethora of job opportunities, which is another major reason people move to an area. It's also a very technology-friendly city, which increasingly is becoming a criterion for growth. The city has a positive outlook for all property sectors, but especially single-family housing and industrial.

Generational divide

Different generations often have different wants and needs. The report shows that those differences continue to be present in both housing and work space preferences. Developers and investors are starting to focus on a new generation of consumers instead of just the much talked about millennials, Generation X and baby boomers. Generation Z — which is loosely defined as those born after 1995 — is starting to have its oldest members enter the workforce and deal with finding housing. This group has a lot of differences from the millennials and could drive new trends.

Preliminary surveys show that Gen Z will likely have the same preference for urban centers as millennials did early in their careers, due to job availability and easy social interactions. Both groups also have to balance housing affordability, student debt and a lack of savings. However, Gen Z might end up with a higher desire for early homeownership than millennials. Many of them identify as do-it-yourselfers, which brings into play a lot of low-cost, fixer-upper homes. If that ends up being the case, it could drive a whole new wave of neighborhood gentrification in cities.

The report authors note that members of Gen Z have grown up in an environment full of stress and uncertainty brought on by events such as 9/11 and the Great Recession, plus a digital society with constant social media messaging. That appears to lead them to seek more stability in their jobs, especially in terms of salary and benefits, rather than on the gig economy. The desire for structure could also translate to less interest in working in shared workspaces or remotely than in traditional offices.

Millennials are starting to follow the trend of previous generations in buying homes and moving from urban areas to the suburbs. That has spurred interest in suburbs that look less like residential centers with a few amenities, and more like amenity-rich central business districts where residents can comfortably live and work.

But their generational difference in housing tastes could spell trouble in the coming years for baby boomers. While many boomers bought their homes based on large sizes, millennials buy based more on house quality and amenities. The disparity in housing preferences could create trouble for boomers trying to sell places that don’t appeal as much to millennials.

Another generational factor that cities should note is the growing demand for senior housing. Current inventory does not meet cities’ needs. That’s a problem as it is, but especially considering that the senior population is expected to grow by 25 million people in the next 15 years.

Incorporating tech and data

According to the report, real estate investors and developers haven’t maximized their potential to use data and technology in property design thus far. Developers have access to a lot of data about consumer preferences that they are not yet widely using. Analyzing gathered data and identifying trends could help them to build and oversee operations at structures with specific features that would make them attractive to the community.

Real estate developers are being forced to keep up with rapid technological advances and changing demands for connectivity, especially when it comes to office space. Employers are finding that boosting the number of devices linked by the Internet of Things improves employee productivity and happiness, so the focus on innovation, flexibility and agility is becoming a requirement rather than an optional amenity.

Connectivity also helps the long-term trend toward greater energy efficiency, green building and sustainability. Just like with technological options, more customers prefer sustainable living and work spaces. Efficient structures help keep operating costs down, as can artificial intelligence, which allows a building to "teach" itself about and implement greater operating efficiency. 

A number of other changes potentially arriving in 2018 — such as tax reform and interest rate hikes — also could affect the real estate market and cities' development. However, none of the known factors appear drastic enough to derail the market's long glide and instead send it into a nosedive.