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Flexibility and resilience dominate RE industry as work, leisure and healthcare spaces are redefined

PwC US and the Urban Land Institute released Emerging Trends in Real Estate 2022 on October 14, highlighting the evolving trends shaping the real estate industry. The report, which includes proprietary data and insights from nearly 1,700 leading real estate industry experts, explores how the property sector has seen encouraging and unprecedented recovery from the Covid-19 pandemic. 

The report highlights that flexibility, convenience and ultimately real estate’s resilience, can drive property sector function over the next decade. Consumer expectations of traditionally designed spaces have changed, and there will likely be a massive shift in the functionality of homes, offices, shopping centers and healthcare spaces. Property markets that were once predictable will likely remain in a bubble of uncertainty, but decision-making confidence has improved since last year. Three-quarters of respondents in the 2022 survey report feeling confident making those same long-term strategic decisions compared to less than half in the 2021 survey. 

Property investment is top of mind for institutional investors in both traditional and alternative sectors as risk remains low and rates stay attractive. Urban landscapes are facing change, as new land uses and updated zoning allows markets to evolve. All these factors remain under the cloud of climate urgency, prompting new ways of standardizing and measuring ESG requirements. As businesses approach environmental, social and governance (ESG) issues in the property sector, it will be imperative to take a holistic approach and create a strong overall strategy — to help create sustainable advantage and value. 

“There is clearly an optimism within the real estate industry for its prospects in 2022 and there is undeniably a weight of capital available for investment,” said Anita Kramer, Senior Vice President of ULI’s Center for Real Estate Economics and Capital Markets. “Yet the ground is shifting and we are seeing long-term and lasting changes in a range of key areas including the relative prospects for property sectors and locations, the extent to which we use various property types, and our attitudes toward the industry’s role in climate risk and decarbonization. Emerging from this is the opportunity to lay the foundation for a new vision for our communities, one in which we repurpose obsolete buildings, reduce carbon emissions, and create more affordable housing.” 

“An abundance of investable capital, low interest rates and a continued demand for many product types has created a positive environment for our industry. However, not everything is rosy, and real estate still has its challenges ahead. There are rising costs, pending tax reform, and new infrastructure spending that could impact the labor market,” says Byron Carlock, PwC Partner and U.S. Real Estate Practice Leader. “There are also various social issues, in which the industry can take a leading role in helping to solve. Some of those include affordable housing, ESG focused city planning, and neighborhood inclusiveness. It’s important that regulators, policy makers and business leaders work together to establish trusted standards that guide responsible behavior in our new post-pandemic reality.” 

Trends Highlighted in the Report: 

A Brief and Muted Real Estate Downturn 

There has been a tremendous shift in global institutional investor allocations from other sectors into real estate this year, and Emerging Trends respondents expect the flood of capital to continue, despite inflation concerns. The overall economy has seen a rebound far exceeding expectations – not only has economic output already recovered to pre-pandemic levels, but growth is forecasted to be at its highest rate in decades in 2021 and 2022. Non-store retail sales increased 35% from Q4 2019 to Q2 2021. Occupancy rates and rents inevitably fell, but the declines in most markets were less than typical for even modest recessions. Uncertainty of return to office plans kept most businesses from selling off their spaces and pricing held firm though sales transactions fell. Consumer payments also held strong due to stimulus money. 

Climate Risks Responsibility and Mitigation 

The Emerging Trends survey found that 82% of respondents consider ESG elements when making operational or investment decisions. A growing consensus sees the property sector as bearing much of the responsibility for climate change and being uniquely positioned to institute helpful improvements to help mitigate impacts and increase resilience to environmental risks. Despite industry participation in environmental accreditation programs and broader ESG initiatives, investors have been slow to incorporate environmental risks into underwriting. However, the growing risks of climate-related property damage may induce more investors to follow the example of leading institutional investors in factoring market-level climate risk into decision-making. While businesses need to consider how decisions can impact investors, it’s equally important that they should be in the business of contributing to society and helping others thrive. 

The Housing Affordability Crisis 

Housing affordability worsened during the pandemic as home prices and rents barely paused during the brief recession and then quickly accelerated as the economy reopened. Costs of both for-sale and rental housing are rising much faster in secondary and tertiary markets as people fleeing pricey gateway markets bid up residential prices in the smaller destination markets. With housing production falling far short of new household formations, affordability will likely continue to deteriorate in the absence of significant private-sector and government intervention. Housing affordability is crucial in creating a diverse workforce and deliberate inclusion efforts that help to drive equitable outcomes that can lead to the broader economic development of our society, which benefits everyone. 

WFH May Mean Less Office Space 

Working from home was relatively rare for the US workforce prior to the pandemic, but it soared during the initial lockdown and is expected to maintain momentum among office workers. Almost two-thirds of real estate professionals believe that fewer than 75% of workers will come to the office at least three days a week in 2022. In fact, industry leaders predict the need for office space will likely decrease between 5-15% within the next three years. However, office tenants will look to redesign the space they have and do more with less to provide new ways of working, and an evolving talent model that marries hybrid and flexible work environments with company cultures. Think big, open spaces that enable effective cooperation instead of individual cubicles. 

The Great Relocation? 

The volume of highly paid office workers making the move away from their workplace has been relatively limited. Many workers likely held off relocating as they awaited callbacks to their offices. Potential employee moves are expected to rise as firms again delay the return to work or formally make remote work a permanent option. This phenomenon can also create a more suburban future, particularly in the Sun Belt region. Until recently dismissed as secondary investor markets, Sun Belt metropolitan areas account for the eight top-rated overall real estate prospects. Sun Belt cities also occupy the top five places in the homebuilding prospects ratings. 

Investment in Alternative Sectors 

REITs and private investors have been much quicker to embrace a broader variety of “alternative” sectors, ranging from niche housing types (student and senior housing) to specialized offices (life science and medical buildings) and warehouses (data centers and cold storage). These sectors are now gaining interest from a wider range of investors because they generally offer higher returns at lower prices, often at limited risk. Tenant demand in many of these alternative sectors are driven more by economic growth, making them less volatile over the business cycle. However, downtown office buildings and regional malls have long been the dominant sectors for institutional investors and still account for almost a third of the value in the NCREIF Property Index. 

The Maturation of Proptech 

The real estate industry is working to close the opportunity gap and digital divide by empowering its people to bring skills, passion and technical expertise to the wider world. The pandemic provided new impetus and scope for technology adoption as the need to better assess and allocate investments, understand and manage properties accelerated sharply. For example, some businesses are adopting property management software that determines the required level of cooling or heating based on building occupancy, saving them roughly 55 cents a foot per year. Despite the higher acceptance, the property technology “proptech” industry still has significant areas for future growth. Businesses must also deliver to stakeholders while continuously adapting to the current realities. 

The Top 10 Markets in Emerging Trends in Real Estate 2022 

Sun Belt cities continue to dominate the Top 10 overall real estate prospects, powered by strong growth, homebuilding outlook, affordability and job prospects: 

  1. Nashville, Tennessee. 
  2. Raleigh/Durham, North Carolina. 
  3. Phoenix, Arizona.
  4. Austin, Texas. 
  5. Tampa/St. Petersburg, Florida. 
  6. Charlotte, North Carolina. 
  7. Dallas/Fort Worth, Texas. 
  8. Atlanta, Georgia.
  9. Seattle, Washington.
  10. Boston, Massachusetts.

Now in its 43rd year, Emerging Trends in Real Estate is one of the most highly regarded annual industry outlooks for the real estate and land use industry. It includes interviews and survey responses from nearly 1,700 leading real estate experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers and consultants.