CRE Outlook Stellar, But Changes Coming
Amid overwhelming optimism about commercial real estate, the industry faces an enormous amount of change, driven by trends that include migration across markets, shifts in the way people work, the impact of climate and rising inflation.
Some 84% of industry executives believe the outlook for 2022 is excellent or good, compared to only 1% who judge the outlook to be abysmal or poor, according to Emerging Trends in Real Estate 2022, which was released last week by PwC US and the Urban Land Institute (ULI).
Optimism is based on strong fundamental performance, including robust absorption and rent growth and a huge inflow of capital into the sector that has pushed acquisition yields to record lows in most property segments.
“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. Said Byron Carlock, PwC Partner and U.S. Real Estate Practice Leader: “An abundance of investable capital, low interest rates and a continued demand for many product types has created a positive environment for our industry.”
The report explores how the property sector has seen encouraging and unprecedented recovery from COVID-19. At the same time, the pandemic is producing changes in the way people work and where they want to live that will have implications for the industry for decades to come.
“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,” Kramer said. “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.”
Carlock noted a host of challenges for the industry: “There are rising costs, pending tax reform and new infrastructure spending that could impact the labor market. There are also various social issues, 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.”
Among the trends covered by the report are:
- Climate risk. 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 players in factoring market-level climate risk into decision-making.
- Work from home. The home as base is expected to maintain momentum among office workers. Almost two-thirds of real estate professionals believe that fewer than 75% of workers will go to the office three or more days a week in 2022. In fact, industry leaders predict the need for office space will likely decrease 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.
- Housing 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.
- Alternate 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 attracting interest from a wider range of investors because they generally offer higher returns at lower prices, often with limited risk.
Read the full Emerging Trends in Real Estate 2022 report.