According to a PwC and the Urban Land Institute report, Emerging Trends in Real Estate 2022, real estate professionals should continue embracing a philosophy that embodies three themes: convenience, flexibility, and resiliency.
The COVID-19 pandemic disrupted every sector of life. It confounded and defied economic predictions. While many businesses forced to close ended up staying shuttered forever, thousands of jobs vanished seemingly overnight, and the stock market took a dive, a prolonged depression never materialized.
First, the Numbers
The economy continues its recovery, and experts predict the U.S. CRE market to return to pre-pandemic levels by 2023—and equity real estate investment trusts (REIT) investors potentially winning big. The Urban Land Institute (ULI) predicts total annual returns will reach 27.8% this year, higher than 2019’s previous 26% high. Its report also found the forecast will approach the 30.1% peak of 2014 and nearly double the 15.0% spring 2021 forecast. The 2022 and 2023 forecasts will come closer to the 20-year 11.3% average (at 10% annually).
With RevPAR falling 47.4% in 2020, the Fall 2021 ULI Real Estate Economic Forecast for 2021 to 2023 predicts the hotel sector faces struggles in the near term. The original 2021 forecast has “collapsed” from 29.6%—predicted this past spring—to 5%.
ULI analysts believe this year’s GDP growth, while lower than spring numbers, will reach 5.7% with long-term forecasts stabilizing and staying at or above the 2.5% 20-year average. Inflation is still climbing but ULI says it’s “optimistic the spike [at 6.2% in October] will recede rapidly to near 2019 levels in 2023.” The organization expects interest rates will rise gradually to 2.25% in 2023, which is lower than the 3.07% 20-year average.
Meanwhile, the capital markets forecast shows “growing optimism about commercial real estate transaction volumes in the next three years with forecasts falling just short of 2019’s peak of $617 billion,” according to ULI. Banks will issue commercial mortgage-backed securities (CMBS) at a rate similar to 2019’s peak $98 billion—climbing from the forecast $80 billion in 2021 to $95 billion in 2023.
Vacancy rates could see a rise of 200 basis points in offices this year, with slight improvement by 2023. Office rental rates are projected to fall 1.5%, although multifamily and industrial properties show growth signs with each anticipated to peak at 5% in 2021. Office vacancy rates, on the other hand, may hit a 10-year high of 16.9% annually this year and next.
Influence of ESG
PwC’s Emerging Trends Survey found 82% of respondents take Environmental, Social, Governance (ESG) elements into considerations when analyzing and making investment and operations decisions. Of those respondents, 52% consider ESG because of risk management and 48% consider ESG elements as they pertain to tenant/investor requirements.
A recent United Nations climate change report concluded that to prevent future damaging weather events and disasters, nations must make concerted changes now. For the property sector—one of the largest contributors to climate change and greenhouse gasses—it means rethinking many approaches. Buildings account for 40%+ of global energy use and carbon emissions, but the property sector has options—and a strong position—to reduce impacts and increase resilience to environmental risks.
It is possible, and necessary, to create value through ESG. Approaches include setting performance-based standards in ESG and zoning codes and then empowering developers, architects, and other stakeholders collaborate to work out the specifics.
Amenitized Work, Live, Play Spaces
Real estate developers recognize a rising demand in wanting walkable, amenitized environments that support residents’ desires to live full, well-balanced lives without having to drive everywhere. The Brand Guild’s 2021 Commercial Real Estate Trend Report—Live. Play. Work. The Great American Shakeup—examined American’s priorities pre- and during the pandemic. The report found a serious reprioritization as people reevaluated what mattered most: health, wellness, mental health. The imbalance identified by the report? Work-life.
Co-CEO and cofounder of The Brand Guild, Barbara Martin said, “We’re seeing colossal shifts in how people use space. But real change takes time—and real estate will be ground zero. Developers need to think in phases. In the short term, it’s about addressing the immediate wants and needs of tenants and consumers and working to meet them where they are. In the long term, it’s about imagining where knowledge work can happen and what needs to come with that in your portfolio.”
Pre-COVID, almost 1/3 of Americans ranked work as priority in their lives. With the pandemic gradually subsiding, that percentage has dropped closer to a quarter. The takeaway? CRE industry and businesses need to address and adjust to that shift from “live, work, play” to “live, play, work.”
Investor Exploration of Alternative Sectors
The ULI/PwC report, which interviewed 1,700 industry efforts on individual property sectors and markets, also found REITs and private investors exploring other niche sectors. Senior housing, student housing, self-storage, and life sciences all have higher returns at higher cap rates, often with zero higher risk.
Senior housing has rebounded with increased demand, especially in Q2 2021. Occupancy levels remain low, but the demographics of an aging population suggest huge demand in the coming years. The 85+ population in this country will increase 177% over the next 30 years, and according to Multi-Housing News, an estimated $6 billion to $8 billion is ready for investment in this sector.
Among the subsets of multifamily housing, student housing is also considered recession-proof. While remote learning took precedence in 2020, by summer 2021, lease demand had increased. The report suggests that the turndown in student housing demand has readjusted to pre-pandemic norms.
Demand for self-storage increased dramatically during the pandemic—possibly resulting from a shift to remote work and household moves or propelled by the desire to pare down and clean out overflowing homes. Regardless of cause, vacancy rates dropped to historic 5.5% lows by the end of 2Q 2021, translating to higher rental fees. Even with the pandemic receding, renter demand will remain high.
Small businesses, too, have increased their reliance on self-storage while they pivot to and accelerate their own ecommerce models. Evolving demand for self-storage has generated significant investment interest in the sector, with large investors (like Blackstone, which announced a $1.2 billion acquisition of Simply Self-Storage in October), are taking note and buying properties.
Increased demand for consumer healthcare services, vaccine R&D, and new technology has attracted more investors to this sector, especially since March 2020. With the uncertainty around how office environments will look—and whether workforces will continue to use a hybrid model over a traditional in-person environment—investors have begun exploring both life sciences labs and medical office buildings.
Healthcare needs—and changing consumer expectations—have increased demand for more diverse healthcare properties, and a definite transition away from traditional hospital campuses. That trend will continue well beyond 2022.
How CREA United Can Help
If you’re involved in commercial real estate, whether you’re looking to expand your portfolio, explore other sectors, or purchase/sell property, talk to someone at CREA United. This group of individuals and successful firms represents all disciplines within the commercial real estate industry. Our members belong to various groups within the CRE sector: Industrial, Retail, Office, Medical & Healthcare, Corporate, Central NJ Industrial, Cannabis, Multifamily, Construction, and Dentistry.
We represent 74 firms covering all aspects of the CRE industry and employ a unique approach to providing collaborative, expert advice on purchases, sales, leases, development, refinance, and construction.