With post-pandemic demand shifts, market uncertainty, and persisting supply constraints as the backdrop, ULI and PWC’s Emerging Trends offers a guide and expert insight on what to expect in the upcoming year. Here are ten (10) things to look out for in 2023 and beyond distilled into a 5 minute read:
1. Going into the new year, moderation will prevail as a potential cyclical downturn will slow residential and industrial sectors while hotel and retail sectors begin recovering. With rising cap rates and falling transaction volumes, multifamily and industrial sectors are likely to revert to previous levels following a period of outperformed expectations. For example, multifamily is expected to return to its long-term historical average of 3% to 4% rent growth, hopefully aiding in increasing affordability. Likewise, office, hospitality, and retail are likely to recover as demand returns.
2. Despite normalization after the pandemic, permanent changes and structural shifts will be reflected in the next year. Compared to other forms of travel, business travel is unlikely to recover in the near future – given the adoption and ease of video conferencing – which will stunt the performance of business hotels, fine dining, and conferences. The U.S. Travel Association expects that business travel will not return to pre-pandemic levels until at least 2026. The shift to e-commerce may decrease from its peak, but online spending will remain strong as it has improved convenience, better pricing, and more extensive selections. trial, multifamily housing, and targeted, niche asset types like single-family rentals.
3. Amidst the current market uncertainty, there is a lack of concurrence between buyers and sellers on pricing, driving down the number of property transactions further exacerbated by the rising cost of debt. As a result, investors are hesitant, with many pulling back or turning their heads towards other investments like equities and bonds.
4. With an undersupply of housing and soaring prices, housing affordability is at a 30-year low. The median existing-home price in the U.S. increased by over 18% in 2021 and another 15% through the middle of 2022, respectively. Between labor shortages, cautious developers wary of excess inventory, and policies limiting new construction, new housing stock lags behind population growth. Mortgage rates are rising significantly, and home prices and rents are unlikely to recover considerably in the face of a potential economic downturn.
5. As investors become increasingly averse to riskier and opportunistic investments, there is a strong and growing interest in industrial, multifamily housing, and targeted, niche asset types like single-family rentals.
6. The last couple of years of structural demand shifts have demonstrated an opportunity for repositioning in retail, office, and older industrial sites. A significant problem in the office market is figuring out what to do with all of the pre-1980 office buildings that are functionally obsolete. The difficulty will be in the execution of these transformations, with necessary upgrades looking expensive and tenant improvements seeming risky in this competitive environment. In the long run, there is a need to retrofit these buildings to decarbonize the assets to meet tenant, investor, and regulator demands.
7. People continue to migrate to sunbelt markets as they are appealing due to lower taxes and fewer regulations. However, the existing infrastructure may have trouble supporting the influx of density and new businesses. The question is whether there will be an infusion of capital and development into these markets to meet demand?
8. With increased funding for new federal infrastructure, such as the $3 billion added in the Inflation Reduction Act of 2022, there is a lot to look forward to in terms of the potential to upgrade and increase necessary urban infrastructure.
9. Climate change may affect demand for housing and investment and risks for particular assets. Therefore, real estate as an industry has ample opportunity and responsibility to mitigate climate change and shift in anticipation of its effects.
10. There are waves of increased regulations, including pressure to have mandated ESG disclosures and policies to help with housing affordability. Where the private sector has not solved problems fast enough, the public sector is stepping in; the question is whether or not these will be better solutions.
Discussion Question: What emerging real estate trends will you be following closely in 2023?
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