High inflation rates and rising interest rates are top of mind for everyone in the real estate industry and outside it, too. Naturally, these two issues also top the annual list of Top Ten Issues Affecting Real Estate generated by a survey of the 1,000 members of The Counselors of Real Estate®, a global organization of commercial property advisors. The annual report analyzes current trends in the context of understanding their impact on the year ahead.
For multifamily developers, perhaps the most significant issue identified (seventh on the list) is “The Great Housing Imbalance.”
“Markets that have not been able to provide lower-cost housing have experienced ongoing out-migration and risk stressing infrastructure capacity as renters are driven further out to the exurbs,” the report asserts.
In the multifamily sector, demand during the first quarter of 2022 was more than double new deliveries. The report says that more than four million new multifamily units are needed by 2035 to meet demand. However, 40% of that demand will be in just three states: Texas, Florida and California. Demand is also expected to be double the national trend in secondary cities such as Boise, Austin, Raleigh, Orlando and Phoenix that have strong job growth, a high quality of life and a relatively lower cost of living.
The top 10 issues affecting real estate in 2022 and 2023 include:
- Inflation and Interest Rates: “An economic slowdown is already underway and the greatest recession risk to real estate is whether rising unemployment and lower household income cuts demand for residential and commercial property,” according to the report. Timothy Savage, a professor at New York University’s Schack Institute of Real Estate, anticipates that CRE transaction volume will remain robust in 2022-23. His analysis is that greatest risk to the economy continue to be pandemic-related supply chain problems and policy errors.
- Geopolitical Risk: “Continued geopolitical uncertainty provides significant headwinds to the economy,” according to the report. “The longer it takes to moderate, the greater the negative implications for real estate.” Both global and domestic issues such as the war in Ukraine, covid-related production shutdowns in China, local regulatory issues around rents and sustainability, and cyberattacks are contributors to inflation and economic insecurity.
- Hybrid Work: Economists expect 50% of the workforce to work remotely or a hybrid manner in the future, which will impact many property sectors including multifamily development in suburban and urban areas.
- Supply Chain Disruption: “Impacting nearly every aspect of real estate, delays will continue to raise costs and cause realignment in supply chain strategies and warehousing,” according to the report. Shortages of materials and accompanying cost increases impact building maintenance, renovation and development and are not anticipated to ease soon.
- Energy Sustainability, Availability and Affordability: “Some of the practical consequences of what building owners and business owners are facing – and need to consider in their business continuity and resiliency planning – include rising insurance costs and the increased investment for on-site energy resilience.” Multifamily owners must adapt to the rising number of people working at home, which means constant demand for power and connectivity. In addition, climate issues increase the need for back-up power for HVAC systems, lighting and elevators.
- Labor Shortage Strain: The labor shortage is a contributing factor to the slowing economy, according to the report. Labor shortages impact construction and renovation projects in the multifamily space and have a more direct impact on demand for office and retail space that could indirectly affect apartment demand in some markets.
- The Great Housing Imbalance: As noted above, markets not providing lower-cost housing have experienced ongoing out-migration and risk stressing the infrastructure capacity in other areas such as exurbs.
- Regulatory Uncertainty: Stability in the regulatory environment is crucial to real estate owners and operators, according to the report. “Changing regulations can add substantial time, risk, and cost to completing development projects and can also impose new and often burdensome operating restrictions on existing properties,” according to the report. “The current regulatory environment at all levels of government— federal, state, and local—throughout the United States increasingly lacks the desired clarity, stability, durability, and predictability that is important to real estate owners and operators.”
- Cybersecurity Interruptions: “This is not a so-called smart building or ‘Internet of Things’ problem, which continues to stack up risks, but rather a 40-year build-up, as our main systems require computers, networks and Internet connections,” according to the report. Investors and owners can mandate policies and requirements for assessments, enforcement and monitoring to reduce the consequences of a cyberattack, according to the report.
- ESG Requirements Forcing Change: Government agencies around the globe are increasingly requiring real estate owners to report and publicly disclose energy and water use, waste, carbon emissions and climate change risks. “These requirements are also instigating much innovation in the design, development and construction of new buildings, as well as renovation of existing stock with long lifespans ahead of them,” according to the report.