For 44 years, the Urban Land Institute (ULI) and PwC have surveyed thousands of real estate investors and developers to gain their insight and produce their annual Emerging Trends in Real Estate report. This year’s Emerging Trends in Real Estate 2023 found that while some of the pandemic-induced changes in the economy and real estate markets have begun to fade, trends such as remote work, high housing costs, climate risk and declining socioeconomic mobility continue to influence investors and policymakers.
Rising interest rates and declining growth are short and medium-term challenges, but increased federal infrastructure spending may offer opportunities to offset those challenges. In addition, as with all real estate, the outlook depends on both the property sector and local market conditions.
Multifamily Sector Continues to Attract Investors
The Emerging Trends report found that investors tightly focus on properties with a strong operating performance and increasingly steer clear of weaker property sectors. Interest in the industrial sector, followed closely by the multifamily sector, is far above other property types. While both have topped the list of most attractive sectors since before the 2008-09 financial crisis, the gap in investment interest between these two sectors and other property types has increased steadily for six consecutive years.
Four factors impacting the multifamily sector identified by the Emerging Trends report include:
- Demographics: Increased household formation is anticipated to support apartment demand through 2030 and beyond.
- Technology: Advances in AI, data and technology will impact building cycles, operations and resident experience cost-vs.-value models.
- Capital liquidity: Investors looking for safety will continue to divert yield-seeking capital into residential rental real estate.
- Policy constraints: Restrictive land use regulations will continue to constrain supply and demand dynamics in many cities, which will lead to ongoing migration to lower cost regions.
Approximately 4.3 million apartment units will be needed to meet demand between now and 2035, which would be an expansion of rental stock in the U.S. by more than 20% in a little more than a decade. However, the report points out the mismatch in supply and demand between market-rate property investors, developers, owners and managers versus the 50% of renters who spend more than 30% of their income on rent and the 25% who spend more than 50% of their income on rent.
However, a tailwind for the multifamily sector for several years is the rise in “rent-by-choice” households, with the share of renter households earning at least $75,000 rising from 20% to 26% over the past decade. The surge in investment in Class A properties in 2021 and 2022 aligns with this group of renters and downsizing aging households, while Class B and C value-add investments match younger and mid-career households shut out of homeownership because of high prices and lack of supply.
New investment is needed for rental development and renovation for households in the 80% to 120% range of area median income as well as affordable housing for lower income households. However, the report found that investment prospects for moderate-income/workforce apartments are the most favorable for any property type for 2023 compared to 2022. Development prospects for this type of apartments are the third highest among all property types.
Regulatory Issues Hamper Multifamily Development
The biggest obstacle to this additional investment, the Emerging Trends report found, is government policies such as restrictions on land use, permitting procedures and other regulations that add to the cost of development. A growing concern is the push for rent regulation. Five states permit local jurisdictions to enforce rent control – New York, New Jersey, California, Oregon and Maryland, along with Washington, D.C. More than half of states (26) prohibit local rent control laws, but proposals are being introduced throughout the country to cap rent increases at 2% to 10%. Proposals to expand rent control have been introduced in Arizona, Florida, Hawaii, Illinois, Kentucky, New Jersey, New York, Washington and Massachusetts.
Top Markets for Investors to Watch
The Emerging Trends survey found the following list of the top 10 cities to watch nearly identical to the list for 2022. The only change is that Seattle dropped off the list and Miami joined it. Nine of the top 10 markets are in warmer climates, but some Sun Belt markets face a lack of affordability and lower quality of life after years of economic and population growth. The report anticipates continued business growth and residential in-migration in these markets, but at a more moderate pace in the coming year.
- Nashville, Tenn.
- Dallas/Fort Worth, Texas
- Atlanta, Georgia
- Austin, Texas
- Tampa/St. Petersburg, Fla.
- Raleigh/Durham, N.C.
- Miami, Fla.
- Boston, Mass.
- Phoenix, Ariz.
- Charlotte, N.C.