The Counselors of Real Estate® and its 900 credentialed real estate advisors create an annual top 10 list of current and emerging issues expected to have the most significant impact on all sectors of real estate. They recently released their 15th annual list based on the group’s insights and included subject matter experts to explain the potential impact of each issue.
While not every topic affects the multifamily sector, here are a few among the top 10 list that do:
Issue #2 The Capital Markets
We’re in a “normalized” rate environment, according to Jim Costello, CRE®, and chief economist, MSCI Real Assets, which is something investors need to accept and understand to reevaluate their strategies.
“Outside of a major calamity, it’s not likely that markets are going to return to the era of extremely cheap debt anytime soon,” Costello wrote. “If anything, new uncertainty around how the Federal Reserve will manage inflation risks raises additional questions about the direction of rate moves ahead.”
Costello’s advice to investors is to stop focusing on interest rates and pay attention instead to fundamentals.
“Focus on what you can control – what happens at the property level,” Costello wrote. “You can manage your property better; hire the right leasing team; and create a healthy industry mix within your tenant base. Simply put, now is the time to focus on fundamentals.”
Issue #3 Construction Costs & The Supply Chain
Construction costs are higher today because of cumulative impacts from trade policies, labor shortages, energy price volatility, supply chain disruptions, and higher interest rates, according to Julian Rondello, CRE®, executive director, valuation & advisory, Cushman & Wakefield.
“Uncertainty around what final construction costs will be, along with ongoing cost pressures, is making project budgeting, underwriting, and forecasting significantly more challenging,” Rondello wrote.
Energy costs, global supply chain disruptions, and longer lead times can create risk for price fluctuations, which impact all areas of real estate, not just new projects.
Rondello’s recommendation is to focus on modernizing existing assets rather than undertaking full-scale redevelopment.
“That creates opportunity for those who understand how to extract value from existing buildings through thoughtful engineering, creative design, and disciplined capital allocation and control of costs,” Rondello wrote. “Ultimately, the key isn't simply spending less on projects. It's about finding that right engineering formula that allows the existing asset to compete with new construction at a fraction of the cost to produce something new.”
Issue #5 The Migration Equation
New migration patterns are emerging that are less dependent on job growth, according to Kathleen Rose, CRE®, president & CEO, Rose Associates. Today, more people are moving for lifestyle reasons, which investors need to watch.
Rose points out that migration decisions are influenced by a complex matrix of lifestyle preferences, quality of life, affordability, tax policy, a desire to locate near adult children and grandchildren, and even climate considerations, particularly with a more mobile workforce and a growing number of retirees.
“Commercial real estate professionals need to look at demographic, economic and other data from a prism and not just one or two dimensionally,” Rose wrote. “The type of product we build for a changing demographic will need to shift. Whether it be housing for aging in place, new work environments for an evolving workforce, or adaptable places for people with differing abilities – it is important to look at a variety of resources to understand the consumer of the next century.”
Issue #6 Housing Attainability
Whether for renters or homebuyers, the lack of attainable housing is creating a ripple effect on communities, employers and people, according to Jenny Walters, CRE®, director, site selection & incentives, Sikich.
“Every site selection decision is now a housing decision,” Walters wrote. “Companies evaluating where to locate or expand are asking not only whether they can hire workers, but whether those workers can afford to live within a reasonable distance of the job—and whether the community offers the housing choices needed to keep them there.”
The fundamental problem, according to Walters, is that supply hasn't caught up to demand, and it hasn't caught up in the right place. She recommends creative thinking, especially about infrastructure and land use.
“Solving this will require more than new construction. It means preserving naturally occurring affordable housing, building a genuine continuum of housing types that lets residents stay in their communities as their needs change, and treating housing as core economic development infrastructure rather than a downstream concern,” Walters wrote.
Issue #7 Distressed Assets & The Refinancing Risk
The looming volume of potential distressed assets have been discussed for years but not eliminated, according to Randall Sakamoto, CRE®, managing director, Andersen.
“Because so much debt has been extended and maturity dates pushed back, it’s hard to get a true sense of the current volume—and the hidden market risk that exists within those maturities,” Sakamoto wrote. “Estimates vary, but most agree that there is still more than $1 trillion in debt maturing in the next 18 months alone.”
While flexible lenders working with borrowers have avoided a surge in short sales and distressed assets, this also led to fewer transactions and possibly distorted market values, according to Sakamoto. In addition, the market isn’t recycling capital because lenders aren’t getting paid back as expected.
He expects elevated risk from the wave of maturities and unresolved loans to persist longer than anticipated. If interest rates rise, that “could be the spark needed that will push more lenders to resolve maturities one way or another. This combination could lead to a rise in short sales and REO inventory,” Sakamoto wrote.
Issue #8 The High Cost of Climate Risk
The financial risk and ROI for sustainability and resilience are increasingly viewed pragmatically rather than ideologically, according to Deborah Cloutier, CRE®, chief innovation officer, Legence, a Blackstone Company, and founder of RE Tech Advisors
“Fundamentally, CFOs, investors, and capital providers want to understand the business case for sustainability and ensure that buildings are financeable, insurable, and attractive to tenants,” Cloutier wrote.
Rising insurance costs and energy prices drive some of the discussion, according to Cloutier, as well as regulatory issues such as building performance standards, emission caps, and disclosure rules.
“The market is starting to see more discounts being applied, and in some cases, buyers who walk away from deals when they realize the scope of investment needed,” Cloutier wrote. “Those properties that have taken steps to mitigate risks and improve resilience with documented upgrades, such as hurricane-rated windows and wind-rated roof systems, are seeing the benefits in lower insurance premiums.”
The commercial real estate industry needs to evaluate the cost and value of sustainability in the context of potential obsolescence, Cloutier wrote.
Issue #9 The Labor Crunch
Worker shortages are increasing costs and stretching project timelines, according to Thomas Rhodes, CRE®, business development specialist, BVRT Utility Holding Company, LLC.
“Labor is constrained across all segments of the construction industry, from designers and engineers to specialty trades to workers swinging a hammer,” Rhodes wrote. “Whether it’s an aging population of workers, fewer new entrants, or tighter immigration policy, the result is the same – not enough people.”
Labor often accounts for as much as 20% to 40% of construction budgets, according to Rhodes.
“It is becoming more difficult to make new housing and commercial construction projects pencil out, while replacement costs continue to move higher,” Rhodes wrote. “Commercial real estate professionals need to be patient and thorough in their valuation analysis. Taking time to gather more data and information could push the analysis of a new construction project from marginal to sub-marginal. Or in other cases, doing a deeper dive might uncover new information that could shift a project from marginal to a huge win.”
To read the full list and deeper analysis of the issues, visit the The Counselors of Real Estate®.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.