I recently read an article on PwC’s website about emerging trends in real estate. You can find the full article below, but I wanted to note a few key takeaways.
- Take the long view – Current market conditions aren’t enough. Real estate companies must consider future trends and potential shifts in the industry. One example in the article is how the rise of remote work will have a significant impact on residential real estate, as more and more people look for homes that can accommodate a home office.
- Remote and hybrid work is here to stay – Real estate developers and investors need to start adapting to this new reality. From building more homes with dedicated workspaces, to offering flexible lease options for businesses, real estate companies need to be prepared for this shift in work style.
- Phoenix is on top for growth – This is good news for local developers and investors. However, it’s important to remember that the market is constantly changing. Now, more than ever, real estate leaders need to stay up-to-date with the latest trends to make informed decisions.
The full article is linked below, but if you want to discuss any of these trends further, give me a call.
Charlie Coppola
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Taking the long view
The real estate industry is moving beyond what it perceives as cyclical headwinds — i.e., rising interest rates, declining gross domestic product (GDP), sinking deal flows — and taking a long-term approach to real estate assets. The mood among the real estate professionals we interviewed for this year’s Emerging Trends is cautious optimism. Their plan: Ride out the current slump and reposition their firms for another period of sustained growth and strong returns.
We find it striking that so many people in the industry are willing to look beyond cyclical headwinds. As one real estate professional told us, “We’ll look back in 10 years, and the prices that seem astronomical today will seem like a bargain.”
This year’s Emerging Trends also reconfirms two sometimes contradictory property market trends: Aspects of the industry are “normalizing” (reverting to pre-COVID patterns), while others appear to have permanently changed as the pandemic has altered how and where we use different types of properties. These patterns are playing out in how real estate professionals view prospects in the 80 markets we tracked. No matter the trends, we believe companies must be flexible and adapt quickly to market changes.
Work from home vs Return to office
Most workers are still not back in the office nearly as often as they were before the pandemic. Various sources suggest that less than half of workers actually go into an office on a given day, at least in major markets. This has led some leading tech firms and investment banks, for example, to issue ultimatums for a return to the office.
It’s still too soon to know if such employer demands will translate to more in-office work, as previous requests have had little apparent impact. In the end, it may be hard for employers to put the toothpaste back in the tube, as there appears to be a shift in consumer behavior. Today, most people don’t want to commute to the office more than occasionally.
This sentiment is having an impact on the real estate industry. The insiders we interviewed suggest that somewhere between 10 and 20 percent of the office real estate stock needs to be removed or repurposed. In the remaining office space, landlords will need to do a better job of delivering what tenants want.
As employers and their workers settle on their work preferences, many firms will continue to hold onto their offices either as a precaution in case they need the space in the future or because they could not break their lease. However, more firms are downsizing or not renewing their expiring leases. As a result, vacancy rates are still rising slowly, in contrast to every other major property sector. Many tenants have even started subletting their office space until their leases expire.
No one knows for certain the amount of office space that will be needed for workers in the years to come. However, we do not expect a mass departure from office buildings going forward — even under the most pessimistic scenarios.
“Although real estate capital markets are constricting, they are still open for business, investors are still buying high-quality properties, lenders will continue to lend, and companies should move forward with cautious optimism through this current cycle and prepare to adapt to quick market changes.”
Let’s look at the top-ranked real estate markets for the year
Aspects of the industry are normalizing (i.e., reverting closer to their pre-COVID patterns), while others appear to have sustained permanent shifts to a “new normal”, following the pandemic-induced changes in how and where we use different types of properties.
Reinforced in this year’s Emerging Trends is the dominance of “magnet” markets, many of which are in warmer Sun Belt regions. They top the Emerging Trends “Markets to Watch” standings, while the number of markets in cold-weather climates in the Northeast and Midwest decline in ranking.
Almost all of this year’s survey of top-ranked real estate markets are in faster-growing southern and western regions and away from the coasts. Nashville was once again the top-rated metro area, while the Dallas/Fort Worth area jumped five spots from a year ago to become the number two-ranked market. The Atlanta metro area scored higher in this year’s survey, jumping to the number three-ranked spot from number eight last year.
Quality of life and affordability play a big role in where people choose to live, and many of the markets that received relatively lower scores this year have inadequate infrastructure for their population size and growth.
Raleigh, Phoenix and Charlotte fell in rankings this year but still remain in the top 10. Reflecting slower coastal growth, Seattle exited our top 10 list, but Miami climbed up to secure the number seven ranking.
