Key Takeaways From the Annual PwC, ULI Emerging Trends in Real Estate Report
If there are three words real estate professionals should consider heading into the next year, they are flexibility, convenience and resiliency. Those are the defining themes that came out of the annual Emerging Trends in Real Estate 2022 report, released last week by PwC and the Urban Land Institute.
So, here’s the good news: The narrative of the past year is that real estate is resilient. Generally, property markets, and especially certain property types, have been able to weather the storm and even emerge stronger than before, pointing to the “industry’s collective capacity to adapt to changing market conditions and future unknown risks,” according to the report.
“The real estate industry was in good shape going into the pandemic, and it's in good shape coming out of the pandemic,” Byron Carlock, U.S. real estate practice leader at PwC, told LoopNet in an interview. “We've now got an opportunity to take advantage of very high demand, especially for products in housing and industrial, abundant capital for investment that’s growing, and inexpensive debt. The big takeaway is that the outlook is very positive.”
Though it’s not all rosy, Carlock continued, “[as] we do have rising costs, labor shortages, and an infrastructure bill that will cause competition for construction labor and materials. But generally, things are looking very positive, and the industry has a lot of demand that needs to be satisfied. This is going to be a cycle focused on development and redevelopment [of older properties].”
While the 100-page report offers robust information gleaned from interviews with 1,700 industry experts on individual property sectors and markets, LoopNet zeroed in on three key takeaways for real estate professionals to successfully navigate the industry through the next year.
Investors Show Interest in Alternative Sectors
In contrast to traditional assets such as office, retail and industrial, the report found that REITs and private investors have “been much quicker to embrace a broader variety of alternative sectors.” These niche sectors have higher returns at higher cap rates, but often with no higher risk. “Tenant demand in many of these alternative sectors are driven more by economic growth, making them less volatile over the business cycle — another appealing feature for investors.”
The report focused on four primary sectors toward which investors have pivoted:
Senior Housing: Thanks to the effectiveness of vaccines, senior housing is on the rebound from the dramatic declines seen in the early days of the pandemic. Demand is up — after a full year of negative net absorption, demand turned positive during the second quarter of 2021. However, occupancy levels remain near historic lows. But demographics are working in favor of the sector, and as a large segment of the population ages into potential users of these types of facilities, the value proposition for senior housing will be a boon for most investors looking for growth and stable returns.
Student Housing: Multifamily housing of any type is usually said to be recession-proof, and that includes student housing. While remote learning took its toll on the sector in 2020, demand for new leases surged in summer 2021, and occupancy rates and rents have increased as students headed back to school in the fall. “The end-of-leasing-season data for fall 2021 suggest that the industry has finally normalized with pre-pandemic norms and that the worst of the downturn is in the rearview mirror,” stated the report.
Self-Storage: Pandemic-induced factors, including the shift to remote work and subsequent household moves, and a new emphasis on outdoor activities created increased demand for self-storage facilities, pushing the vacancy rate to historic lows of 5.5% at the end of the second quarter of 2021. This in turn pushed up average asking rents. Renter demand is anticipated to exceed supply in the near future, even as some pandemic-driven factors dissipate, according to the report, which found through interviews that sales volume is high and climbing.
Life Sciences: A focus on vaccine development, greater demand for consumer healthcare services and new technology has attracted investors to this niche sector over the past 18 months. The report likened the burgeoning sector’s trajectory to the tech boom seen in Silicon Valley over the past two decades. The uncertainty surrounding the role of the traditional office has also shifted investor attention to life sciences labs and medical office buildings.
In addition to the report’s asset types to watch, the increased attention on the healthcare space is also causing a shift within that sector, Carlock told LoopNet.
“As healthcare and retail go through their transformations, we are seeing great demand for different types of healthcare properties. Healthcare providers are trying to be closer to consumers, whether its off-site from medical buildings or in retail spaces, but what’s happening is that they’re moving away from old-school hospital campuses,” he said.
“That’s nothing new, it’s just a transformational trend that is continuing.”
Carlock also pointed to the single-family rental market as a good bet for smaller or non-institutional investors.
“Look at the growth that happened there, where mom and pop rental owners could get inexpensive financing and renovate homes to create a portfolio of their own. You’re also seeing that kind of vibrancy in the 1031 exchange market, where someone might sell family land, for example, and invest in an income-producing property. Small investors can be particularly successful in their local markets because they are closer to the ground and know what the particular needs are in their areas,” he explained.
Regardless of where individual investors are focusing their interest, demand is high across the board and experts expect investment activity to ramp up this coming year.
“There is a ‘tremendous amount of liquidity looking for allocations and investment in real estate,’ said one senior asset manager quoted in the report. Fundraising actually increased in 2020 — a most unusual trend during a recession, when investors typically pull money out — resulting in a record amount of ‘dry powder’ on the sidelines looking to be placed.”
ESG Drives Decision Making
One of the survey statistics that impressed Carlock most was the industry’s focus on its role in alleviating climate change, and the responsibility real estate leaders now feel in mitigating environmental risks. While Environmental, Social and Corporate Governance (ESG) has always been something investors paid attention to and participated in — think green building certifications and other environmental accreditations and initiatives — they have been slow to actually incorporate it into decision-making.
This year’s report found that 82% of respondents consider ESG elements when making operational or investment decisions. That can mean they’re incorporating it into their underwriting, buying decisions or property selection and positioning of assets.
“Our industry leadership has really awakened to the reality that our role in society is about more than bricks and sticks,” said Carlock. “We [the real estate industry] have the opportunity to lead the way with respect to social issues that we can actually have a hand in solving. ESG is clearly something that is top-of-mind for investors.”
The report pointed out that the “growing risks of climate-related property damage may induce more investors to follow the example of leading institutional investors in factoring market-level climate risk into their decision-making.”
Carlock also noted the other social issues the real estate industry is focusing on, such as housing affordability, which severely worsened during the pandemic, and taking a more proactive approach to promoting diversity and inclusion within companies or industry groups.
Sun Belt Markets Offer the Most Opportunity
Historically considered secondary or tertiary markets, Sun Belt markets top the report’s list of promising places for real estate prospects, with eight out of 10 of the “markets to watch” located in this region. These markets showcased potential during the pandemic, as top-tier cities cleared out with closures and remote workers opted for less expensive, nearby alternatives.
Looking at the markets listed in the report, Carlock said they all have similar defining attributes that make them attractive.
“They all stand out for quality of life and they’re also tax-friendly states for businesses. That’s a continuation of last year’s trend as well — the pandemic did show us that the urban exodus out of cities like New York, San Francisco and Chicago were real, but we are already seeing a boomerang back to those cities. But when it comes to the importance of investor favoritism and good cities for development, it always points back to these Sun Belt markets.”
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