Climate-related risk could be a major headwind for real estate investment

The institutional investment capital that’s been flowing into real estate globally is expected to increase as an already rebounding economy expands. But there’s also a growing consensus among real estate professionals that environmental, social, and governance (ESG) elements will factor more impactfully—and uncertainly—into future development. Broader housing affordability is one of those elements that could create diverse workforces and drive equitable outcomes.

These are some of the trends that arise from a survey of industry experts whose responses form the basis of “Emerging Trends in Real Estate 2022,” the 43rd edition of this series, which was released today. (To download the full report, click here.)

Researchers for the latest report’s co-sponsors, PwC and Urban Land Institute (ULI), interviewed 930 individuals and evaluated survey responses from another 1,200. Private property owners or commercial/multifamily real estate developers accounted for 35% of the respondents; real estate advisory, service, or asset managers 22%.

Among the AEC firms whose representatives were interviewed were BOKA Powell, Brasfield & Gorrie, CM Constructors, Gensler, Kimley Horn, Malasri Engineering, Swinerton, STG Design, Tenet Design, and Turner Construction.

The 100-page report lays out the challenges that lie ahead for the real estate sector to cope with changing consumer expectations and a “massive shift” in the functionality of homes, offices, retail, and healthcare spaces. “Property markets that were once predictable will likely remain in a bubble of uncertainty,” the reports states. It will also be “imperative” for businesses’ strategies to approach environmental, social, and governance issues holistically.

Industrial and multifamily remain the two hot property types. — Industrial and multifamily remain the two hottest investment and development building types.

IS HOUSING AFFORDABILITY INTRACTABLE?

The report finds the real estate community optimistic about its future, and the main reason is “an abundance of investable capital, low interest rates, and continued demand for many product types,” says Byron Carlock, a Partner and U.S. Real Estate Practice Leader for PwC. The real estate industry is also finally getting into the 21st Century by adopting technology to assess investments and manage properties. But despite higher acceptance, property technology “still has significant areas of future growth,” the report states.

Proptech investment increasing — The adoption of property technology is intensifying.

The report highlights several other trends that include a rebound from a COVID-19 induced “brief and muted real estate downturn” in real estate investment. Economic output is forecasted to grow “at the highest rate in decades” in 2021 and 2022. One area of concern, however, is housing affordability, which “worsened” during the pandemic and as the economy reopened. “Affordability will likely continue to deteriorate in the absence of significant private-sector and government intervention,” the report asserts.

Remarkably, 82% of respondents claimed that their companies consider ESG elements when making operational or investment decisions. However, the report also observes that investors “have been slow to incorporate environmental risks into underwriting.”

THE SUNBELT OFFERS FERTILE CRE PROSPECTS

Office space needs are expected to decline — Office space needs are projected to decrease, and that space's use is changing, too.

One of the question marks in the real estate sector revolves around the future value of office space. Nearly two-thirds of the report’s respondents believe that fewer than 75% of workers will return to their offices at least three days a week in 2022. In fact, industry leaders predict that the need for office space will decrease by 5-15 percent in the next three years. This trend is already leading to redesigns of offices for hybrid work patterns and flexible usage.

Cybersecurity seen as an industry disrupter — Real estate experts are concerned about the potential impact of cyberattacks on their assets, among other things.

The office conundrum is compounded by what the report calls the Great Relocation, where highly paid office workers are moving away from their workplaces. The report’s authors think this phenomenon could create more of a suburban and Sun Belt future. “Sun Belt metropolitan areas account for the eight to-rated overall real estate prospects [and] occupy the top five places in the homebuilding prospects rating.”

Nashville was identified as the No. 1 market for real estate prospects, based on growth, homebuilding, affordability, and employment opportunity. It was followed by Raleigh-Durham, N.C., Phoenix, Austin, Texas, Tampa-St. Petersburg, Fla., Charlotte, Dallas-Fort Worth, Atlanta, Seattle, and Boston.

The report points out as well that investors and Real Estate Investment Trusts (REITs) are now more disposed to consider alternative sectors like student and senior housing, life sciences, and industrial. These sectors, the report explains, offer higher returns at lower prices. They are less volatile to business cycles, too.

The Architectural Billings Index measures the general sentiment of U.S. architecture firms about the health of the construction market by measuring 1) design billings and 2) design contracts. Any score above 50 means that, among the architecture firms surveyed, more firms than not reported seeing increases in design work vs. the previous month.