Drawing insights from over 2,000 leading real estate industry experts, the Urban Land Institute (ULI) and PwC US have released Emerging Trends in Real Estate 2023. The report confirmed that aspects of the industry are “normalizing” and returning to pre-pandemic ways, while other aspects have permanently transitioned to new normals adopted during the pandemic. The pandemic also reinforced the dominance of the “magnet” markets with nine of the top 10 markets to watch in the warmer Sun Belt region.
"As we enter 2023, the pandemic-driven factors that upended the global economy for more than two years are starting to fade. At the same time, structural changes like the widespread adoption of remote work will likely continue to inform investor behavior,” says Anita Kramer, senior vice president of ULI's Center for Real Estate Economics and Capital Markets.
“A series of long-term factors such as the rising cost of housing, increased climate risk, and declining socioeconomic mobility pose continued uncertainty for the private and public sectors alike. There are also opportunities—the increase in federal infrastructure spending provides the chance to create greener and more equitable communities that can adapt to these challenges."
Highlighting experts’ choices to look beyond cyclical headwinds and focus on a long-term approach to assets, the report shares the industry’s desire to “ride out the slump and position itself for sustained growth and strong returns.” Although housing costs fell in the summer, housing is still too expensive, the report says. Since the pandemic began, the U.S. median home price has risen over 30%, placing housing affordability at its lowest level relative to income in more than 30 years.
“The past few years have been historic territory for the real estate industry, and the pandemic has permanently changed how and where we use different types of properties,” says Byron Carlock, U.S. real estate leader for PwC.
“There are several factors at play determining both the near and long-term future of the industry. 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. The industry should also work closely with stakeholders to help assess they are addressing demands and shifting sentiments while building trust.”
Likewise, the housing market is continuing to sell, just not at the record pace of 2021 and early 2022. Commercial property has also had a record-setting run with strong returns, price appreciation rates, and rent growth. Rent prices continue to surpass historic levels, and demand far outweighs supply.
In both the housing and rental markets, undersupply of affordable housing is not a new challenge. Experts say many factors contributing to affordability issues include restrictive codes and building zoning blocking or limiting new supply, increased complexity around affordable housing development deals, home builders’ cautious construction pacing, and ongoing sector labor shortages.
To find affordability, millions of people have moved to more affordable markets like the Sun Belt. Early movers experienced the shift as a positive solution to affordability, yet prices and rents are now increasing in those once affordable places. While signs of migration are slowing, developer interest and investments are still gaining momentum.
For many markets, it was too much too soon, placing inflation rates in Phoenix; Atlanta; Tampa, Florida; and other Sun Belt metros among the highest in the country. The rates are partly due to soaring housing costs that make up a large portion of the inflation calculation, the report mentions.
According to the report, the top markets to watch are:
- Nashville, Tennessee
- Dallas/Fort Worth
- Austin, Texas
- Tampa/St. Petersburg
- Raleigh/Durham, North Carolina
- Charlotte, North Carolina
The report notes that some of the Sun Belt markets are experiencing growing pains and “big city” problems after years of continuous economic and population growth. However, these markets will remain popular to both business and residential in-migration but at more moderate levels.
In terms of day-to-day living, more functional spaces became preferred during the pandemic. That trend has remained as builders look for ways to maximize or adjust existing floor plans with extra bedrooms or additional flex spaces. To accomplish this, many home builders are right-sizing the home office, taking from larger spaces like the kitchen and dining room, and creating drop zones or workspaces in hallways or lofts, for example.
Public spaces are now being paired with more private areas like prep kitchens, nooks, retreats, and drop zones. Taking a larger share of homeowner spending and space are outdoor areas. Outdoor spaces are trending in the form of “nodes” off primary living areas. This may look like small patios, decks, and balconies instead of just one larger yard.
The Rise of Single-Family Rentals
For traditional builders, the popularity of single-family rentals (SFRs) has created problems as well as positives. Many builders reported receiving calls each day from SFR operators wanting to contract to build homes. A concern is the possibility of SFR becoming a competitor to for-sale homes. The report highlights that nearly half of all master-planned communities are planning a build-to-rent section. A CEO of a national firm in residential architecture said that the SFR space can serve as a “living laboratory” for reducing cycle times.
“As single-family rental operators design new floor plans and build hundreds of houses at a time (with no option choices from consumers to manage), the industry can modernize and become more precise. The repetition will allow for innovation and ultimately reduced cycle times that could, in the end, solve the problem of affordability faster than expected,” the report reads.
A Glimpse at ESG
The impacts of climate change are altering the dynamics of where people want to live. As temperatures and drought rise, cities are already pausing new developments, the report finds. This shift toward greater environmental, social, and governance (ESG) disclosures requested by stakeholders is moving the market toward newer, greener, and more energy-efficient buildings.
Both investors and stakeholders are calling for voluntary action, and the SEC has proposed regulating greater disclosure, transparency, and enhanced consistency in reporting. Due to the potential regulations, demand of stakeholders and the growing impacts of climate change, experts say that it’s important “the industry does not wait to get ahead of the inevitable here. ESG impacts how businesses create value and their ability to attract and retain customers and attract talent and capital.”
Because the built environment only intensifies climate change, Sun Belt cities like Dallas and Phoenix are working with commercial real estate owners to reduce heat islands (buildings and roads that absorb and retain heat) by adding tree canopies, reflective coatings, or vegetation to roofs, and using cool pavements.