This year will likely be defined by its deluge of black swan events, with the coronavirus pandemic, ensuing economic downturn, civil unrest, and sustainability and environmental issues leaving marks on multiple industries.
For real estate, that can be layered on with supply and demand imbalances, property valuation ambiguity and possible turning points in how people interact with the world — and particularly the built environment — around them.
These challenges pervade The Counselors of Real Estate‘s newly released list of top 10 issues affecting real estate for 2020-2021. The Counselors of Real Estate 2020 global chair Michel Couillard revealed the organization’s top 10 while speaking at the National Association of Real Estate Editors’ Industry Insights webinar.
From No. 10 to No. 1., these are the top issues the Counselors, an invitation-only group of international real estate experts, see impacting the real estate market today:
No. 10: Environmental, Social and Governance
As millennial investors and climate change experts gain a greater footing in the real estate and public opinion spaces, environmental, social and governance issues are expected to become critical components of how real estate investment dollars are spent in the future.
One of the recent drivers of this trend is the financial impact of the coronavirus outbreak and the subsequent building shutdowns enacted to control its spread. The virus itself highlighted the real estate market’s need for stronger health and wellness components inside buildings, The Counselors of Real Estate said.
The Counselors of Real Estate believes ESG initiatives will help investors and real estate professionals mitigate environmental and health risks while creating long-term real estate value through quality environmental control solutions and savings through sustainability initiatives.
No. 9: Infrastructure
Infrastructure in the U.S. is critical to ensuring the nation’s real estate market has the logistics, transportation systems, technologies and highways needed to transport goods and connect businesses and customers.
The Counselors estimates there is a $15 trillion funding gap in the investment of critical infrastructure and foresees a future where the country requires more infrastructure investment to curtail everything from a future healthcare crisis to extreme weather and cyberattacks. The growth of America’s e-commerce logistics space is expected to put even further strain on the system.
With the nation’s public infrastructure investment activity lagging behind preferred levels, The Counselors recommends the development of strong public-private partnerships to fund future projects.
No. 8: Technology and Workflow
The coronavirus chased most U.S. workers home in March, highlighting the need for office tenants, businesses and landlords to operate remotely and enhance their workflow solutions on-site and off-site.
The Counselors of Real Estate foresee a future where technologies like remote working, contactless doors and entries, improved water and air monitoring, remote building services and health screening technologies go from “nice to have” amenities to “necessary” tools of the trade.
Many U.S. workers grew accustomed to these tools during the pandemic, which is expected to prompt an ongoing interest in remote working and the need for buildings that have investments in technologies that control density, traffic and wellness inside their spaces.
No. 7: Space Utilization
The coronavirus outbreak may have a lasting impact on how real estate developers and operators establish building occupancy, density, floor plans, mechanics and exterior and interior building configurations.
The virus will provoke a level of real estate space modernization not seen since the end of World War II, according to the Counselors. It predicts there will be increased emphasis on urban planning and how space requirements and healthcare issues will impact everything from sports and recreational facilities to housing, jobs and social services.
There also will be a focus on the ongoing creation of connectedness, nature and walkability. Meanwhile, classic retail formats will require overhauls in the use of their spaces to ensure their long-term survival.
No. 6: The Flow of People
With a May Harris Poll saying nearly 40% of urbanites intend to flee urban centers for less dense areas and suburbs and foreign travel and immigration grinding to a halt, the flow of people is expected to be the sixth-most-significant issue impacting real estate in 2020-2021.
Experts expect communities to change their habits from where they live to how they work and interact with others in restaurants and entertainment facilities. What this will do to real estate demand is still unknown, but it could be significant, The Counselors said.
The flow of people inside buildings and across the U.S. could reshape everything from healthcare to living and working. As more Americans gain access to remote working or alternative workplace options, this could significantly impact where people live in relation to their jobs and work assignments.
No. 5: Affordable Housing
Affordable housing remains a critical issue for U.S. real estate professionals, but they continue to struggle with how to finance it and combat strong feelings from residents that don’t want this type of product in their neighborhoods.
The National Low-Income Housing Coalition projects a shortage of 7.2 million affordable rental homes for those with incomes at or below the federal poverty level, the Counselors report says. A dwindling supply of for-sale homes in the U.S. is also causing multifamily housing prices to rise, further enhancing rental affordability issues in U.S. markets.
The Counselors recommends increasing the approval process for “inherently beneficial use” projects at the city level to combat opposition, while also expanding taxpayer one-time front-end subsidy programs for affordable housing. The group also encourages the use of subsidies from federal, state and local governments and recommends the use of zoning to create subsidies that will foster the development of affordable housing at no additional cost to the taxpayers.
No. 4: The Public and Private Debt Bomb
The debt that individuals and the U.S. carry is going to have a significant impact on the nation’s real estate market for years to come. The Counselors notes that the U.S. national debt now sits at $26 trillion, up from $23 trillion six months ago. That equates to $210K per taxpayer, and the Counselors say it is hurting savings and investments.
Student loan debt sits at $1.7 trillion, which will suppress millennial spending in the housing market and limit auto purchases, travel and leisure spending. Total personal debt sits at $20.5 trillion, or $62K per citizen.
All of this debt is expected to affect everything from interest rates, which will have to rise to get new capital to fund debt, the Counselors said, to the country’s ability to invest in critical infrastructure projects like 5G to compete with other nations.
No. 3: Capital Markets Disruption
The coronavirus and ensuring economic fallout disrupted the U.S. capital markets, leaving real estate analysts with numerous ambiguities like uncertain real estate values, difficult underwriting scenarios and zero interest rates, the report says.
Pricing debt is much more challenging today; and even though federal intervention kept the capital markets stable, the industry is still likely to face more late payments and loan defaults in the coming months.
The commercial mortgage REIT sector fell more than 36% year to date, and re-evaluation is expected in the lodging, retail and office segments. Couillard expects distressed asset sales will hit the market by fall and extend through next year. Assets in the lodging, retail and office sectors also face severe revaluations after the pandemic disrupted their cash flows and revenue.
No. 2: Economic Renewal
The No. 2 issue impacting the real estate market is the state of the U.S. economy, with the pandemic deepening debt and job growth issues underpinning the economy. The Counselors’ report said the economy had already reached a tipping point prior to the virus outbreak, with annual job growth in the U.S. reaching only 2 million in 2019, down from 3 million in early 2015.
Parts of the economy face a long way back after the virus, with leisure, hospitality, retail and air travel expected to see slow and partial rebounds by 2022, the report said. The healthcare industry also is expected to see job struggles and financial losses from the virus.
Overall, the Counselors predict the real estate market faces a W-shaped recession, with some jobs permanently lost. Once the economy reaches its first year of post-coronavirus recovery, the economy is expected to be subdued by weak gross domestic product growth, which could be a new normal that will carry through the next decade.
“The post-COVID-19 economy will be constrained by long-run potential GDP growth of only 1.5% to 1.6%. That is the ‘new normal’ for which we need to prepare,” Couillard said in a press statement.
No. 1: The Coronavirus
The No. 1 issue impacting real estate is the coronavirus outbreak itself. More than any other issue, the virus is a game changer that will either reduce demand for office and hospitality space across the nation or expand demand for additional office space as social distancing forces landlords and tenants to dedicate more floor space to individuals.
The pandemic is an outlier that is still too difficult to nail down with no vaccine in play and outbreaks still occurring across the nation. Real estate will continue to feel the aftermath of the virus and may eventually find itself facing questions about what building density looks like and whether social distancing will persist for much longer than initially expected.