Introduction
The real estate industry is facing significant challenges in the coming year, with a range of issues expected to have a major impact. From inflation and interest rates to cybersecurity interruptions, these challenges are reshaping the way we think about and operate within the real estate market. This article will delve into the top 10 issues affecting real estate in 2022-23, providing insights and analysis on each topic.
1. Inflation and Interest Rates: Some Clarity To Mixed Macroeconomic Signals
The leading concern within the commercial real estate industry is the influence of inflation and interest rates. As the U.S. Federal Reserve focuses on these factors, tightened monetary policy is placing upward pressure on cap rates and market volatility. While real estate transaction volume remains vibrant, the pandemic and policy errors pose threats to continued economic growth.
2. Geopolitical Risk: Political, Capital Markets and Real Estate Uncertainty
Understanding the implications of geopolitical risks in real estate can be challenging. These risks materialize as volatility due to uncertainty about the future impact on economies and financial markets. Conflicts, shutdowns, and local politics all contribute to the uncertainty. The impact of geopolitical risks is amplified by rising interest rates and inflation, adding further complexity to an already blurred landscape.
3. Hybrid Work and the "Great Decentralization": A Correction Towards Resiliency?
Remote work has become a permanent part of the work landscape, leading to a surprising shift in urbanization patterns. The "Great Decentralization" has seen people moving away from large urban employment centers to suburbs, exurbs, and destination locations. While remote work has its challenges, workers appreciate the autonomy it provides. Companies must adapt to retain employees by accommodating remote and hybrid work in the near term.
4. Supply Chain Disruption
Supply chain issues have become a global problem, impacting various aspects of the real estate industry. Delays in deliveries, rising costs, labor shortages, and material scarcity are affecting businesses and their properties. Developers and contractors are facing challenges in completing projects, leading to increased costs and unmet contractual obligations.
5. Energy: Sustainability, Affordability & Availability
The focus on healthy buildings and workspaces has increased energy consumption, affecting sustainability and affordability. The incorporation of technology and increased demand for energy resilience are important for maintaining critical building functions. Rising energy costs can also impact real estate, affecting consumer sentiment and spending in retail and hospitality markets.
6. Labor Shortage Strain: Where Have All the Workers Gone?
The pandemic and government benefits have led to a shortage of workers in various industries, including commercial real estate. The mismatch between available workers and job openings, along with workers' reassessment of their employment status, has resulted in labor shortages. This shortage impacts property markets indirectly, as occupiers lease less space due to a lack of workers.
7. The Great Housing Imbalance
Housing in the United States has been underbuilt for decades, leading to a shortage of new supply. The pandemic has further increased demand for housing, leading to a surge in new household formations. Multifamily construction has not kept up with demand, resulting in low vacancy rates and rising rental rates. Affordable housing remains a challenge, causing ongoing out-migration and straining infrastructure capacity.
8. Regulatory Uncertainty
The regulatory landscape at all levels of government lacks clarity, stability, and predictability. Changing regulations impact development projects, add time and cost, and impose new operating restrictions. The federal government's response to climate change and the increasing number of state and local regulations are shaping land-use patterns and requiring the production of housing in urban areas. Regulatory uncertainty is a top concern for real estate investors and operators.
9. Cybersecurity Interruptions
The real estate industry is facing cybersecurity risks as buildings' physical and environmental functionality becomes more technology-dependent. Insurance gaps, ill-equipped building managers, and hackers pose risks to real estate assets. Cybersecurity incidents can result in life safety issues, equipment replacement, network access, and brand damage. The industry must address this systemic problem and implement cybersecurity measures across the value chain.
10. ESG Requirements Forcing Change
Government regulators are passing laws and regulations regarding ESG criteria for real estate assets. This shift requires real estate investors to measure, report, and disclose their assets' energy and water use, waste management, carbon emissions, and climate change risks. ESG requirements are driving innovation in the design, development, and renovation of buildings to meet sustainability goals. Cities and municipalities are also implementing local ordinances to address climate-related risks and reduce environmental impacts.
Overall, the top 10 issues affecting real estate in 2022-23 require the industry to adapt to changing economic, social, and environmental landscapes. Addressing these challenges will be crucial for real estate professionals to navigate the evolving market and ensure long-term success.
Image:
Source: The Counselors of Real Estate