The Urban Land Institute and PwC recently released their 2021 Emerging Trends in Real Estate®: Global Outlook report, which explores predictions for the global real estate industry for the coming year. PWC annually conducts an extensive survey of business people and academics in the real estate field, and then produces a comprehensive and detailed report on the subject.
This year, the report focuses on the mid- and long-term impacts of the global pandemic, including changes in how people live, work and spend money and the economic impacts of massive government spending in response to the pandemic. The report also looks at the increasing pressure on the real estate industry to respond to climate change as a result of government regulation and investor preferences.
Following are some highlights of the Emerging Trends in Real Estate: Global Outlook report and a link to the report in case you want to take a deep dive.
Impacts of COVID-19 Recovery
Working From Home and Online Shopping
COVID-19 accelerated existing trends toward working from home and online shopping. In Asia, more traditional office occupancy is expected to continue, but in Western markets, analysts expect a turn toward making expensive office space more flexible for companies that want a hybrid work-from-home and in-office structure.
Asia Pacific Will Lead the Recovery
The Asia Pacific area is expected to lead the recovery from the pandemic because it was already growing quickly and more centralized governments are better equipped to quickly respond to the pandemic and ensure compliance with response regulations. Asia Pacific was considered a good investing environment prior to the pandemic and investors continue to put money into this area.
Growth Spurred by Consumer Spending
Consumer spending is expected to spur growth post-pandemic because individuals have accumulated cash as a result of government programs and are now getting vaccinated, allowing them to get out and spend. Spending is already strong in Asia Pacific areas and the same is expected to occur in Western economies.
Concerns of Bubbles
As a result of stimulus and other pandemic response spending, government debt is at an all-time high and stock markets are soaring, raising concerns of bubbles, at least in the equities sphere. Further, once government support ends, businesses may have COVID debt that suddenly becomes unmanageable, particularly in the retail/leisure sectors. Governments are expected to keep interest rates low despite inflation to avoid this, but some players think this combination will lead to results that are not predictable based on traditional economic theory.
Focus on Investments in Residential, Logistics and Data Centers
Many investors are continuing to put capital into residential, logistics and data centers rather than office and retail. Big opportunities are available for residential investment, which is seen as a safety play, in markets other than North America. Investors continue to show interest in “impact investments” which address social values such as affordable housing.
Risk of Poor Investment Choices
While many are of the opinion that real estate does not face the same bubble risk that the stock market faces, many do believe there is significant risk related to poor investment choices because there are so many investors eager to deploy capital without a lot of value-add opportunities.
Lenders are expected to adopt a more conservative approach in the coming year. They have managed to work with most struggling businesses to get through COVID-19-related difficulties and avoid a wave of foreclosures and bankruptcies. However, they are likely to wait to see steady cash flow post-pandemic rather than to lend broadly now.
More Financial Distress Ahead
The report notes that “US research signals ‘more financial distress ahead of us than we’ve seen in the past year’, highlighting retail as the sector most at risk.” Buying opportunities are expected in Asia Pacific, India and Australia, which have experienced difficulties in specific sectors such as retail, leisure and hospitality.
Climate Change and Decarbonization is Urgent
Over the last year, the urgency of climate change and the need for decarbonization has reached a fever pitch according to the report. “People are reacting to the evidence of their own eyes,” the report notes. “California and Australia are on fire, and 100-year storms are becoming more and more common.”
Tougher Government Regulation
More importantly, government regulation is beginning to make climate adaptation a necessity rather than an option. For example, New York’s Local Law 97 fines property owners if their building breaches carbon emission levels, the United Kingdom has national building efficiency standards now, and Germany has implemented a carbon tax on commercial buildings that emit too much carbon. Asia, China and Singapore have also recently unveiled net-zero targets, which leads industry experts to expect tougher regulation of real estate to ensure that these targets are hit.
Private Sector Implementing Carbon Goals
Additionally, institutional investors are implementing carbon goals that require projects to comply in order to receive capital. Similarly, private companies are adopting net-zero goals that will impact their choices with respect to real estate. Lessees are also seeking environmental certifications with respect to the property they rent. All of this provides incentive to real estate developers and owners to get ahead of the curve on this issue. However, there is concern about a need for a uniform system for certifying that buildings meet these requirements. Notably, constructing a new fully energy efficient building typically produces more carbon than retrofitting an old building to improve efficiency.