Rob Thomson of Jupiter Florida is a Member of the "BILLIONAIRE CLUB" (Youngest member to be inducted by the International Luxury Real Estate
As 2020 winds down, buyers and sellers alike take a huge interest in the real estate industry’s outlook come 2021.
Here are the ten factors that will affect real estate companies likely to shape real estate markets across the globe in the coming year:
One good example is the demand for office space, which continues to decline as companies opt to switch to a remote setup. In contrast, the need for larger spaces may also rise to reduce density in public places, such as banks, restaurants, airports, etc., as people continue to observe social distancing and other health protocols.
As expected, the situation has gone from bad to worse in the months that followed, up to the present. Significant segments of the economy are still experiencing a lull in their operations. Industries such as air travel, retail, construction, leisure, and hospitality are all expecting a winding road to recovery and should rebound, albeit partially, come 2022.
The economic lockdown severely impacted state and local tax revenues, causing a reduction in non-federal government employment numbers and a delay in essential infrastructure projects.
Capital Market Risk
With the Covid-19 crisis weighing heavily on real estate investments of late, capital markets are doing their best to soldier on, ahead of a bumpy recovery.
Numbers show that the investment volume in the first three quarters of 2020 trended downwards by 44% compared to those recorded in the same period last year. Lending activity has also been sluggish due to the risks involved over near-term rental income. Not to mention, 61% of buyers seek bargain prices, and only 9% of sellers are willing to meet that demand.
Such numbers indicate no less than a bumpy road over the next six months at the least. However, it is to be expected that not all real estate assets are equal. During this downturn, investors shifted their interest towards industrial and logistics resources, while apartment complexes also continue to be resilient amidst distress calls from other industries.
Public and Private Indebtedness
Local indebtedness funded by local taxes has a profound effect on commercial real estate proceedings.
The US national debt has increased to at least $26 trillion in just six months -- with trillions more ahead in fiscal rescue intervention and stimulus. Such growth in the level of debt brought on by the pandemic isn’t sustainable, not by a long shot, and would impact commercial real estate in several ways.
Many companies are bracing for:
- reduced demand for housing
- interest rates that are likely to surge to attract new capital, and
- the need to repair or upgrade aging infrastructure and fund essential projects in the future
Reports from the National Low-Income Housing Coalition show a shortage of at least 7.2 million affordable rental homes for below-average income renter households. The lack of affordable properties for sale causes rental prices to shoot up and the value of multifamily investment properties to appreciate.
The Counselors of Real Estate (CRE) notes solutions to this crisis, as proposed by members of the said organization, including:
- The expansion of taxpayer-funded, one-time front-end subsidy programs for low-cost housing
- Use of the power of zoning to come up with subsidies necessary for providing more affordable housing and market-rate housing at no additional cost to taxpayers
- Finding ways to overcome “not in my back yard” opposition
Flow of People
The flow of people within and between countries has always been a critical proponent of a real estate venture’s success and the economy in general. With the imposition of health protocols that cause unprecedented mobility challenges, this flow has come to an abrupt halt.
It has become increasingly evident how badly reduced migration, coupled with behavioral changes brought upon by the pandemic, can hurt the demand for residential, retail, and hospitality real estate properties.
Historically, the flexibility of people to move around has driven productivity in real estate markets. Eventually, stakeholders can determine real estate implications by:
- How long the current behavioral changes caused by the Covid-19 virus lasts.
- The quality of living, working, and healthcare innovations that will emerge.
- The effectiveness of leadership that world leaders will demonstrate.
As mentioned previously, the pandemic will have a lasting impact on how real estate spaces will be designed and used moving forward.
Covid-19 highlighted several key factors of commercial buildings, including their location, mechanical infrastructure, interior configuration, and even use.
Real estate developers are expected to place a premium on the density and affordability of the following:
- Social Services and Healthcare
- Cultural, Sports, and Recreational Activities
- Job Opportunities
Each one of these will play an even larger role in urban planning and will come with significantly-improved expectations on capacity.
Finally, since physical distancing will continue to be the norm, intentional designs will become rampant. These designs shall resemble older European cities wherein public spaces, residential, office, and retail establishments are seamlessly integrated.
Technology and Workflow
Another direct effect of the pandemic is the urgent need to develop technology that people can use to monitor, manage, and mitigate risks.
Several factors contribute to the urgent incorporation of technology in the built environment, including:
- The need for reconfiguration and change of outdated operating methods
- The surge in demand for remote work
- The migration back to the traditional office setup
Since many technologies will evolve from a mere “nice to have” to “mandatory,” necessity will foster the creation of better and smarter work processes, even buildings for operations.
Everyone will soon benefit from more efficient and safer spaces that are better equipped to handle the next big crisis.
Funding for infrastructure remains elusive at present. As a result, basic infrastructure needs won’t be met and could negatively impact development patterns and real estate values.
Unfortunately, certain factors like terrorism, cyberattacks, extreme weather, and the coronavirus pandemic further complicates the infrastructure crisis.
Since being subjected to stern preventive measures at the onset of the health crisis, retailers worldwide have increasingly relied on online sales to drive revenue.
To support their businesses, warehouse and distribution facilities will remain important, even when physical stores gradually reopen and the demand for online retail stores potentially subsides.
Environment, Social, and Governance
Environment, Social, and Governance (ESG) remain a critical component of real estate investment. As the world gears toward the so-called “new norm,” the significance of addressing ESG concerns remain paramount.
It is the opinion of the CRE that ESG has been put into place as a sensible risk mitigation strategy that contributes to long-term value creation that real estate benefited from, historically.
Within the real estate industry, ESG requires a more concerted effort from investors and clients, tenants, residents, and contractors to address pressing concerns.
These concerns include sustainability, health and wellness, diversity, and equity, which are all vital aspects of every decision-making process geared toward countering the risks of climate change, among other things.
© 2021 Rob Thomson Jupiter