Hot sectors and rising markets typically highlight the Urban Land Institute’s annual Emerging Trends in Real Estate report, but the 2022 edition also emphasizes other major shifts in commercial real estate.
“The real estate industry is now being called to participate in the improvement of society,” PwC US Real Estate Leader Byron Carlock said.
Released Thursday during ULI’s fall meeting at the McCormick Convention Center in Chicago and jointly prepared with PwC, the report is a survey of more than 1,000 industry leaders and experts. Alongside thoughts about how well various cities’ office markets are progressing toward recovery or how supply chain bottlenecks may threaten new development, it reflects growing recognition that social problems, especially climate change, may now be the biggest threat.
“The rash of natural disasters and the obvious warming we’ve experienced in the past two to three years have really heightened sensitivity,” Carlock said.
2021 saw devastating wildfires and drought afflict much of the U.S., while other nations, such as China and Germany, suffered deadly floods. That helps explain why more than 80% of survey respondents told ULI and PwC they consider environmental, social and governance issues before making major investment or development decisions, Carlock added.
There is also a widespread agreement that real estate plays a significant role in global warming. Most respondents said the industry needs to do more to combat the problem, not just because there are bottom-line concerns, but because it’s the right thing to do.
A 2017 report by the United Nations Environment Program found buildings accounted for about 40% of global energy use and carbon emissions, with two-thirds of that impact coming from operations and the rest from construction and building materials. Although environmental groups have introduced widely used energy-efficiency programs such as Leadership in Energy and Environmental Design and many data collection efforts to identify flaws in building performance, most real estate leaders say more needs to be done.
In the office sector, the vast majority of space was built in the 1980s or before, Carlock said. With both tenants and an increasing number of investors, especially Europeans, now calling for more environmentally sensitive buildings with lower carbon output, for the foreseeable future owners and operators will have to constantly evaluate and upgrade their properties, aligning them with green building standards.
Climate change isn’t the only social problem getting more notice from industry leaders.
“Historically, the real estate industry has been White male-dominated,” Carlock said.
ULI and PwC found widespread recognition among the surveyed leaders and experts that the industry’s historic lack of diversity is a concern. About 43% said they disagreed or strongly disagreed that commercial real estate professionals understand how past policies and practices may have contributed to systemic racism. Another 31% were uncertain.
Nearly 70% also said the industry could take actions to alleviate the problem, such as boosting efforts to recruit diverse workforces. Only 9% disagreed and the remainder were uncertain. But recognizing the problem is just a first step.
“The extent to which the industry will hold itself accountable remains to be seen,” said Onay Payne, New York-based managing director of Clarion Partners and a contributor to the ULI/PwC report.
Commercial real estate companies currently focus a lot of attention on collecting data on diversity, equity and inclusion, she added. That’s a good and necessary first step. But industry leaders now need to get serious about setting diversity targets, and they need to devote enough funding and time to hit those goals.
“It is not likely those targets will be reached without allocation of sufficient resources,” Payne said.
Aside from the grim prognosis about the climate crisis, most of those surveyed by ULI and PwC look forward to 2022 with a great deal of optimism, according to Carlock.
“There is even some celebratory feeling that this recession was not the industry’s fault,” he said.
Most economic crises of the past century were deepened by overbuilding in real estate or a collapse in demand. But as the coronavirus pandemic ebbs and the recession recedes further, most believe the fundamentals of real estate are already strong.
Demand is high, and vast amounts of equity are available, with investors itching to jump into several real estate sectors, especially multifamily and industrial, Carlock said. In addition, demand will likely have staying power in the coming years with a sizable federal infrastructure program expected, continued low interest rates and healthy levels of savings for most U.S. consumers.
“That’s a developer’s dream on the surface,” Carlock said.
Courtesy of ULI and PwC
More than 80% of the survey respondents rated their firms’ 2022 prospects as good or excellent, the most in any ULI/PwC survey between the Great Recession and the pandemic’s onset.
Some changes anticipated due to the pandemic did not materialize in 2020 or 2021. Most respondents say the office sector has been permanently altered by new work-from-home strategies, with corresponding impacts on residential markets as many workers freed from the office start moving into suburban or rural areas. However, a majority don’t believe the impacts on cities will be as great as originally feared.
The adoption of hybrid work schedules, with most workers coming into the office for at least part of the week, will help keep cities healthy, respondents said. About 56% of those surveyed said they disagree there will be a trend away from high urban density, with about 23% taking the opposite position.
Respondents say the so-called “smile cities,” located across the Sun Belt and along the East and West coasts, will benefit the most, according to Carlock. The most popular cities with investors and developers are likely to include Boston, due to its vibrant life sciences sector; Nashville, for its quality of life, diversity, and arts and culture scene; and Raleigh-Durham, due to the high level of cooperation between its universities and business community.
“This is the fourth year in a row that the smile cities have dominated investment and development,” Carlock said.
Beneath the surface of optimism, CRE leaders do see some dangers lurking, he added. Recent anemic recent jobs reports highlighted fears about the continuing struggle to fill empty positions across much of the economy. Prices for essential materials like steel and drywall remain elevated. And the massive backup of ships outside Los Angeles and Long Beach harbors shows supply chain issues may sabotage a recovery.
“We still don’t have a seamless supply chain,” Carlock said.