Emerging trends in the pandemic helped bring the future to today
By Patrick Duffy
The most recent version of ULI and PwC’s “Emerging Trends in Real Estate” for 2022, now in its 43rd year, is somewhat unique in that it’s focused primarily on multiple land use shifts greatly accelerated by the COVID-19 pandemic.
While the nation’s property markets provided a surprising amount of resiliency during the pandemic, some new challenges emerged: to repurpose obsolete buildings to new uses, reduce carbon emissions and create more affordable housing. For the residential sector, changes that would have taken up to a decade to play out are with us today, although just how permanent these shifts will be are certain to unfold over time.
The changes in non-residential land uses are important because they’ll likely impact the demand for homes in different ways; whether that’s due to a dramatic rise in those working from home at least part of the time, an equally dramatic rise in online shopping, a shift to offices from central business districts to more suburban nodes and a growing awareness of the need to store more goods closer to where customers live.
This competition for space, especially when it’s faced with constraints on growth due to geography or politics, will also accompany shifts from the pricey ‘gateway cities’ along the coasts to a variety of smaller cities inland from the coasts and throughout the Sunbelt and mid-Atlantic states which can still provide residents a “15-minute lifestyle.”
Because this preferred lifestyle allows them to walk to work, run errands, visit the gym or park and connect with friends and family within 15 minutes of home, it requires a well-balanced mix of residential, commercial and recreational land uses to function properly.
At the same time, the housing market faces long-standing supply constraints which don’t apply equally to other real estate sectors aside from industrial warehouse space near ports and major cities. With home prices continuing to rise thanks to low mortgage rates, many of today’s millennial households are instead turning to single-family homes for rent, providing them a suburban lifestyle without having to save up for a down payment.
Whereas this type of investment was long the domain of individual investors, since the Great Recession it’s increasingly been dominated by a combination of opportunistic Wall Street-backed institutions able to buy low and rent high.
The rise of entire single-family residential communities for rent has captured the attention of prior investors, builders and developers, as well as private equity funds and multi-family REIT investors. Although part of this demand is due to the excitement of this newer asset class, most investors are operating under the assumption that this ‘mezzanine’ level of housing will disproportionately capture the interest of both ‘rent-by-necessity’ and ‘rent-by-choice’ households.
Because the best operating margins are for higher-priced rentals, more needs to be done to address the chronic need for affordable housing in many markets. That’s where the traditional multi-family sector comes in, but changing demographics make it difficult to pinpoint demand by cohort.
We still don’t know how quickly and extensively millennials will leave rentership for homeownership, how soon Generation Z will be able to become well-qualified renters, how many aging baby boomers will leave their single-family homes for higher-density apartments and how many seniors will choose to age in place versus opting for age-restricted apartments or assisted living communities.
Moreover, given that the country’s housing stock is under-built by up to 5 million homes, matching rents and housing payments to income growth will likely remain a critical challenge throughout the decade.
“Providing more affordable housing stock to meet pent-up demand must include more classic solutions.”
One possible savior for working through this challenge is technology focused on properties or proptech ranging from more efficient management of properties and showing vacancies or listings to better analytics resulting from a higher acceptance of harnessing high-frequency internal data to make business decisions.
Although this data technology is not yet predictive, as it improves over time with more data, it could allow internal analytics teams and outside consultants to forecast investment and development opportunities faster than ever.
However, even technology has its limits. Providing more affordable housing stock to meet pent-up demand must include more classic solutions. These can range from countering NIMBYism and encouraging cities to adopt zoning changes to allow more than just single-family homes in certain areas. As well as start-ups offering rent-to-own, down payment assistance programs and governments boosting their support of first-time buyers and more workforce and senior housing with the use of tax credits. The future is here.
Click here to watch Patrick’s 30-minute interview with PwC’s Byron Carlock about the 2022 Emerging Trends report!
Patrick Duffy is a Principal with MetroIntelligence and contributes to BuilderBytes. He can be reached at firstname.lastname@example.org or at 310-666-8288.