Here’s how COVID-19 is accelerating changes in real estate industry

Above: COVID-19 is accelerating suburban growth in places like Sterling Grove, a 780-acre master-planned neighborhood, west of Loop 303 in Surprise, offers homeowners access to a private country club and 18-hole Jack Nicklaus-designed golf course. Real Estate | 19 Oct |

The Urban Land Institute (ULI) and PwC US released Emerging Trends in Real Estate 2021, highlighting the evolving trends shaping the real estate industry. The report, which includes proprietary data and insights from more than 1,600 leading real estate industry experts, explores how Covid-19 accelerated changes in the real estate industry and many existing trends like retail footprint reductions, while it spawned new ones such as an increased focus on social justice and health and wellness, and stopped others in their tracks like the appeal of big cities.

The report highlights how Covid-19 heightened the desirability of lower density areas for both residential and commercial real estate, with interest concentrated in the Sunbelt markets. Cost-conscious companies will gravitate toward cities that are business-friendly and low cost with large, growing workforces. Raleigh/Durham, N.C., for example, is nicknamed the “Bay Area of the East Coast,” due to a surge in technology jobs and the area’s reputation as an education mecca. Homebuyers will look for suburban locations with low taxes, affordable housing, auto-oriented transportation, and good job prospects. While growth in the suburbs has been a consistent trend since this report first predicted it five years ago, greater family formation among millennials and flexible work from home policies are boosting this shift.

Social unrest and protests in cities across the country have also played a role in the reevaluation of presence in urban cores. 70% of respondents agree that the real estate industry can address and help end systemic racism – from promoting diversity, equity and inclusion within the sector, to looking for ways to develop underserved communities. On a rating scale of social issues in real estate, income and racial inequality moved from little to moderate importance last year, to moderate to great importance.

“Times of great change always present significant opportunities,” said W. Ed Walter, Global CEO of ULI. “In the near term, our suburbs will benefit from new growth spurred by shifting demographics and changes to living and working patterns resulting from the COVID crisis. Our cities will have the opportunity to respond by reimagining their public realm, building more resiliently, and reinventing assets, such as retail, that were already struggling before the pandemic. As an industry we have the opportunity to strengthen by truly embracing diversity and tackling the challenges faced by our communities.”

“Now, more than ever, the real estate industry has the chance to take the lead in using planning and development skills and investment capital to reshape our work and lifestyle environments. These tools can be used to address societal issues of safety, green space and racial equity,” says Byron Carlock, PwC Partner and U.S. Real Estate Practice Leader. “The gauntlet of responsibility is ours to embrace, and industry leaders see the opportunities and are responding with investment and leadership.”

Trends Highlighted in the Report Include:

• The Economy (and Real Estate Sector) Hang On: Though real estate capital markets have settled, most anticipate overall real estate prices to fall 5-10% as income is curtailed for several years. Industrial properties, data centers and single-family homes are expected to rise in value, while retail and hospitality will see the largest decline. The long-term outlook in the real estate sector hinges on the country’s ability to reign in Covid-19.

• Exodus to the ‘Burbs: Covid-19 is accelerating suburban growth, especially in the Sunbelt markets. Appearing first in the 2020 report and now ranked second for 2021, Austin, Texas has continued to see a surge in the suburban office and homebuilding sectors. With a greater emphasis on health and safety, the need for lower density environments and more space has only grown. Remote work and higher taxes in large cities due to declining tourism and business tax revenue are contributing to the shift away from an urban core.

• Work from Home Changes Office Outlook: The rapid shift to widespread remote work is considered the ultimate test of digital transformation in the workplace. Companies that invested in digital capabilities saw great success with work from home policies, and 94% of real estate professionals agree that companies will allow employees to work remotely at least part of the time in the future. As a result, some businesses will shrink their footprints as a cost savings measure. However, more than 60% of professionals agree that office tenants will look to expand spaces for new ways of collaboration and interaction, while complying with social distancing measures.

• The Essentials: Safety and Wellness: 82% of professionals agree that health and wellbeing will become a more important factor across all sectors of real estate. The industry will need to meet higher standards of cleanliness and safety to make tenants and customers feel safe and attract them back – particularly at hotels, office buildings, retail and restaurants. The new focus on personal safety will lead to new services and advanced technology that provide cleaner buildings, improved HVAC infrastructure, sensors, touchless entry and contact tracing apps.

• Social Justice and Racial Equity Now: The industry must do more to address social and racial inequality in the US. Nearly half (48%) of respondents disagree that real estate understands how past policies and practices have contributed to systemic racism. 70% agree that the real estate industry can address and help end racial inequality. Existing job training and recruiting programs for minorities and underserved communities need to be supported and expanded. Real estate professionals are also evaluating efforts to invest and develop minority and low-income neighborhoods with an emphasis on housing and schools.

• Stores Still Matter: The next few years promise to be “retail’s great transition period,” as demand for larger retailers and department stores dwindles in favor of discount stores, fast fashion and online retail. More than 80% of participants agreed that Covid-19 accelerated the shift in retail that likely would have occurred over the next few years. Expect to see a much smaller physical retail presence and vast amounts of vacant space with lower rents. Top brands will take advantage of lower prices to upgrade their locations, while malls will leverage empty space to improve their tenant roster or convert to distribution centers for online retailers.

• Affordable Housing Remains a Major Issue: Covid-19 has only accelerated the housing disparities in the US as many low-income workers experience unemployment and possible eviction. With state and local governments facing large revenue declines, experts agree that the federal government has the wherewithal to provide programs and resources to this problem, including the expansion of the Low-Income Housing Tax Credit and Section 8 vouchers.

• The Great Fiscal Challenge: Real estate taxes, generally the largest source of local government revenue, are likely to decline as hotels and shopping centers (and potentially offices) lose tenants and value. Long term revenue declines will affect all government services but could be particularly impactful on infrastructure investments, a critical need (not just for real estate) that this report has highlighted for many years. An analysis by the National League of Cities predicts that 65% of cities will delay or cancel infrastructure projects due to Covid-19.

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