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1、2024EMERGING TRENDSIN REAL ESTATEUnited States|CanadaiEmerging Trends in Real Estate 2024Contents 1 Notice to Readers 3 Chapter 1 A New Era Comes into Focus 8 Higher and Slower for Longer 11 The Great Reset 14 A Painful but Needed Capitulation 18 Its All About the Debt 23 Eco-Anxiety Comes Home 29 E

2、ven Further Out of Reach 31 Portfolio Pivot 33 Not Remotely the Same 35 Downtowns Need to Reinvent themselvesAgain 41 An Artificial Boom?47 Chapter 2 Property Type Outlook 49 Multifamily:Build Baby Build 58For-SaleHousingsBalancingActin2024 64 Industrial/Distribution:Fundamentals and Capital Markets

3、 Normalize as Future Growth Is Evaluated 75 Hotels 78 Retail:Despite Challenges,Retail Emerges as CRE Darling 83 Office:The Future Is Now 93 Chapter 3 Markets to Watch 100 Grouping the Markets 95 Chapter 4 Emerging Trends in Canadian Real Estate 108 Costs,Deals,and Capital Markets 115 ESG Strategy,R

4、eporting,and Performance 117 The Housing Market at a Breaking Point 121 Markets to Watch 127 Property Type Outlook 132 Best Bets for 2024 135 Interviewees 139 Sponsoring OrganizationsEmerging Trendsin Real Estate2024iiEmerging Trends in Real Estate 2024Editorial Leadership TeamAaron Sen*Abhi JainAda

5、m Findlay*Adam Moghtaderi*Agnieszka Masse*Alec Watson*Alex Howieson*Ali Abbas*Amy Perron*Anastasia Ivanova*Andrea Ades*Andrew AlpersteinAndrew NelsonAndrew Popert*Anthony Di Nuzzo*Asako Kitamura-Redman*Audrey Tulio*Avery PartiAvi ShahBill StaffieriBlake BylBrian CacedaBrian KeidaBrion L.SharpeBryan

6、Allsopp*Calen ByersCarly Stallwood*Chantelle Cadeau*Charles CampanyChris BaileyChris DietrickChris Vangou*Christopher CarlsonChristopher EmslieCindy Wu*Colin MacKinley*Cosimo Pellegrino*Dan GenterDan RyanDaniel DArchivio*Danielle Aucoin*Darren Speake*Dave BaldwinDave MustinDave SwerlingDavid Neale*D

7、avid Yee*Dean RamsthalerDerek Hatoum*Donald Flinn*Douglas StruckmanDylan AndersonDylan ShuffEmily PillarsEric Lemay*Erica Pereira*Ernie Hudson*Evan CohenFrans Minnaar*Frederic Lepage*Gloria ParkGraham McGowan*Hadielia Yassiri*Haley AndersonHarshini Sivanand*Henry Zhang*Ian NelsonItisha JainJack Brow

8、nJacqueline KellyJake WileyJasen Kwong*Jeff TaverasJennifer Farber*Jeremy LewisJeremy Pister*John CrossmanJohn Sheppard*Jonathan Osten*Jonathan PongJordan AdelsonJordan Samberg*Joseph Moyer*Josh ParksJoshua Musa*Julie SchloskyJustin StarrKen Griffin*Laura Lewis*Leah WaldrumLeanne McKinnon*Lee Overst

9、reetLou DefalcoLuda Baidan*Luisa BreidtMalcolm WilliamsonManisha Chen*Manu VeguntaMarc Sena*Mario Longpre*Marisa KurtzMark Rathbone*Martin SchreiberMasood Hameed*Matt BerkowitzMatthew RosenbergMaxime Lessard*Megan AndrewsMeredith DeLucaMichael ReadyMichelle McArthur*Mihai Homescu*Mike Harris*Milan K

10、shatriya*Mirjana Simonovski*Nadia King*Nadja Ibrahim*Natalie Cheng*Nicholas Mobilio*Nick Ethier*Nick WorrallNicole StroudPaul Hendrikse*Peter Harris*Peter Hill*Philippe Desrochers*Pinar Dogruer*Rachel KleinRahim Lallani*Renee SarriaRicardo RuizRichard Martin*Richard Probert*Rick MatrosRick MunnRob S

11、ciaudoneRobert Coard*Roberto HernandezSabrina Fitzgerald*Sam MelehaniSamay Luthra*Santino Gurreri*Sarah LoganScott Collinson*Scott McDonald*Scott TornbergShivalika Handa*Sonia Parmar*Spyros Stathonikos*Stephan GianoplusStephen CairnsSteven WeisenburgerTim BodnerTrevor Toombs*Tom WilkinVeronic Doucet

12、*Victor Wang*Wandi Zhu*Warren MarrWendy McCray-BenoitWesley Mark*Based in CanadaPwC Advisers and Contributing ResearchersEmerging Trends ChairsAndrew Alperstein,PwCMary Beth Corrigan,Urban Land Institute Leo Gonzalez,Urban Land InstituteEditors-in-ChiefChuck DiRocco,PwCAnita Kramer,Urban Land Instit

13、uteAuthor,Chapters 1 and 3Andrew J.NelsonAuthors,Chapter 2Garrick Brown,RetailLesley Deutch,Single-Family HousingPaul Fiorilla,Office and Multifamily HousingAvikar Shah and Justin Starr,HotelsAhalya Srikant,Industrial/DistributionAuthors,Chapter 4Glenn KauthPeter KovessyContributors Zach Aarons Lind

14、say BruggerJohn ChangLesley DeutchEmily Godward Mike HargraveRandy HoffKatherine HuhLisa Kent Beth Burnham MaceLake MurphyJay ParsonsChris PorterMarta SchantzCarl WhitakerCody YoungSenior AdvisersFred Cassano,PwC,CanadaBraiden Goodchild,PwC,CanadaMiriam Gurza,PwC,CanadaFrank Magliocco,PwC,CanadaStev

15、en Weisenburger,PWC,U.S.Project Staff,ULI Center for Real Estate Economics and Capital MarketsChanell Hawkins,CoordinatorULI Editorial and Production Staff James A.Mulligan,Senior Editor Libby Riker/Manuscript Editor Brandon Weil,Creative Director/Cover DesignerDeanna Pineda,Muse Advertising Design,

16、DesignerCraig Chapman,Senior Director,Publishing OperationsEmerging Trends in Real Estate is a trademark of PwC and is registered in the United States and other countries.All rights reserved.At PwC,our purpose is to build trust in society and solve important prob-lems.PwC is a network of firms in 15

17、2 countries with more than 327,000 people who are committed to delivering quality in assurance,advisory,and tax services.Find out more and tell us what matters to you by visit-ing us at .2023 PwC.All rights reserved.PwC refers to the U.S.member firm or one of its subsidiaries or affiliates,and may s

18、ometimes refer to the PwC network.Each member firm is a separate legal entity.Please see for further details.October 2023 by PwC and the Urban Land Institute.All rights reserved.No part of this publication may be reproduced in any form or by any means,electronic or mechanical,including photocopying

19、and record-ing,or by any information storage and retrieval system,without written permission of the publisher.Recommended bibliographic listing:PwC and the Urban Land Institute:Emerging Trends in Real Estate 2024.Washington,D.C.:PwC and the Urban Land Institute,2023.1Emerging Trends in Real Estate 2

20、024Notice to ReadersEmerging Trends in Real Estate is a trends and forecast publication now in its 45th edition,and is one of the most highly regarded and widely read forecast reports in the real estate industry.Emerging Trends in Real Estate 2024,undertaken jointly by PwC and the Urban Land Institu

21、te,provides an outlook on real estate investment and development trends,real estate finance and capital markets,property sectors,metro-politan areas,and other real estate issues throughout the United States and Canada.Emerging Trends in Real Estate 2024 reflects the views of individuals who complete

22、d surveys or were interviewed as a part of the research process for this report.The views expressed herein,including all comments appearing in quotation marks,are obtained exclusively from these surveys and interviews and do not express the opin-ions of either PwC or ULI.Interviewees and survey part

23、icipants represent a wide range of industry experts,including investors,fund managers,developers,property compa-nies,lenders,brokers,advisers,and consultants.ULI and PwC researchers personally interviewed about 600 individuals,and survey responses were received from almost 1,260 individuals,whose co

24、mpany affiliations are broken down as follows:Private property owner or commercial/multifamily real estate developer:37%Real estate advisory,service firm,or asset manager:19%Private-equity real estate investor:12%Homebuilder or residential land developer:6%Bank or other lender:5%Construction/constru

25、ction services/architecture firm:4%Investment manager/adviser:4%REIT or publicly listed real estate property company:2%Private REIT or nontraded real estate property company:2%Other entity:7%Throughout this publication,the views of interviewees and/or survey respondents have been presented as direct

26、 quotations from the participant without name-specific attribution to any particular participant.A list of the interview participants in this years study who chose to be identified appears at the end of this report,but it should be noted that all interviewees are given the option to remain anony-mou

27、s regarding their participation.In several cases,quotes contained herein were obtained from interviewees who are not listed in the back of this report.Readers are cautioned not to attempt to attribute any quote to a specific individual or company.To all who helped,the Institute and PwC extend sincer

28、e thanks for sharing valuable time and expertise.Without the involvement of these many individuals,this report would not have been possible.2Emerging Trends in Real Estate 20243Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into FocusThis is what will be.A consensus is growing in the c

29、ommer-cial real estate community that the world were looking at now is the world well be living in for a while.The worst of the COVID-19 pandemic has long passed.We should no longer expect a sudden U-turn to the way things were in the prepan-demic times.After three years of holding out hope,industry

30、 leaders have finally concluded that most of us really wont be returning to the office nearly as often,and some not at all.The implications A New Era Comes into Focus“Unbuckle your seatbelts because its probably going to be a slow,careful ride.Disruption wont happen like a roller coaster.Its gonna b

31、e slow going,and youre just gonna have to do your homework when it comes to specific details and specific places and specific property types.”for our industry are profound,and not only for office owners,managers,and brokers.Collateral impacts will also be seen on downtowns and other property sectors

32、 that depend on a vibrant office market.Investors need to rethink long-held can-ons about how to construct portfolios.These are all topics we explore in the following pages of this 2024 edition of Emerging Trends in Real Estate.As the contours of a new era in real estate become increasingly clear,on

33、e overarching theme to emerge is one were calling“The Great Reset.”The past is no 4Emerging Trends in Real Estate 2024Itching to BuyGiven all the negative press about commercial real estate markets,one perhaps surprising result from our survey:inves-tors are eager to acquire new assets.The Emerging

34、Trends Barometer for 2024 registered its highest“buy”rating since 2010,likely reflecting recent and expected price declines,making this a more favorable entry point for acquisitions after a decade of relentless appreciation.In addition,almost half of survey respondents expect cap rates to rise furth

35、er next year,further depressing values.Yet sales transaction levels are down,and many in our industry see a negative loop where buyers and sellers cannot agree on pricing because the shortage of sales limits price clarity.The reality does not seem so bleak.Transaction levels in the first half of 202

36、3 fell about a quarter(26.1 percent)from the first-half average in 20152019harsh,but not historically hor-ribleand they are well above levels in 2020 when the markets really were at a standstill during the economic lockdown.But there is no doubt that wide bid-ask spreads between buyer offers and sel

37、ler expectations are limiting transactions,par-ticularly in the beleaguered office sector,where sales are down over 60 percent from 2015 to 2019.longer prologue;old assumptionsabout market dynamics,pricing,and risksmust be visited.Another central element in this new era:the reluctant accep-tance of“

38、higher for longer.”As a leading investment banker said,“The good news is that we have more clarity,more cer-tainty,but the bad news is we dont like what we see because the rates are higher for longer.”Respondents to this years Emerging Trends survey believe the worst of inflation is behind us,with o

39、ver half expecting infla-tion to decline in 2024 and another third believing inflation will at least stabilize.That should give the Federal Reserve Bank permission to stop hiking interest rates.But only three in 10 survey respondents expect commercial mortgage rates to drop in the coming year.The go

40、od news of greater market certainty must be tempered by the latest smoke signals from the Fed suggesting that the mantra should be“higher for even longer.”Paired with forecasts of slower future economic growthanother theme this yearowners must prepare for more painful property value losses.NAREIT Eq

41、uity REIT IndexNCREIFGDPSources:NCREIF,NAREIT,Bureau of Economic Analysis/U.S.Department of Commerce,ULI Real Estate Economic Forecast*NCREIF,NAREIT and GDP projections for 2023 and 2024 are based on the ULI Real Estate Economic Forecast,Fall 2023.5Emerging Trends in Real Estate 2024Chapter 1:A New

42、Era Comes into FocusSaid an executive with an asset management firm,“Were in a fairly good pause while theres a realignment of expectations between buyers and sellers.Sellers have not yet fully adjusted their expectations to current market conditions.”Investors want more assurance about where prices

43、 will settle.“We think were seeing good opportunities,but its hard to evaluate what a good opportunity is today because we dont have price comps,”explained one fund adviser.Industry participants also blame the debt markets.“Interest rates and cost of capital”remains the top concern in the survey,fol

44、lowed closely by“capital availability.”Debt is viewed as slightly more available than last year for all sources except commercial banks.Still,respondents believe that both debt and equity underwriting will become more rigorous.Not So Bad.Or Great.Despite these capital market challenges,many in the i

45、ndus-try remain at least somewhat hopeful,if less optimistic than typical.Over 40 percent of survey respondents rate their firms profit outlook as good to excellent,but that is the lowest share since the 2011 edition of Emerging Trends,when the industry was still trying to climb out of the Great Fin

46、ancial Crisis(GFC).Conversely,just 13 percent rate their firms profit outlook as abysmal or poorthough thats the highest such share in over a decade.Despite the weakness in real estate capital markets,this guarded optimism seems appropriate as property fundamen-tals remain surprisingly resilient in

47、the face of considerable market dislocation and economic uncertainty.The office sec-tor remains a conspicuous exception on this score,but its deep problems should not tar the entire industry.Said one industry strategist,“With office in such doldrums,its easy to paint with a very broad brush about co

48、mmercial real estate and think its all bad.”The mixed sentiment expressed in the survey also reflects the diversity of outlooks among industry participants,which seems greater now than during either the GFC or the COVID lock-down,when most people seemed to share a common market mind-set.According to

49、 one adviser to pension funds,“Theres different people in different places for different idiosyncratic ExcellentGoodFairPoorAbysmal6Emerging Trends in Real Estate 20247Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focusreasons.Theres some investors that are full speed ahead,some

50、are starting to pick up their pencils,some that are still pencils down.”Many investors,especially“core”institutional funds,remain on the sidelines,waiting for the right entry point when prices will fall enough to make returns compelling.But that might take a while because few owners face enough dist

51、ress to force inop-portune sales.And most investors are looking for the end of interest rate hikes,which seems close at hand,though the wait for actual rate cuts will take longer.The good news here is that the Merrill Lynch Option Volatility Estimate(MOVE)index,which measures bond market volatility,

52、was at its lowest point in 18 months as of mid-October 2023 and generally trending down.Unfortunately,the index remains highly elevated by historical standards at its second-highest level since it was initiated in 2002.Thus,the markets likely need to calm down considerably before investors feel comf

53、ort-able to re-enter the market.Reflecting the view of many investors we interviewed,one firms strategy head said,“I think it will take til 2024 for an uptick in transaction volume,but itll come.It wont necessar-ily hinge on a lowering of interest rates by the Fed.It could happen before then as peop

54、le get used to the new higher rates and start to transact again.”The sentiment of developers seems similarly bullish but cau-tious.Said one mixed-use developer,“Were keeping the foot on the gas and getting lease deals done,but were watching closely for when it makes time to deploy new capital again.

55、I think its difficult to make big capital deployment bets until we start to see some stability in the interest rate markets and some settling of capital costs.”Meanwhile,more opportunistic funds are raising capital and circling,looking for distress,but not finding much yet.“I dont know when that dat

56、e is going to be,but I think that theres going to be more distress,so I think that theres gonna be more opportunities,”said the head of an asset management firm.8Emerging Trends in Real Estate 2024Although the broad contours of the commercial real estate(CRE)sector are coming into greater focus,the

57、path forward will not necessarily be easy to discern or navigate.As noted in the quotation that opened this section,well still need to do our homework.1.Higher and Slower for LongerAlmost 18 months since economists started predicting a recession,there are scant signs that a downturn is immi-nent,and

58、 many forecasters have dialed back their recession probabilities.The emerging consensus is that the economy is headed for a“soft landing”or a“growth recession”with slow economic growth and at least moderate job growth,but with risks weighted firmly to the downside.Looking out further,we seem to be h

59、eading for an era of higher interest rates and slower economic growth than we have experienced in recent decades,presenting a challeng-ing environment for real estate investors.Weve all been waiting a long time for a recession to start,but the U.S.economy refuses to give in.As one prominent econo-mi

60、st we interviewed remarked,“Its amazing that the U.S.and many other economies have been so resilient in the face of rising rates.This is the most forecasted recession ever.”Indeed,according to the Wall Street Journals closely watched survey of economists,the probability of a recession occur-ring wit

61、hin the next 12 months jumped to about 30 percent in April 2022,just after the Fed began its long string of rate hikes.By July,the economists surveyed put the odds at 50:50.By October,the median probability rose to 63 percent.And then the yield curve between the three-month and 10-year Treasuries in

62、verted in late October.The recession watch was on.As we prepare to publish Emerging Trends,it has been a whole year since that inversion.We are still waiting for the downturn.Bears might point out that we need to be patient.The typical duration of an inverted yield curve before a recession starts is

63、 15 months,so we may need to wait a bit longer.But few signs indicate a recession is imminent,and many prominent economists and forecasters have dialed back their recession probabilities well below 50 percent.9Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into FocusStill Growing,but S

64、lowerShould we expect a recession?Given a long enough time hori-zon,the economy will inevitably fall into a recession at some point.But like the broken watch that tells the correct time twice a daybut cannot tell you when that iscontinual recession predictions do not yield any meaningful information

65、.The received wisdom of industry pundits we interviewed is that the economy is headed for a“soft landing”or a“growth reces-sion where we have a relatively strong labor market and decent job growth,but we have interest rates that are pushing us to a slowdown,”in the words of a senior executive of a C

66、RE advi-sory firm.However,“it is difficult to assess where the overall economy is headed,and there remain mixed signals.”To be sure,the economy has begun to slow on several fronts in recent months:real gross domestic product(GDP)growth slowed to an annualized rate of 2 percent in the first two quar-

67、ters of 2023,down from 2.9 percent in the second half of 2022.But the recent rate was not appreciably lower than the 2.3 percent average for 20152019.More convincingly,job growth has slowed to its slowest rate since the pandemic,with an average of 150,000 new nonfarm payroll jobs added monthly in th

68、e second quarter,down a third from the first-quarter average.But the recent average is still just 15 percent off its monthly average in 20182019.Similarly,the number of job openings was down almost 10 percent in the second quarter relative to the first-quarter average.Yet the 9 million openings in J

69、uly were still 25 percent above the 20182019 average.As the single best gauge of demand for workers,this is hardly a sign of a looming recession.Other indicators are strikingly encouraging for an economy supposedly on the verge of correction.Consumer spendingwhich accounts for two-thirds of GDPslowe

70、d to 1.7 percent in the second quarter of 2023,compared to a surprisingly strong 4.2 percent in the first quarter,but the recent growth was still on par with 2022 and only slightly below the prepandemic rate.Many economists have been predicting a consumer slowdown as households deplete the extra sav

71、ings they built up dur-ing the pandemic.But spending has remained durable,if not quite robust.More positively,there are few signs of significant consumer distress as credit delinquency rates remain modest,in part because household debt burdens remain modest,as we discuss in the“Its All About the Deb

72、t”trend.10Emerging Trends in Real Estate 2024Worrying SignsStill,economists worry,as they are wont to do.Soft landings are relatively rare for a reason:they are difficult to pull off,not least because economies become more vulnerable to shocks as they slow,pushing the economy into an outright recess

73、ion.Indeed,soft landing predictions were common before each of the last few major recessions,including the GFC,but events swamped their rosy scenarios.The chief concerns now include the following:Household savings rates are below normal levels,and consumers have depleted most of their pandemic savin

74、gs(which could reduce future consumer spending);Student loan payments are resuming(which could further reduce consumer spending);Oil prices are rising(which could reignite inflation);andBanks are tightening lending standards(which could depress business investment).Thats a lot of ways to derail the

75、economy,not to mention other potential black swan events,like the recent terrorist attacks in Israel.But perhaps the greatest near-term threat might be the economys very resilience in the form of persistent inflation.Though inflation is significantly down from its peak,getting“the last mile”down to

76、2 percent is proving to be difficult.Consumer pricesrose in August 2023 at their fastest pace in more than a year,demonstrating the challenge of getting the last mile of inflation out of the system.And wage growth remains elevated,which is good for workers,especially the lower-income workers receivi

77、ng a disproportionate share of recent wage gains,but problematic for reducing price inflation.With inflation remaining still stubbornly above the Feds target ratesand threatening to reignitepolicymakers could be forced to push rates high enough to drag the economy into a recession.A related fear is

78、that the Fed could hold rates too high for too long as interest rate hikes act with a significant lag.But CRE industry leaders remain sanguine about the prospects for a soft landing.“A year from now,the economy will still have positive growth,but it will be slower,and rates will stay elevated becaus

79、e the economy can handle higher rates,”said the head of CRE at one investment bank.That sentiment tracks with most Wall Street expectations.The Federal Open Market Committee(FOMC)expects real GDP growth will slow to 2 percent in 2023 and just 1.5 percent 11Emerging Trends in Real Estate 2024Chapter

80、1:A New Era Comes into Focusin 2024,rising to 1.8 percent the following year and 1.85 per-cent in 2026,based on the central tendencies of forecasts by FOMC participants.But even with slower growth,the era of more elevated inter-est rates will not likely end soon.The investment banking head further p

81、ointed out that“Pressures are going to be more inflationary than they were for the past 20-plus years where free trade allowed us to have deflationary pressure on goods.”Higher for longer,indeed.Slower for Longer,TooWhat does this mean for the CRE industry?The senior execu-tive of a CRE advisory fir

82、m said,“Its important to distinguish between whats going on in the overall economy and whats happening in real estate.The upbeat assessment of avoiding a recession has some dark clouds for the real estate industry because it means that we have a longer period of higher inter-est rates than previousl

83、y projected.”Higher for longer is not only challenging for real estate deals.It also slows economic growth by reducing business investment and productivity.These headwinds to economic growth will be compounded by weaker demographic drivers,with slower natu-ral population growth via childbirth and re

84、strictive immigration policies.It all adds up to weaker space demand.2.The Great Reset The Fed spoiled CREs long run of historically strong performance with the first of 11 rate hikes in March 2022,and markets are not expected to return to their former glory anytime soon.The office sector has an out

85、sized impact on the perceived risks and opportunities in commercial real estate,but fundamentals in most sectors are still generally strong,and distress is low.Still,market participants will need to recalibrate their expectations to reflect diminished drivers in the coming years to the detriment of

86、rent growth,property values,and returns.It was quite a run.Year after year following the GFC,commer-cial real estate generated unusually strong returns via robust rent growth,declining cap rates,and rising property values.And much of the appreciation was fueled by the octane of near-zero interest ra

87、tes.It crashed briefly with the COVID lockdown and then surged again in 2021 on the strength of soaring warehouse and apartment rents and investors seem-ingly insatiable appetite for more product.12Emerging Trends in Real Estate 2024for longer,then the negotiating advantage should shift to folks loo

88、king for good deals,particularly for highly indebted property markets.”That means lower asset values.But Adjustments Take TimeEventually.But that adjustment process may take an extended time to play out.The U.S.head of one asset management firm explained it as follows:“With no incentive to sell unle

89、ss you have to,theres a reticence among owners to sell that will tamp down on transaction activity,definitely in the near term.But as theres more and more acceptance of the broader state of the macro environment,the owners who probably need to sell will start to loosen up a little bit.”Some will hav

90、e no choice.Owners facing major lease or debt expirations may be forced to sell,particularly if the higher debt costs render refinancing unfeasible or the asset cannot satisfy required loan terms or covenants.Many banks now require that borrowers put more equity into their projects to lower the proj

91、ects loan-to-value ratio;others require that borrowers keep deposits in their banks,which effectively accomplishes the same thing.Some owners will conclude it is not worth throwing good money after bad and will hand the proverbial keys back to their lender.Distress levels are still relatively contai

92、ned compared with other periods when there was pervasive market disruption,as we discuss in the“Its All About the Debt”trend,so there are still few distressed sales.But owners are starting to capitulate to the reality of falling demand and pricing,particularly in the beleaguered office sector.Promin

93、ent owners have recently walked away from even class A buildings in New York and San Francisco,among other markets.Even if painful to their owners,these value losses often will not be devastating,especially for longer-held assets.The values of most commercial properties continued to appreciate until

94、 just last year,and the office sector aside,recent value declines gen-erally have been modest compared with prior gains.According to Green Streets Commercial Property Price Index,property values have declined 16 percent since the COVID peak in 2022,far less than the 54 percent run-up since the GFC.T

95、hese fig-ures are inherently difficult to quantify precisely,and different sources report different figures.But these various sources all concur that many,perhaps most,owners will be simply giving No longer.The Fed popped the CRE balloon with the first of 11 rate hikes in March 2022,and markets have

96、 not been the sameand are not expected to return to their former glory anytime soon.Capital had flooded into real estate because it provided a unique combination of yield,income growth,and inflation protection,as well as the downside security of hard assets.But as the yield on 10-year Treasury bonds

97、 has pushed past 4.5 percentdouble its 2.25 percent average from 20152019bonds and other assets offer more compelling risk-adjusted returns,and CRE funds must compete harder for capital allocations.It will not be easy.The executive of one real estate investment bank explained,“A lot of investment ha

98、s been driven by people betting on a better future and having aggressive exit caps,which was rational for the industry environment that existed for the last 15 years.In this investment environment,thats not rational.”Adjusting Our ExpectationsIndeed,the“higher for longer”era portends a period of dif

99、-ficult adjustments for the industry.Higher rates mean higher borrowing costs,which kills many acquisitions at the old prices and strains the feasibility of new construction.Both transaction activity and construction have slid as interest rates continued to rise,with no rate relief in sight.Accordin

100、g to the head of one asset management firm:“Right now,I think that most investors are anchored to what transpired over the last 13 or 14 years with zero interest rates.Everybodys anchoring to the old days,and until they adjust to the new rates,”buyers and sellers will not transact.At the same time,t

101、he industry is expecting slower income growth going forward.As discussed in the“Higher and Slower for Longer”trend,population growth has slowed in recent years due to lower birth rates and more restrictive immigra-tion policies.At the same time,economic growth is also projected to be more subdued,pa

102、rtly due to the elevated interest rates.The slower economic and demographic growth translates into slower job growth,reduced space demand,and slower rent growth.“The period of excessive income growth seems to be in the rearview mirror,”concluded one prominent industry economist.Ultimately,cap rates

103、must rise to justify lower growth rates and higher costs,which drives down prices.The head of strategy for one asset management firm said,“If its going to be higher 13Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focusup some gainsunpleasant as that isbut still exiting well ahead

104、 of their initial acquisition basis.That does not cover everyone,of course.With office val-ues down more than 30 percent already according to some sources and further decline expected,many office owners will soon face difficult decision points.And some investors bought apartments and industrial buil

105、dings in 2021 and early 2022 with aggressive underwriting assumptions about future rent growth and terminal cap rates.Assets were purchased with adjustable-rate debt at rock-bottom interest rates that have since increased significantly,reducing net income below break-even.These situations are still

106、the exception,but property values will need to come down further to set the stage for the next invest-ment wave in an era of higher interest rates and slower growth.Until then,“I dont think the transaction market is going to snap back.I think its going to be in a malaise for a while,”concluded the h

107、ead of an asset management firm.Back to FundamentalsAnd what then?“In a slower-growth environmentslower economic growth,slower population growth,which means slower rent and net operating income growthpeople should not be relying on cap rate compression for the returns,”advised a senior investment ba

108、nker.That means owners will need to pay more attention to their operations and rein in extraneous expenses.“People will be more focused on operating funda-mentals going forwardmuch more focused on recurring cash on cash,”said another investment banker.The greater attention to operating fundamentals

109、portends structural adjustments to address the expense side of income statements.The industry scaled up for higher transaction levels in the 2010s:“the amount of money in the market that can transact,the way that managers have structured the size of their funds and their teams,”explained an adviser

110、to major institutional investors.Add in the brokerage team and other resources that support transactions.All these resources are oversized,given current and likely future transaction levels,and must be resized to reflect actual activity levels.The industry faces other adjustments,too.Changing demo-g

111、raphic patterns mean the old geographic investment rules must be revised.Investor interest has shifted from downtowns to the suburbs and from the Gateway markets to the Sun Belt.Some of these changes began even before the pandemic but have taken on new urgency and reinforce the dislocation that inve

112、stors facea topic we address in the“Portfolio Pivot”trend to follow.A Diverse IndustryNot every part of the industry is hurting.In the words of one industry economist,“Commercial real estate is so incredibly varied not just by property type,but also by geography,so wed be committing a grave mistake

113、if we hitch our wagon to the tyranny of averages.”As we noted in the introduction,the office sector has an outsized impact on the perceived risks and opportunities in commercial real estate,but fundamentals in most sectors are still generally strong,and investor demand for good product remains healt

114、hy.An executive with one CRE investment firm said,“Were still seeing strong investor interest in the very well-located stuff.An especially well-located asset is still getting very good pricing from a sellers perspective,particularly in the industrial and multifamily space.”The Emerging Trends survey

115、 shows continued interest in several niche segments including data centers,student housing,and medical offices.Nonetheless,the era of higher interest rates and slower economic growth will have profound impacts throughout the industry.“Maybe were coming to the acceptance phase of grief that the bull

116、market is no longer,”concluded the executive with one advisory firm.But even if changes will be painful to many and significant to most,they may not be as wrenching as some fear.The execu-tive at one asset management firm put it this way:“I think this realignment period is less dramatic,less emotion

117、al than the realignment after the Great Financial Crisis or even the pause during the early moments of the pandemic.This realignment feels to me to be more studied and thoughtful.”It will need to be.For most of the 20th century,interest rates were even higher than they are now,and real estate people

118、 were able to make deals and build things.“But the difference is that the economy was growing at a significantly higher growth rate with a growing population and growing middle class and younger population,”pointed out an asset manager we interviewed.“Now we have an aging population that is spending

119、 less.”How does the industry operate with higher rates and slower growth?We are about to find out.14Emerging Trends in Real Estate 20243.A Painful but Needed CapitulationThe office property sector is going through a reconsidera-tion of its purpose and sustainable size comparable to the retail shakeo

120、ut of the past decade,but at much greater speed.After three years of remote and hybrid working,there is no longer any reasonable expectation of a full office market recovery back to prepandemic levels.Broad-brush conclusions should be resisted as many buildings and markets outperform in this increas

121、ingly bifurcated sector.Nonetheless,a significant share of the existing inventory is functionally obsolete and will need to be repurposed or demolished to make way for higher-use uses,at great expense to their owners.“There is more clarity now than there was a year ago about the future of office,”sa

122、id one investment banking firm executive.With all the adaptations weve made to work from home,“it is difficult to change work and commuting behavior patterns after a few years.”That sentiment is the growing,if not entirely settled,consensus among industry experts,with wide-reaching implications for

123、not only office markets but also other property sectors and our nations downtowns.With more than three years of experience since the pandemic lockdown,we now accept,at the very least,that things are not returning to the way they were before,so there will be no full office recovery back to prepandemi

124、c levels.Indeed,the very purpose of office buildings is being challenged,much like people started to question the need for retail space a decade ago as e-commerce emerged as a more convenient and economical alternative to in-store shopping.Malls have not disappeared,of course,but fewer are needed no

125、w that online shopping is easy and widely available.Office space is going through a comparable reconsideration.“Why do we even office in the first place?”asked the head of research for an industry association.“For getting todays tasks done,people are more efficient not in the office.But for devel-op

126、ing workplace capital,you needed people to be together,bumping into each other,having random conversations that help build for the future.”Not every day,however.Historically,offices supplied all the equipment knowledge work-ers needed to be effective:landline phones and copy machines,then fax machin

127、es and printers,and credenzas to store all the paper documents produced.Now,almost all of that has been replaced by better,portable equipment that can be set up anywhere with a wireless internet connectionwhich is to say,pretty much everywhere.In addition,employees have made significant investments

128、and life adjustments to facilitate hybrid or remote working.Many have moved to more distant suburbs or even to other regions.Others have adapted their lifestyles around more flexible hybrid work schedules or found more practical uses for the Direct Office Vacancy Rate,Downtown versus Suburban,4Q19 a

129、nd 2Q234Q192Q23Percentage point changePercent changeDowntown10.0%17.3%+7.3%73%Class A only10.1%18.3%+8.2%81%Suburban12.1%16.0%+3.9%32%Class A only13.1%19.3%+6.2%47%Top 6 markets*class A7.7%16.0%+8.3%108%Top 6 excluding New York class A9.7%19.7%+10.0%104%Sources:Nelson Economics analysis of Colliers

130、International data.*Top six markets are Boston,Chicago,Los Angeles,Manhattan,San Francisco,and Washington,D.C.15Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focustime they formerly spent commuting.In short,there are just too many compelling reasons to work from home for at least

131、 part of the week.Labor Day was hyped by many tech and other companies as yet another line in the sand when employees had to return to work more often.Major firms announced plans to track card swipes and tie compensation or performance ratings to atten-dance.But Labor Day 2023 looks little different

132、 from Labor Day 2022 and Labor Day 2021.Industry data,such as the card swipes tracked by Kastle System,show only slight improve-ment.The 10-city average occupancy did edge up slightly,rising from 47 percent to just over 50 percent since Labor Dayhardly a return to prepandemic normalcy.It all adds up

133、 to reduced tenant demand for office space.“Demand is probably 60 or 70 percent of what it was,so youve probably got 30 or 40 percent too much space that exists,”con-cluded one industry adviser.“But unlike an apartment,where at some point you can lower the rent enough to rent it up,sometimes there i

134、s no rent in which you can lease an obsolete office building.”But Not Every Office BuildingContext is important.Not all office buildings are hemorrhaging tenants;many are doing just fine.The newest,premier facilities are attracting a disproportionate share of leasing interest.At the same time,the of

135、fice markets in many smaller metro areas are at least getting by,if not thriving as before.Still,there is no doubt that the typical office building in most major markets is suffering.While the occupancy rates for most property sectors are near or above prepandemic levels,office occupancy has plum-me

136、tedespecially in the class A space of downtowns that used to boast the highest occupancies(and rents).Vacancy rates have jumped twice as much in downtown markets as in subur-ban markets.But the change in the countrys dominant office markets is perhaps most troubling:vacancy rates have more than doub

137、led since the pandemic began.And all this at a time of record office-inclined knowledge employment,which should support more tenant office demand.This issue is a problem for investors because downtown office buildings have been a pillar of institutional real estate holdings,as we discuss in the“Port

138、folio Pivot”trend.And it is a problem for downtown areas,which account for a disproportionate share of distressed office buildings,as we discuss further in the“Downtowns Need to Reinvent ThemselvesAgain”trend.A Bifurcated MarketMuch as the retail sector experienced over the past decade,the office ma

139、rket is bifurcating between the haves and the have-nots.“Theres just a few relevant properties in very attractive locations that remain relevant to corporate America,and thats where all the corporations are leasing,“said a director of an asset management firm.Firms want the newest,safest,health-iest

140、 buildings with the top amenities in the best locations.Said one investment banker,perhaps with a dose of hyperbole,“Close to 90 percent of the office absorption is in the top 10 percent of the stock.And the rest of the space?Its like put-ting lipstick on a pig.Youre trying to take a class B buildin

141、g to class A.But there are some buildings where there isnt enough lipstick around to get it leased up.”That“lipstick”comes in the form of expensive building and tenant improvements.But“with elevated interest rates,con-struction costs,and tenant allowances,its really hard to make those retenanting de

142、cisions pencil,”said a leading office owner and developer.What to Do with All That Other Space?Tenants arent the only ones avoiding offices.Office buildings have lost their appeal to investors as well.As noted in the intro-duction,office sales transactions are down more than twice as much as the oth

143、er major property types.“The only way to get an office transaction done that has any kind of hair on it at all today is with seller financing and perhaps a master lease,a willingness to take a substantial hit to the price,and even then,you may not get anything,”said the asset management firm directo

144、r.If neither tenants nor investors want them,the paramount question for owners and cities has become what to do with all the empty office space.An executive with a development firm explained:“Converting office spaces into other types of proper-ties is overhyped.While some conversions are feasible,no

145、t all office buildings can be economically converted.Demolishing buildings and repurposing the land might be more economical in some cases.”“Everyones talking about redeveloping office to other uses,but the percentage of office inventory that can be converted to residential or other viable uses is a

146、ctually pretty small,”said the industry adviser.“And the valuation has to get to a much lower basis before a lot of significant changes happen.”But this capitulation has begun and will likely gain momentum as major leases roll and loans come due.Most experts we interviewed anticipate further value d

147、eclines as owners must choose 16Emerging Trends in Real Estate 2024Design for Disassembly:Embodied Carbon and Real EstateUntil recently,when real estate professionals thought about reducing carbon,they looked at operational emissionsemis-sions mostly associated with utility use during the operations

148、 of the building.However,over the past few years,more experts have begun to understand the significance of embod-ied carbon.In doing so,they have instituted government policies,industry reporting standards,and corporate goals to accelerate the reduction of embodied carbon.While up front embodied car

149、bon is the current focus,real estate professionals are beginning to look further into design for disassembly for a more circular approach to development.The Importance of Embodied CarbonEmbodied carbon refers to the greenhouse gas emissions arising from the manufacturing,transportation,installation,

150、maintenance,and disposal of building materials.Of the 39 percent of global emissions attributable to buildings annually,28 percent is from operational carbon and 11 percent is from embodied carbon.For real estate,embodied carbon is consid-ered a Scope 3 emission.Between now and 2060,developers aroun

151、d the world will be doubling the amount of building floor space,equivalent to building an entire New York City every month for 40 years.Much of the carbon footprint of these new buildings will take the form of embodied carbon.Embodied carbon will also be a significant portion of emissions of existin

152、g buildings in the form of fit-outs;renovations;mechanical,electrical,and plumbing(MEP)replacements;and demolition.Real estate professionals can no longer ignore the embodied carbon elephant in the room,and stakeholders are putting on the pressure from all angles to address the issue.Policies and Pr

153、ograms Are Addressing Embodied CarbonGovernment policies are showing strong support at a market level for reducing embodied carbon in the built environment.Many of these policies have come about within the past few years.Examples include the following:In August 2023,the California Building Standards

154、 Commission passed two California Green Building Standards Code(CALGreen)amendments to reduce embodied carbon emissions associated with buildings for new construction and major renovations.The city of Vancouvers(British Columbia)Whole Building Life Cycle Assessment zoning requirement became part of

155、its Building By-Law,which went into effect in July 2023.Effective January 2025,embodied carbon must be reduced by 10 to 20 percent compared with the standard-ized baseline.San Franciscos Construction and Demolition Law went into effect in January 2022.It sets debris recovery requirements for all pro

156、jects in the city to be recycled or reused with no waste to landfill.At the federal level,in December 2021,the General Services Agency announced its Buy Clean program,requiring low-carbon concrete and asphalt to be used in large public projects and requiring Environmental Product Declarations(EPDs).

157、In March 2021,the U.S.Securities and Exchange Commission proposed climate reporting requirements based on the Task Force on Climate-related Financial Disclosures(TCFD)framework,which includes disclosure of Scope 1,2,and 3 material emissions as well as physi-cal climate risk.The Inflation Reduction A

158、ct,passed in August 2022,includes billions of dollars in assistance and tools to help manufacturers,institutional buyers,real estate developers,builders,and others measure,report,and substantially lower the levels of embodied carbon.Corporate real estate firms are also including embodied carbon in t

159、he accounting of their net zero goals.Much of this is motivated through Science Based Targets initiative(SBTi)commitments.Examples include the following:Kilroy Realty Corporation aims to reduce the embodied carbon of construction materials in development projects 30 percent by 2030 and 50 percent by

160、 year-end 2050.It is also aiming to reduce Scope 1,2,and 3 emissions 31 percent by 2030 and 72 percent by 2050 from a 2017 base year.Lendlease aims to achieve net zero carbon by 2025 for Scopes 1 and 2 and absolute zero carbon by 2040 for all scopes and activities without the use of offsets.Continue

161、d next page.17Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focusbetween reinvesting in their properties or giving them back to their lenders.The Chance for a RecoveryBefore we pronounce the death of office,however,we should consider the recent rebound in retail,as we document in

162、 our retail sector section.As the saying goes,we learn more from our mistakes than our successes,and indeed,Emerging Trends offered a bleak outlook for the sector only three years ago as we were in the throes of lockdown.Point taken,but that still does not make an office rebound any more likely.It c

163、alls to mind Jim Carreys character,Lloyd Christmas,in the Dumb and Dumber movie.When told his chances of getting a date with a particular woman were one in a million,he beamed.“Youre telling me theres a chance?”So,yes,there is a chance for a robust office recovery.There is always a chance.(Trivia fa

164、ns will remember that in real life,Carrey ultimately did get the girl,marrying the actress Lauren Holly,who played the object of Carreys affection in the movie.So indeed,there was a“chance,”though the marriage lasted less than a year.)And there are industry optimists.The development firm execu-tive,

165、who dismisses the broad potential for office conversions,nonetheless is“encouraged”by his recent“conversations with larger technology companies.Now theyve got three years of data that proves that they are not working as well as they once did when we were all together.”Certifications and reporting st

166、andards are focusing on embodied carbon as an important part of whole-life carbon analyses,as a part of their connection between sustainability and financial performance.Examples include the following:Green building certifications including LEED,Living Building Challenge,and Building Research Establ

167、ishment Environmental Assessment Method(BREEAM)recognize embodied carbon measurement and mitigation as part of minimizing the impact of a buildings life cycle.Voluntary sustainability frameworks such as GRESB already require companies to provide data on the embod-ied carbon emissions of their buildi

168、ngs,including the materials used in construction and the transportation of those materials.The TCFD,recently absorbed by the International Sustainability Standards Board(ISSB),emphasizes disclo-sure of climate-related risks and opportunities,as well as Scope 1,2,and 3 emissions.Not Every Building Ca

169、n Be ConvertedA common phrase in the industry is that“the most sus-tainable building is the one thats never built.”As such,the movement to convert existing buildings from office to mul-tifamily(or any other asset class,really),offers a meaningful achievement in saving carbon emissions.Because most o

170、f a buildings embodied carbon is accounted for by the foundation,structure,and envelope,it typically makes sense to reuse these parts of a building rather than to demolish and rebuild.According to the U.S.Environmental Protection Agency,it takes about 65 years for an energy-efficient new building to

171、 save the amount of energy lost in demolishing an existing building.Building conversions are an increasingly popular way to repur-pose existing buildings whose original purposes no longer support market needs.However,not every building will be converted;some assets will simply become obsolete.In thi

172、s case,the buildings demolition adds further embodied carbon emissions to its life-cycle total.Moving forward,architects and developers are beginning to explore design for disassembly.Design for disassembly is a building design process that allows for the easy recovery of products,parts,and material

173、s when a building is disas-sembled or renovated.The process is intended to maximize economic value and minimize environmental impacts through reuse,repair,remanufacture,and recycling.Localities such as King County,Washington,are already educating the development community on design for disas-sembly,

174、encouraging stakeholders to consider questions such as“How easily can the building be transitioned to different uses?”;“What will happen to the building when it has reached the end of its life?”;and“What connections are used between all the different building elements?How easy are they to undo?”Embo

175、died carbon will be playing an increasingly heavy role in the industrys consideration of the materials,design,and life-cycle carbon emissions of its buildings.ULI Greenprint Center for Building Performance18Emerging Trends in Real Estate 2024Another developer we interviewed,who focuses on upscale in

176、ner suburban markets,is quite bullish on his firms office portfolio,noting that“office tenants are downsizing and consolidating but are relocating to newer buildings and paying more rent per square foot”in buildings like his.Finally,some investors point to the potential for artificial intel-ligence(

177、AI)to generate a new source of demand,particularly in traditional tech markets such as San Francisco,where much of the venture capital and employment is based.Salesforce just announced a major new round of hiring fueled by AI and reversed some recent layoffs.But these views have become lonely voices

178、 in the industry.For one thing,AI could also ultimately undermine office demand by replacing different types of office-based jobs,as we discuss in the“An Artificial Boom?”trend.And eventually,firms whose business model can support some amount of remote work will keep reducing their office footprint:

179、they save on rent,and their workers will be happier and save on commuting time.Plus,as firms go more remote,their talent pool goes global,enabling them to recruit the best talent at the most affordable wages.The economics are just too compelling for firms to reverse course and lease office space lik

180、e before.4.Its All About the DebtDebt levels in all corners of our economy have increased to record levels,but household and corporate debt burdens seem to be under control relative to historical benchmarks and delinquency rates remain low.However,CRE capital has become scarce and expensive,reducing

181、 sales transactions and broadly undermining proj-ect feasibility.Distress levels remain low,but a liquidity crisis looms as many owners of underperforming buildings face debt deadlines and will be unable to refinance their projects,prompting either defaults or distressed asset sales.As they sang in

182、Cabaret,“Money makes the world go round.”Debt is vital to the functioning of not only commercial real estate markets but to the economy as a whole.It must be because our nation is awash in debt.The total outstanding debt among U.S.households,corporations,and the federal government now exceeds$50 tri

183、llion,up a third in just the three and a half years since this decade began(through the second quarter of 2023).The federal government alone accounts for almost two-thirds of that.But even excluding Washington,households and corporations together have accu-mulated$18 trillion in debt,up a quarter si

184、nce the end of 2019.The federal debt now exceeds GDP.Should we be concerned?Probably,to all but the most fanatical adherents of Modern Monetary Theory,who hold that revenues should not constrain our government spending.The inflation of the past year seems to undercut their lack of concern about the

185、national debt,and their theory will be severely tested in the coming years as Medicare and Social Security costs soar as baby boomers retire.Higher interest rates on the debt will compound this growth.But nongovernment debt looks to be under control.Both corpo-rate debt(relative to the market value

186、of corporate equities)and household debt(as a percent of disposable personal income)have been sliding since they peaked before the GFC and have stayed within a narrow range for about a decade.Even better,there are few signs of distress,as delinquency rates on both corporate and household borrowing r

187、emain subdued,even if late payments on credit cards and consumer loans have ticked up a bit this year.In sum,significant debt is outstanding,but household and corporate debt burdens,at least,seem generally well in hand(within the means of borrowers to repay with scant signs of pervasive financial di

188、stress).That is reassuring news for the economy for when we do ultimately fall into a recession.Together with accumulated household savings,the downside risks of a severe finan-cial event seem limited.These are positive drivers for CRE.However,the rapidly rising federal debt could be more prob-lemat

189、ic,potentially“crowding out”private investment,leading to slower economic growth and higher interest rates,both of which would be long-term drags on property construction,investment,and returns.Real Estate Is DifferentIf the rest of the economy is flooded with debt,CRE capital markets are begging fo

190、r more credit.Almost every industry participant we interviewed for this report said debt became less available to them or the industry generally after the Fed began to hike interest rates in March 2022.Many blame this years sales transaction decline partly on this reduced availability.“Transaction v

191、olumes are low simply because theres a lack of debt right now,and debt is the oxygen of most real estate 19Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focusinvestors,”said the head of one asset management firm.“When oxygen starts cutting off,the patient is struggling to figure

192、out what to do with no debt.”Indeed,the industry is struggling,with reduced availability and higher financing costs.The Mortgage Bankers Association(MBA)estimates that the dollar volume of loan originations this year is down by about 30 percent from the first-half-year average from 2016 to 2019.That

193、 drop exceeds the 24 percent decline in the volume of sales transactions over the same period.Originations are falling among all primary debt sources,including banks,commercial mortgagebacked securities(CMBS),and life insurance companies,although private debt sources are sometimes stepping in where

194、others refuse to lend.Debt technically might be available but not at a price that anyone likes.As we noted in the introduction,“capital availability”was cited as the second most important issue for real estate in 2024 in the survey,topped only by“interest rates and cost of capital.”Further,more than

195、 three-quarters of respondents believe that debt for acquisitions and refinancing is“undersupplied.”No directly comparable surveys of credit availability exist for non-CRE businesses,but a study by the National Federation of Independent Business(NFIB)in August reports that almost two-thirds(62 perce

196、nt)of small businesses say that their approved credit is adequate to meet their needs.CRE debt has not vanished,however.There is still plenty of debt in the system.In fact,it is increasing.CRE mortgage debt was up 7.8 percent year-over-year as of August 2023,double the yearly 3.8 percent increase in

197、 household and corporate debt through the second quarter of 2023,according to figures from the Fed.Tighter Underwriting and Costs Limit Credit AvailabilityHow then to reconcile the sharp decline in originations and the increase in debt outstanding?“Banks are making fewer new loans,”said one industry

198、 economist we interviewed.“But theyre still growing their books of business because borrowers are holding on to the lower-cost debt or just their debt.”Thus,the increasing volume of outstanding CRE debt reflects the limited availability of new credit and their higher interest rates,as borrowers are

199、holding onto their existing debt.One developer we interviewed said,“Its more expensive,theres less of it available,and its more stringently underwritten.”That last point is underscored by banker survey data from the 20Emerging Trends in Real Estate 202421Emerging Trends in Real Estate 2024Chapter 1:

200、A New Era Comes into FocusFederal Reserve Bank of Dallas,showing that CRE debt is more difficult to get now than last year.(The most reliable national figures come from the Federal Reserve Bank,but that data is published with a significant lagas of the end of September 2023,the latest figures were p

201、ublished in March.The Dallas Fed publishes its own Banking Conditions Survey that is more timely and generally tracks closely with those of the national Fed,though it covers only banks headquartered in its south-central region.The latest report is based on surveys conducted in late September.)Banks

202、began sharply reducing their credit availability after the March 2022 interest rate hikes,with more banks report-ing tighter credit standards and decreasing their CRE loans.However,the most recent figures may provide some modest optimism for real estate investors,showing that conditions might finall

203、y be easing,though they remain well above last years levels and quite elevated by historical standards.The Looming Liquidity CrisisReduced availability and greater cost of debt present signifi-cant obstacles for investors seeking to acquire new assets and developers wanting to construct new projects

204、.One executive with an investment management firm constantly looking for new deals said his firm is using more cash now and holding off on financing until rates fall.“Why lock down your debt costs at such a high rate,or at least,perceived high rates today?”The bigger problem for the industry is the

205、wall of debt com-ing due that must be refinanced.The MBA estimates that over$725 billion of commercial and multifamily mortgages mature in 2023,with another$1.2 trillion maturing over the following two years,representing over 40 percent of the$4.4 trillion of outstanding CRE mortgages.Much of this d

206、ebt will be refinanced at higher interest rates,although some lenders will agree to“extend and pretend”to postpone difficult choices until lending conditions are more favorable.One investment manager said,“Banks are struggling to figure out what to do.They might be willing to negotiate extensions wi

207、th owners because they dont want to write down their loan portfolios,and they dont want to own these assets.”Other lenders are explor-ing different types of“dequity,”various flavors of financing that combine elements of both debt and equity to plug gaps in the capital stack.But there are two major g

208、roups of owners facing more difficult choices.Some purchased assets a year or two ago that they underwrote with aggressive rent growth assumptions and very optimistic exit cap rates,assuming they could either sell or refi-nance in a few years.Instead,interest rates have grown faster Source:Nelson Ec

209、onomics Analysis of Federal Reserve Bank of Dallas Banking Conditions Survey.22Emerging Trends in Real Estate 2024than their net income,and lenders are lowering maximum loan-to-value ratios.Together,these factors mean the borrowers can refinance only a portion of their original debt and must contrib

210、ute additional equity.Plus,the new debt will be a lot more expensive than their cheap older debt.The net result:lower asset values and inability to refinance the debt on feasible terms,even on assets that are otherwise still performing well with high occupancies.Owners may be forced to default on th

211、eir debt and give the assets back to their lenders,particularly in the multifamily sector.The situation confronting owners of underperforming assets,especially major office buildings,is even more dire.Most were purchased years ago,before the pandemic,under much more favorable market circumstances.Ma

212、ny are enduring ten-ant departures and require significant capital investments to attract or even retain their tenants.Even if their mortgages are not yet expiring,some borrowers are choosing to default on their debt and give the property back the keys.Limited but Growing DistressThus far,delinquenc

213、y and default rates remain at healthy levels and well below levels seen in recent recessions,though they are inching up,particularly for CMBS,life insurance companies,and banks and thrifts.However,we can expect these rates to rise significantly,particularly in the office and multifamily sec-tors,as

214、major leases expire and mortgages come due.While obviously painful for the particular borrowers and their lenders involved,one benefit to investors of the growing distress is that sales transactions will increase,bringing much-needed pricing transparency to the marketplace.That clarity,in turn,could

215、 help break the logjam holding back many buyers now.But the process will not be easy.One investment manager said,“Expiring debt will trigger a whole lot of transactions because not everyones going to be able to refinance.Thats going to force a repricing.It depends on how much capital is on the sidel

216、ines,but theres not enough dry powder out there to absorb the differential.So,there will be a lot of pain.”If there is not enough dry powder,there will not be enough buyers of the troubled properties,leading to more distressed assets.As often in business,one partys adversity is anothers oppor-tunity

217、.The pullback from traditional lenders such as banks and life insurance companies is creating more compelling pros-pects for private lenders.An executive with one private debt firm explained the upside for his firm:“Because its a sellers market as a lender,youre getting higher quality borrowers,your

218、e getting better rates.Just everything,in every way,the market is better for lending because theres relatively the same amount of borrowers,a lot fewer lenders.”23Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into FocusBut overall,the situation for many CRE lenders is bleak.One indust

219、ry economist summarized the scenario as follows:“Theres a ton of opportunity out there for new loans,but pain in existing books of business.”5.Eco-Anxiety Comes HomeAs heat records continue to be broken,the number of bil-lion-dollar climate events is rising sharply,posing increased costs and risks t

220、o owners and operating challenges for managers.Insurance historically has been only a minor concern for commercial property owners,but rising insurance costs and declining availability is forcing the industry to rethink the approach to insuring assets against growing climate risks.Property owners an

221、d managers are getting caught in the middle of culture wars and fiduciary duty,as some people decry environmental,social,and governance(ESG)efforts that government regulations and investor mandates require.After a record-breaking summer,2023 is trending to be among the hottest years ever recorded.Pr

222、eliminary data from the Copernicus Climate Change Service shows that the global average surface temperature for June through August was 1.17 degrees F above the 30-year average through 2020.For perspective,that was over half a degree warmer than the previous summer record,set in 2019.Numerous U.S.ci

223、ties set all-time records.And once again,the number of billion-dollar climate events continues to rise.The United States has already endured 24 billion-dollar events this year through mid-September only part way through the hurricane season.By comparison,the annual average number of events for 19801

224、999,adjusted for infla-tion,was just 4.5.Over the past five years,the yearly average has risen to 18,and now that figure has been reached in just nine months.But why is this a concern,aside from our own personal comfort and safety?One answer was succinctly offered by ULIs former chair,Owen Thomas,in

225、 a recent article in Urban Land maga-zine:“The quality and financial performance of real estate 24Emerging Trends in Real Estate 2024assets is increasingly correlated with sustainability perfor-mance.”Even if they want to do the right thing,however,CRE inves-tors and fund managers face complex and d

226、ifficult choices in considering how exactly to move forward.On the agenda:decarbonization and energy efficiency,indoor environmental quality,climate resilience,soaring insurance costs and declin-ing insurance availability,and uncertain access to resources like power and water.The Tragedy of the Hori

227、zonMost of these issues have been percolating in the background for years but have become increasingly urgent as climate events mount and the risks and costs to owners rise.The head of sustainability for a property and investment management firm said,“Investors are not investing to lose their money.

228、They want to understand what the risks are and what might impact that investment.”A critical industry problem is that most market participants have a decision time horizon that is much shorter than needed to address physical risks due to climate change,a concept that Mark Carney,then the Bank of Eng

229、land governor,famously dubbed“the tragedy of the horizon.”Even if it makes financial sense over the lifespan of a building to enhance its resilience,the risk of a climate event occurring in any particular year within the anticipated hold period is minimal,and many own-ers believe the costs would be

230、covered by insurance anyway.Indeed,that is what insurance is supposed to be for.But is that a wise long-term strategy?It is the industrys collective disconnect between the decision time horizon for property investments and natures climate change timeline that enables people to ignore climate risks.E

231、xplained one leading CRE academic,“Daniel Kahneman got his Nobel Prize over this,about how short term our horizons are and how little information we use to make decisions.So,we keep seeing market capitalization not reflect the risk of climate change like fires and floods.”Suddenly,People Pay Attenti

232、on to InsuranceMaybe not for much longer.“The key issue right now with climate is the insurers are bringing the costs of climate events to you in real time today,”said the head of research for a CRE analytics firm.“Depending on the insurance company,depending on the building owner,insurance costs ha

233、ve more than doubled over the last two to four years.”Historically,insurance has been only a minor concern for com-mercial property owners,accounting for only about 3 percent of rent,and even then,often paid or reimbursed by tenants.But the huge spike in costs is forcing owners to pay attention.Owne

234、rs who normally routinely pass these costs on to tenants worry that,at some point,tenants will balk or the costs might limit future rent increases;while if the owner pays,that eats into returns.And that assumes the insurance is even available,which is no longer a given in some areas.The analytics fi

235、rm researcher further explained,“Regulators have their fair share of blame by limiting the increases in insur-ance premiums.Even without additional climate events,just the inflation makes it extremely hard for an insurer to make money in California or Florida,”so they elect to stop offering coverage

236、.An asset manager for one CRE investment firm said,“The rapid increase in cost and the decline in the availability of insurance coverage is forcing property owners to explicitly deal with what the carriers believe the risk is associated with that location.So,they have a choice:they can either pay wh

237、at the carriers believe the risk is,or they can self-insure.”Major institutional investors generally secure insurance for their entire portfolio,so they may not worry about obtaining insurance for a particular property.But one investment execu-tive we interviewed said,“If youre a smaller buyer,and y

238、oure buying in one of these high-risk areas,like Houston or South Florida,the seller is going to be concerned about whether youre going to be able to secure the insurance.”The buyer might also be less able to secure a long-term mortgage for the property if insurance is unavailable.“The netnet of hig

239、her insurance costs is probably less new supply of housing or industrial space and higher rents,”said that property investor,as these two property types are more likely than other major property sectors to be located on high-risk sites such as along the coastline or near forests.To ESG or Not to ESG

240、Regardless of insurance costs,property owners and man-agers have more urgent reasons to address climate risks:growing government regulation and ESG mandates.The city governments of most leading CRE markets have enacted climate-related regulations in recent years including such mandates as regular en

241、ergy audits,energy benchmarking disclosure,and requiring commercial buildings to implement energy-saving measures.New York City has pioneered these 25Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focusefforts,but other cities include Austin,Boston,Chicago,Denver,Los Angeles,Seatt

242、le,and Washington,D.C.,among many oth-ersin other words,most of the top markets where institutional investors buy property.But it is not just local governments making this push.According to the leader of one asset management firm,“Investors are getting far more knowledgeable and sophisti-cated about

243、 climate and resilience.Looking forward five years,thats what will really differentiate performance to a much greater extent.”Often,the push comes from European inves-tors,where ESG and impact investing are more accepted.A board member of one climate investment firm said,“Were starting to see greate

244、r demand in the U.S.,in part because capi-tal is global.”In this era of heightened polarization,however,there has been a growing blowback from“anti-woke”groups who reject ESG efforts.Many leading asset management firms,including the three largestBlackrock,Vanguard,and State Street Global Advisorshav

245、e all been criticized for their ESG efforts by con-servatives.One asset manager said,“There is a broad range of investors,some of whom think that ESG efforts are not doing enough,and some are convinced that they are wasting time and effort that could be spent increasing returns.”Another asset manage

246、-ment executive also saw these“barbells of investors,which certainly creates a challenge for funds if youve got some of both in a commingled product.But,aside from that,the reality is its hard not to look forward and see cap rates being applied to what might be comparable buildings,except for some o

247、f these environmental factors,not getting wider.”Homeowners Still Dont Take NoticeThe situation is more problematic in residential real estate because homebuyers generally operate with less information than CRE professionals do.For example,a 2022 Fannie Mae survey found that“Overall awareness of flo

248、od risk is low,par-ticularly for those in high-risk zones.Despite being required 26Emerging Trends in Real Estate 2024Sustainable Real Estate:On-Site SolarAmid the urgency to limit the impacts of climate change and the desire to cautiously navigate market fluctuations,com-mercial real estate owners

249、and occupiers are increasingly focused on two critical things:improving environmental performance and their own bottom line.Adopting energy efficiency practices and implementing renewable energy initiatives pave the path to achieve these goals.Due diligence criteria,financial viability indicators,an

250、d sustainability perfor-mance metrics are now a significant part of the investment process and operational decision-making for real estate investors.The journey to reach the critical goals mentioned above highlights the relevance of several other factors at play,including the following:Value creatio

251、n.Seventy percent of private equity(PE)investors(including PE real estate investors)surveyed by PwC in its Global Private Equity Responsible Investment Survey 2023 place value creation among the top three drivers for their organizations environmental,social,and governance(ESG)activities.For real est

252、ate,according to the U.S.Environmental Protection Agency(EPA),energy use can account for one-third of total operating cost in commercial office buildings.Furthermore,30 percent of energy in commercial buildings is wasted due to inef-ficient use.This inherent gap provides a lucrative opportunity to u

253、ndertake energy efficiency projects and imple-ment operational changes that can reduce operating expenses,attract tenants,demand a higher rent premium due to improved indoor environment,and increase property values.In addition,pursuing various certification and rating programs such as Leadership in

254、Energy and Environmental Design(LEED)and Energy Star,which recognize top sustainability and energy per-formers,can lead to enhanced brand reputation for the building and the organization.Net zero commitments.Companies,including real estate investors and occupiers,have adopted formal and public commi

255、tments to reduce their Scope 1,2,and 3 greenhouse gas emissions by a specific date(typically 2050)to support the objectives of the Paris Accord.These goals are public and are often measured against a formal set of criteria and frameworks such as the Science Based Targets initiative,Better Buildings

256、Partnership,and Net Zero Asset Managers initiative.This momentum is well demonstrated by the fact that companies spanning over a third of the global economy by market capitalization(including real estate managers,their institutional investors,and their blue-chip occupi-ers)plus governments have set

257、or committed to set net zero commitments by the end of 2022.Regulatory compliance.Global regulatory compliance for ESG reporting and energy performance is a priority for real estate executives.Europe is leading the way.Certain companies that market or hold assets in the EU are under pressure to quic

258、kly comply with the EU Taxonomy,Sustainable Finance Disclosure Regulation(SFDR),Corporate Sustainability Reporting Directive(CSRD),and other policies.In the United States,the Securities and Exchange Commission(SEC)proposed that Climate Disclosure,which continues to be discussed for public companies,

259、will increase disclosures relating to emissions reporting and climate risk.At the local level,more than 50 states and cities have adopted building laws related to energy and carbon benchmarking and reduction,performance standards,and electrification.Owners or landlords that fail to act in a timely m

260、anner face varying and steep penalties plus brand and reputational risks.Tax credits and incentives.Increasingly,local,state,and federal incentives are provided to support projects that lower emissions and energy use.The Inflation Reduction Act(IRA)is the largest investment in climate and energy in

261、U.S.history.The IRA was adopted in August 2022,and the initial forecast is that$390 billion in funding for climate and energy initiatives is available to tap into over the next decade.Energy incentives of$270 billion will drive opportuni-ties for real estate companies,providing an impetus to underta

262、ke impactful renewable energy projects.The IRA makes existing energy credits and deductions more use-ful and valuable.Incorporating analysis of credits and incentives into energy efficiency strategies and project plans can significantly improve return on investment(ROI)and cut simple payback periods

263、.Continued next page.27Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into FocusSpecifically related to solar energy,the Solar Energy Industries Association(SEIA)forecasts that over the next 10 years,the IRA will lead to 48 percent more solar deployment(an additional 160 GW of solar po

264、wer)than would otherwise be expected under a no-IRA scenario.This translates to$565 billion in new solar investment over this 10-year period,$144 billion more than under a no-IRA scenario.In the past year,there has been a significant growth of on-site solar for commercial real estate including rooft

265、ops,parking canopies,and ground mounts.According to another recent report,solar accounted for 54 percent of all new electricity-generating capacity added to the U.S.grid in the first quarter of 2023,and the commercial solar segment grew 27 percent compared to the previous year.Solar photovoltaic is

266、now the lowest-cost source of new energy compared to coal,oil,and nuclear power.According to PwC,nearly half(46 percent)of commercial and industrial leaders expect an increase in on-site energy generation or battery storage over the next two years.Sustainability implementation has a clear advantage

267、for real estate:it can help improve financial returns for on-site renew-able investment,create tenant demand for green energy,and accelerate electric vehicle(EV)charging adoption given the recent surging interest.Solar also presents a value-creation opportunity for real estate owners either through

268、electricity cost savings(lower cost to produce power,reduced demand charges,and lower transmission and distribution cost)or by creating a new revenue stream by selling electricity and/or renewable energy certificates to tenants.In addition to the economics,many other reasons make building owners con

269、sider solar,including the following:Reduction in annual utility costs and associated increase in property values;Support of tenants sustainability commitments to net zero transition;Increase in property resilience to extreme weather events;Reduction of grid dependency for propertys energy needs;Impr

270、ovement of regional air quality;andGrowth in local job opportunities during installation.Continued next page.28Emerging Trends in Real Estate 2024to have flood insurance if they have a mortgage,nearly 40 per-cent of respondents in a high-risk zone claim they do not have insurance because they do not

271、 live in a high-risk zone.”Even when they are aware,insurance uptake is often inad-equate.“People historically have not been incentivized to think long term because taxpayer-subsidized insurance for flood insurance underprices the risk,so we subsidize people on coastal hills and rivers that are in f

272、lood zones,”said a real estate professor.Another factor is the flood maps drawn by the Federal Emergency Management Agency(FEMA)are outdated and do not account for future risk due to climate change,but changing them is difficult.According to one asset manager who focuses on climate risk,“Theres a hu

273、ge constituency,well funded,that wants no change to a FEMA map,ever,because when you change a FEMA map,there are big losers:if the FEMA map changes,you may or may not have any value left in the prop-erty you bought.”It is no surprise,then,that most households do not take climate risk seriously.A stu

274、dy by Redfin found that twice as many people moved into our nations most flood-prone counties as moved out of them in 20212022,compared with the prior two years.Similarly,the counties most prone to wildfires and excessive heat also have experienced more in-migration than move-outs.Either households

275、are not getting the message,or our government insurance programs are providing the wrong incentives.The asset manager who focuses on climate risk said,“You have several forces at work determining migration patterns:you have economic opportunity,youve got lifestyle,and then exposure to natural risk.P

276、eople tend to oversimplify to justify a decision theyve made.It took years to build up the momentum of this movement,and it will take years to change it.”But a reckoning could happen sooner than homeowners expect.A new residential climate risk study in the journal Nature highlights the financial ris

277、ks to homeowners.The authors conclude that residential real estate markets fail to properly reflect the true costs of flood risks such that the mar-ket is overvalued by$121 billion to$237 billion,with the most overvalued property concentrated in markets with no flood-risk disclosure laws and where t

278、here is less concern about climate change.Furthermore,a Redfin study found that homebuyers in high-risk areas who have access to flood risk informa-tiondatapoints many MLS sites are now includingbid on lower-risk homes.The study concludes that“home values in flood-prone areas could drop as more peop

279、le become aware of the risks.”Though the Nature and Redfin studies addressed only residen-tial markets,it seems likely that commercial real estate could be similarly overvalued because they are subject to the same climate forces and emerging consumer awareness.Caveat emptor.A recent Morgan Stanley r

280、eport estimated that about 40 billion square feet in roof/parking space available in U.S.real estate and commercial trucking properties could be used to generate solar power.Annual electricity generation from these properties could equal 25 percent of total electricity consumption from commercial pr

281、operties in the United States and about 10 percent of total electricity sales in the country.While the opportunity is significant,the largest U.S.real estate owners continue to be the first movers to deploy strategy and capital to capture the renewable energy opportunity.SEIA cites Target,Prologis,W

282、almart,Amazon,and Lineage Logistics as the top five corporate users by total installed on-site solar capacity for the past year.The first step for building owners looking to take advantage of solar opportunities and benefits is to develop an installation strategy.They should prioritize individual si

283、tes based on sev-eral key factors,including location and solar potential,federal and local incentives,utility programs,roof condition,and property restrictions.While on-site solar may not be feasible for every property in a portfolio,the assessment could help property owners discover additional oppo

284、rtunities to advance their sustainability and energy efficiency goals,while creating positive impact for their bottom line.Randy Hoff,PwC29Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focus6.Even Further Out of ReachHousing affordability continues to reign as a top challenge for

285、 the CRE sector.The United States experienced the fastest-ever deteriora-tion in housing affordability over the past three years as housing prices soared during the pandemic,followed by a historic mortgage rate shock that more than doubled mort-gage interest rates.After sharp rent escalations last y

286、ear,rent growth has eased for now due to large supply deliveries,but rent growth is expected to resume as construction has fallen.Housing affordability has graced the pages of Emerging Trends for too long,securing a place among the Top 10 trends for the past seven years starting in 2017 as housing b

287、ecame less and less affordable to more and more people.Last year,Emerging Trends noted that“housing affordability has fallen to its lowest level in over 30 years”as both for-sale and rental housing costs soared to record levels.This year,it is even worse,especially for homebuyers.Rents are higher th

288、an ever,too,but rising more slowly,at least.For now,the affordability focus is back on the for-sale market and likely to remain there for a while in this era of“higher for longer”interest rates.A troubling combination of slowing but still rising home prices and rapid increases in borrowing costs has

289、 put home purchases further out of reach of even more people.The share of U.S.households that can afford the median-priced home is at its lowest point in almost 40 years,according to the National Association of Realtors(NAR).“Housing affordability is the critical issue in real estate,”said a leading

290、 real estate academic,referring specifically to the market for for-sale housing.Many industry participants seem to agree.Respondents to the Emerging Trends survey over-whelmingly cited“housing costs and availability”as the most critical social/political issue this year,far outdistancing other import

291、ant issues including immigration policy and political extremism.Blame the Fed(At Least in Part)The United States experienced the fastest-ever deterioration in housing affordability over the past three years,with the Fed bearing much of the responsibility.First-home prices soared during the pandemic

292、when the Fed lowered interest rates to near zero to stimulate the economy.Mortgage interest rates fell to their lowest rates ever,fueling increased demand for housing just when supply was falling.Homebuilders slowed construc-tion of new homes while investors were buying many existing homes to conver

293、t into rentals,further reducing the supply.The result was a 30 percent jump in the median price of existing homes sold from 2020 to 2022,based on NAR data.Then came the historic mortgage rate shock as the Fed moved aggressively to tame inflation by driving up interest rates,ultimately leading to a 1

294、50 percent surge in mortgage interest rates(from 3.0 to 7.7 percent).The adverse impact on afford-ability was even greater than the 30 percent price increase:a homebuyer earning the median household income of about$75,000 can afford about a$300,000 home with a 7.7 percent mortgage rate(the average i

295、n early October 2024)assum-ing typical terms such as a 30-year fixed-rate mortgage,20 percent down payment,and spending 28 percent of gross income on mortgage payments(including property taxes and insurance).Two years ago,that same buyer could have bought a$500,000 home with a 3.0 percent mortgagea

296、40 percent decline of over$200,000.For further perspective,the median home price in August 2023 was about$407,000,or more than a third higher than a typical household could afford.The Feds complicity goes further.The chief economist at a CRE data firm stated,“The easiest way to deal with the lack of

297、 affordability is just to build more.And the Fed raising rates made it harder to get financing,which then makes it harder to develop homes,and whats really needed to deal with the affordability issues.”Ironically,the Fed must actually slow eco-nomic growth to improve affordability by lowering intere

298、st rates and costs,which would allow for more construction.Unfortunately,no relief seems to be in sight.Though home prices fell briefly earlier this year as high interest rates cramped affordability,that decline appears to be over as prices started rising again this summer.The chief culprit now is t

299、he extreme scarcity of existing homes put up for sale.The good news for existing homeowners is that few must pay the prevailing high interest rates.Most either own their house outright with no debt or have locked in rock-bottom interest rates on their fixed-rate mortgages.The bad news for homebuyers

300、 is that homeowners are opting to stay in their homes rather than face higher mortgage payments,so the supply of homes on the market is at historic lows.With so little on the market,desper-ate homebuyers are bidding up home prices on the few homes available.30Emerging Trends in Real Estate 2024More

301、Options for RentersThe situation has been more favorable for renters of late.Rent growth nationally is flat or minimal,depending on the source,after peaking at over 15 percent year-over-year in early 2022.The difference?Healthy additions to supply.Apartment construction is on pace to add over 460,00

302、0 units in the United States this year,on top of over 700,000 units added in the past two years for a total of 1.2 million since the pandemic began.This is finally providing much-needed relief for renters,though angst for some multifamily investors who bought projects last year in anticipation of st

303、rong continued rent growth.Another million units are scheduled to be completed through 2025,most in high-growth,high-demand markets,which should put additional downward pressure on rents.But to be clear:rents have not actually declined in most markets,where rents remain at or near record levels;only

304、 the rate of increase has eased.And that relief may not last for long.The same interest rate increases that sharply increased borrowing costs for homebuy-ers did much the same for multifamily developers.According to one CRE investment banker,“The supply of new product has been choked off quickly.Bet

305、ween the cost of financing,labor shortages,and material shortages,the cost to add new prod-uct is really choking off new supply.”Another reason for high rents is rising household formation rates,as remote workers need more workspace at home.Many have been ditching their roommates.An analysis by the

306、Economic Innovation Group found that while remote work increased out-migration from dense,high-rent markets such as New York and San Francisco,rising household formation rates counterbalanced the impacts of the outflow,so occupancy and rents stayed high.Thus,all the recent apartment supply has done

307、little to dent the nations wide housing supply gap,which Zillow has calculated has grown to 4.3 million units.“The shortage of housing in the U.S.is perpetual,”said the investment banker.Little wonder then that rents are expected to resume rising in 2024 as multifamily deliveries start to decline.On

308、e mixed-use developer stated,“Were under-housed in this country.Supply may have gotten ahead of itself in the Sun Belt markets and some corporate growth markets,but overall,were very bullish on the ability to grow revenue in our multifamily portfolio.”Which means higher rents for renters.Now What?Th

309、ere are no easy answers to solving the affordable housing crisis,as we have explored in prior editions of Emerging Trends.But maybe there is one:build more housing,preferably at all price points.As if there were ever really any doubt,the recent market trends in the for-sale and rental sectors demons

310、trate that supply does matter when it comes to housing affordability.The price of homes soared when demand increased but supply fell.Rent growth moderated when significant new apartment supply came to market.This simple dynamic should not be controversial.But the reality is that the industry does no

311、t build enough units affordable to lower-income people especially,so not all new supply will necessarily improve affordability.Most(60 percent)of the new units built from 2020 to 2022 are affordable to less than half(41 percent)of Americas renter population,accord-ing to an analysis by RentCafe.In t

312、heory,some of the units formerly occupied by the households renting these new pricey units will filter down to less affluent families.But will they,if there is a perennial housing shortage?We have previously discussed impediments to increasing the supply,such as excessive permitting fees and entitle

313、-ment costs,as well as restrictive zoning.Some states such as California,Florida,and Oregon have adopted measures to increase as-of-right density to boost affordable housing production.However,these measures can sometimes create conflicts with legitimate efforts to preserve neighborhood char-acter w

314、hen state boards can override local jurisdiction.Regardless,this progress is being overwhelmed by spiraling construction costs.What would it take,short of a magic wand,to produce more affordable housing?One former homebuilder said,“Lower interest rates,lower material costs,lower labor costs.Material

315、 costs can come down,and lumber has come back down.But labor?No way.Maybe if we went into reces-sion,then plumbers and electricians might start dropping their prices right now.”The challenges to building truly affordable lower-income hous-ing are even greater.One affordable housing lender stated,“We

316、 are so very much in an era of real estate trying to solve social challenges.So,it could logically follow that deals are getting harder to do.With a lot of social challengesaddiction,crises of despair,and lots of health-related challengesall sorts of individuals need and deserve a kind of care that

317、goes well beyond a standard property management operation.And those kinds of housing needs are trying to be jammed into a program that was not set up to do that kind of work.”31Emerging Trends in Real Estate 2024Chapter 1:A New Era Comes into Focus7.Portfolio PivotRecent shifts in both property and

318、financial markets are upending long-established norms about how CRE portfo-lios should be constructed,including the definition of“core”assets.With downtown offices and regional mallsthe traditional pillars of CRE portfoliosboth suffering existential declines in tenant demand and property values,fund

319、 managers must find replacement investments.Fund managers are considering a range of newer product types previously viewed as niche but offering more compel-ling returns.Constructing a commercial real estate portfolio was perhaps never a simple matter.Working with the client to identify their invest

320、ment goals and risk tolerance,the portfolio manager must determine the property sector allocation,target asset markets,desired tenancy by type of asset,as well as the pre-ferred operational,physical,and site attributes of each asset type.Once all these targets are decided,the portfolio manager must

321、also establish the portfolios level of diversification and liquidity.And those are just the primary considerations.Additional strategic management issues to consider include balancing short-and longer-term market views and objectives,how much weight should be placed on ESG factors,and how to compete

322、 for investors investment allocation.That is a lot.But most of these issues need not be revisited frequently.For different styles of the portfoliosay,a conservative“core”portfolio or a more aggressive“value-add”or riskier still“opportunistic”portfoliothese parameters have tended to be relatively con

323、stant over time,with a narrow range of options within each type depending upon the clients specific prefer-ences.These parameters might be modified periodically and fine-tuned more regularly,but the tweaks tend to be modest,even over longer time horizons.These parameters are changing.“One thing that

324、 has evolved during this last period is how we think about the composition of a core portfolio and the definition of core,”said the head of an asset management firm.Falling Out of Love with Retail and OfficeRecent shifts in both property and financial markets are upend-ing long-established norms abo

325、ut how CRE portfolios should be constructed and even how often they should be refreshed.Institutional funds began investing more seriously in commer-cial real estate after the Employee Retirement Income Security Act(ERISA)was enacted in 1974,which allowed pension funds to invest in a broader range o

326、f assets.Ever since,there have been two traditional pillars of CRE portfolios:conventional office and enclosed retail centers.Downtown office and regional malls offered investors several key benefits.They provided stable cash flows with relative liquidity because these in-demand assets could be easi

327、ly resold.Their long-term leases typically included escala-tions,providing an inflation hedge.As large assets,they also allowed fund managers to invest large sums of capital with one underwriting in one transaction.And it did not hurt that these buildings looked good on the cover of an annual report

328、.But then e-commerce and work-from-home happened,upend-ing the market dynamics of the retail and office sectors.It is unfair to ascribe all the fall-off in tenant demand to these two factors alone.As a nation,we had built too many malls(and other types of retail space,too)for years,even as shopping

329、patterns were evolving.And firms were reducing their per-head office space demand well before COVID.Nonetheless,e-commerce and remote working greatly increased during the pandemic and helped accelerate the tenant shifts away from enclosed retail and office.Their appeal to investors sank,even if regi

330、onal malls have staged a partial recovery this year,as discussed in Chapter 2.An investment banking executive stated,“The fortress invest-ments,the super secure investments in real estatewhat the heck happened?Where did they go?Malls and office buildings were the storehouses of value,the great infla

331、tion hedges.And now the only thing that has really stood up over time has been multifamily.”“Its not clear how to replace the stability we used to expect from class A offices and top-tier regional malls,”said the head of strategy for an asset management firm.“Theyre not going away totally,but theyre

332、 going to be much more diminished,so theres still a lot of turmoil about where to redeploy.Thats the number one issue institutional investors are facing.”32Emerging Trends in Real Estate 2024What Is“Core”?What are investors considering to replace office and regional malls?Investors were already shif

333、ting their gaze and fund allocations to other CRE product types.The head of an asset management firm stated,“Traditionally,core has been defined as the four main food groups office,retail,industrial,and mul-tifamily.Looking forward,I expect some of what has been a little bit more niche or specialized becomes a bit more main-stream.And maybe its not necessarily even as a new asset class,but its an