MAJOR ISSUES IMPACTING REAL ESTATE IN 2021
In a prior TIP, I covered some of the major issues that have recently impacted real estate.
In discussing this topic, I mentioned the Counselors of Real Estate, who have been issuing a yearly collection of the top 10 issues or concerns affecting real estate.
(The Counselors, also known as CREs, is an invitation-only organization under the National Association of Realtors. I disclose my position as a member of the CREs.)
The 2021 Top Ten list from the CREs was just issued. There are some very interesting areas that are worthy of consideration as we move through this year. The current Top Ten List includes the following, in reverse order of the CRE listing of priority.
1. Remote Work & Mobility _________________________________________________________________________________
This number 10 listing considered the impact of Covid-19 and the different capital markets. After looking at some changes in the area of commercial mortgage-backed securities, REITs, private equity funds, and much more, the CRE conclusion on this issue, among others, found “…there is plenty of capital ready to deploy.” This amount of capital in the market will be very important in 2021 and the following years.
This item is in the top 10 because, as stated in the CRE top 10 issues: “The Counselors of Real Estate has identified Adaptive Reuse as 2021 Top Ten Issue not just because of the number of projects completed and underway that now surpass even self-storage as a property type with more than 50,000 properties, but because it holds the promise of:
1) reconnecting our communities from what the Interstate Highway system divided from the 1950s to the 1980s;
2) preventing blight that developed in our dense urban cities from flowing to the suburbs and secondary MSAs;
3) restoring much-needed green space to our neighborhoods and cities that can germinate interaction of diverse demographic groups; and
4) promoting good ESG and diversity, equity, and inclusion policies.” How property will be repositioned in the market remains to be seen. Changing the use of a shopping center to other uses, as an example, will be common in many commercial markets in the US.
This issue addresses the unknown area of how we address the potential of the economy relative to many areas, including real estate. Will office use remain much weaker than pre-Covid19 levels? Will apartments continue to be a favored investment in the real estate area? How fast will retail, hotels, resort properties, and others recover, post-Covid19? The CREs concluded that there are many unknowns in this area. Hence, the conclusion was: “The thinking is ‘focus on what you can control’ during this period where macro-level uncertainty is the governing headwind at the policy level in terms of the structural problems in this economy.” In this setting, some firms are turning more toward managing the assets they now control.
The Counselors’ position is clear: There is political polarization and this will impact many areas, including real estate. However, some effort to work together must come about. The Counselors’ report stated: “We acknowledge that there is legitimately a diverse range of political ideology in America. But there must also be a kind of Venn Diagram in which the political positions can acknowledge an area of overlap, common ground that is apparent when those outside the Beltway are queried. Even though the red and blue map represents truly differing perspectives and priorities, the nation is decidedly less polarized than are its elected representatives. The economy and the real estate industry would be far healthier, as would American society if the pattern of party-line voting in the halls of Congress could be transcended in favor of something very traditional: the definition of politics as the art of compromise.”
The stock of housing supply is low and does not support the needs in the US. Covid-19, supply and demand, affordability, tax laws, employees, political concerns, risk, and many other factors have influenced this issue of housing supply. The current position is clear: Housing is in short supply in many areas and the cost of housing is increasing at a much higher rate, overall, than the stated inflation rate. What can be undertaken to solve this issue remains uncertain, given the many forces that influence the level of housing, new and existing. The National Association of Realtors continues to address this issue, as do other groups, such as the National Association of Home Builders. It has been widely stated by many economists and some of these housing groups that the shortage of housing units is in the 5.5 to 7 million range—if not more. And, even if the number of units was increased for housing, the affordability concern continues to grow.
With the proposals by the Biden Administration as to the need to pass legislation to support needed infrastructure changes, this area identified by the Counselors, will continue to be of concern. In recent discussions, the issue has also been focused on what is meant by “infrastructure.” The Counselors Report, in discussing this item, seemed to focus on the agreed need for the traditional types of what one might historically have labeled as “infrastructure,” such as roads, bridges, airports, ports, mass transit, etc. There seems to be little disagreement among the political parties in the US that there is a clear need for the improvement of these traditional infrastructure items. Noted in the CRS Report, was a reference that the American Society of Civil Engineers scored the current US infrastructure with a C- grade. We have much to do in this area!
This factor labeled as “logistics” by the Counselors refers to the concerns with the functioning of our economy. This includes supply side issues, moving goods and products by rail, sea, trucks, pipelines, or otherwise. It also includes issues of storage, ease of access, cost of access, the timing of access, etc. The eCommerce issues, be it delivery to the home or otherwise, are clearly impacted by the issue of logistics. We have recently seen what can happen to sales and the economy when pipelines are down, electric grids are interrupted, and deliveries cannot go forward or cannot move on a timely basis.
The ESG issue, Environment, Social, and Governance, remain of concern to many entities. When looking to the corporate level or other entity in the market, the Counselors’ Report noted a few studies that have stressed the import of ESG to influencing shareholder value. In the CRS Report, it was stated that in a “2019 McKinsey survey, 57% of CEO respondents said they believe ESG programs create long-term value, and 83% say they expect ESG to contribute more shareholder value.” Thus, the Counselors are acknowledging the position that the direction of many companies will be influenced by ESG.
Clearly, the use of more technology, coupled with additional discoveries, inventions, and creativity have accelerated many areas or uses of real estate, such as industrial/warehouse space employed for creating, holding, and delivering goods. The need for more warehouse space, be it for the Amazon type company, marijuana growing and production, driverless vehicles, electric vehicles, and much more is accelerating the need for such real estate. eCommerce and more home deliveries of various products, Covid-19 restricting some activity and growing other businesses are only a few illustrations of changes that are impacting real estate, among other areas. What will happen over time, such as moving or not moving back to the office for work and retail shopping online are some of the unknowns that will continue to impact real estate. Hence, the reason for including this area of technology acceleration and innovation within the top 10 areas impacting real estate. The technology is weighted very heavily in the Counselors’ Report, moving it to the number 2 spot.
Coming to the number 1 position as to the Top Ten Issues Affecting Real Estate in 2021 is the impact of remote working and the changes in mobility. There is no question that Covid-19 has had an enormous impact on our society. Whether people work at an office or at home is a huge change. If people go out to eat or eat at home is very important. These two items strongly influence the types of real estate in demand and the use of the same. If people do not go to the office to work, but rather, work from their home, there are major implications to such results. In the CRE Report, it was noted that as of the middle of June 2021, it appears that only about 1/3 of the office employees have returned to the office. What is unknown is how soon this number will change and to what extent it will change. If most employees return to the office, there will continue to be demand for office space. However, if the number of employees who return to work at the office, as opposed to working at home, stays under say 50%, this has massive implications for the office market. If consumers choose to order food to be delivered to their home, as opposed to going out, this, too, has strong implications for the real estate market, among others.
Everyone is impacted by these issues. Consider, for example, how students will be educated in the formal sense. Will such education be virtual or in-person? Does this change from K-12, to college education, to other education? Will most of the enrollment in elementary schools, secondary schools, and university training return to pre-Covid19 levels? Or, will we see a permanent shift away from the numbers and approach to education that were in place prior to Covid19? Hence, Remote Work (education, etc.) is a crucial factor that will dramatically impact real estate. The mobility of workers and others to locate at home, at rural locations, or elsewhere, and the given location within the US also is of utmost concern when looking to the real estate market—among other markets.
It is very helpful, even without all the answers, for everyone to consider not only these Top Ten areas emphasized by the Counselors but other changes that have taken place and continue to take place through evolution, technology, inventions, political issues, safety, etc. that will influence our lives. Part of that influence is clearly in the real estate area. However, these changes are far broader than real estate issues. They impact every aspect of our lives.
Dr. Mark Lee Levine