Many different factors can affect real estate values. Cities can develop hot housing markets; infrastructure investments promote interest in one place over another; and business expansion or contraction can affect real estate investment decisions throughout the community. In the last year there have been some massive and unprecedented economic changes that have affected all of the real estate sector – reactions to recession in 2020 and subsequent moves to address explosive growth recovery in 2021. As attention starts to turn towards 2022, there are current drivers of growth that will continue to stand out and there will be some new ones making an appearance.
One of the new drivers is logistics and supply chain related. There has been a dramatic change in how companies are dealing with their supply chain due to the pandemic as well as other factors. The Just-In-Time system has been fractured by global port delays, shortages of drivers, and overall capacity strains. Companies are working to diversify those supply chains, but they are also adding warehouse capacity so they can hold more inventory.
The demand for logistics centers and distribution centers has increased as consumers shift from the traditional brick and mortar experience to online shopping. Estimates suggest that ecommerce growth could account for 27% of all commercial real estate purchases between now and 2025.
The major questions as far as real estate development is concerned involve the demand for office and retail space. The expectation is that many workers will remain remote even after the threat of the pandemic fades. In fact, according to Kastle Security Systems national data, offices across the 10 largest cities in the United States are still at just 34.3% of their pre-pandemic occupancy rates.
Given the fact that mask mandates and other restrictions are coming back (in the wake of the recent spread of the Delta variant of COVID), the office environment is unlikely to return to normal for a while yet. Retail has also been affected by the changes brought on by ecommerce. Malls have been in real trouble and Big Box retail stores do not see the traffic they once enjoyed. In many cases mall developers are investing in converting existing square footage to multi-use spaces (blending commercial, private residential, and retail space together). But those projects are slow to get started because of labor and construction material shortages, along with uncertainty regarding future use demand.
The boom in residential activity has also stimulated investors. In some markets almost half of the homes sold in the last year have been purchased by investors. They either intend to make them into rental property or they will plan to sell them later. Given the run up in prices over the last year it is hard to imagine the prices will be appreciably higher later, but for a few more months they will certainly gain in value. Home prices have reached record levels as there have been shifts in where people are buying – moving from congested urban areas to more distant suburbs. Multi-family units remain in demand but this changes from one region to another.
Market Make Up
At this point retail and industrial development each make up 16% of real estate exposure. The largest share is held by office development (35%) with multi-family at 22%. The alternative housing sector is at 12% but in the next few years these numbers are expected to shift. Alternative housing and industrial will make up 20% each. Healthcare, technology, and multi-family will account for 15% each while traditional office sinks to 10% and traditional retail to 5%.
The hot markets in 2021 will continue to grow for the next few years. The top ten include Raleigh/Durham, Austin, Nashville, Dallas/Ft. Worth, Charlotte, Tampa, Salt Lake City, Washington D.C., Boston, and Long Island. These markets have been hot for several years now and there seems to be a pattern that starts with job growth and then changes into broader demand. The growth means that more people support the amenities that are on offer and the momentum continues. These are not growth centers in the way that boom towns have been. The motivation for expansion is long lived and not dependent on a single industry.
The real estate market continues to change. MarksNelson can help you navigate the new opportunities emerging. Reach out to us today.