Key Takeaways From 'Emerging Trends in Real Estate 2021'

For more than 50 years, investors have turned to the annual “Emerging Trends in Real Estate,” report, which today is published jointly by PwC and the Urban Land Institute, to understand the evolving landscape around a variety of property sectors. Through interviews and surveys of mostly private property owners, real estate developers, real estate advisors and private-equity real estate investors, the publication expresses the collective outlook of these front-line real estate professionals.

CRE professionals offer their perspectives on the near-term future of key real estate property sectors, as well as regions and cities around the U.S. and Canada. Availability of capital for property sectors and subsectors is also assessed and a myriad of other critical factors are explored, such as pricing, leasing and sales volume, demographics and consumer behavior. Most surveys and interviews for this year’s publication were conducted during the spring and summer of 2020, so the outlook for 2021 incorporates all the challenges posed by the coronavirus.

At over 100 pages, the publication is robust. To provide LoopNet’s readers with a top-level view of investment prospects for property types, below are rankings by property sector as well as commentary from the report. The complete publication can be accessed here.

Property type scores are listed below from best to worst in terms of investment potential for 2021. The scores are based on survey results using the following scale: 1 (Abysmal); 2 (Poor); 3 (Fair); 4 (Good); and 5 (Excellent). The property sectors were ranked as follows:

• Industrial, warehouse and distribution facilities (3.76).
• Single-family housing (3.39).
• Multifamily housing (3.39).
• Office (2.93).
• Hotels (2.86).
• Retail (2.69).

This sector was rated 3.76, meaning investment prospects are “good.” When the pandemic hit, online sales and home delivery of consumer goods, as well as food and beverage, were already growing and “COVID-19 reinforced the value of these already established demand drivers and also accelerated their growth,” according to the report.

After experiencing disruptions in the supply chain during the COVID-19 crisis, wholesale and retail operators alike are “reconsidering the normal rate of inventory carry within their supply chain,” and this could generate additional demand going forward. They have learned during the pandemic that increasing the amount of inventory on hand helps reduce the impact of supply chain disruptions. Keeping more inventory in the U.S., rather than storing it in foreign countries, will generate more demand for warehouse, distribution and logistics space in the U.S.

“As logistics customers increasingly recognize that their supply chain is the lifeblood of their revenue streams in a time of potential serious disruption, just-in-case supply chain strategies such as higher inventory carry (aided by lower interest rates) are expected to be adopted going forward,” not just during the pandemic, the forecast noted. “The combination of stronger e-commerce demand and higher inventory carry from COVID-19 may increase logistics demand by 400 million square feet over the next couple of years, according to Prologis Research.”

Investment prospects for subsectors include fulfillment, which was ranked “excellent,” and was the only subsector among all property sectors in the forecast to receive this designation. Warehouse was rated “good,” and research and development facilities were deemed “fair to good.”

The sector was rated 3.39, meaning investment prospects are "fair to good." “While new-build single-family housing activity did better by far than key stakeholders might have hoped through the middle part of 2020, they remained uneasy,” said the forecast. Participants acknowledge that “flight from downtown,” due to COVID-19 has generated a surge in demand for single-family housing in 2020, but traditional forces relating to demographics will drive demand beyond the COVID-19 era.

“Population bulges among millennials in their mid-30s—many of whom have postponed marrying and having children—and baby boomers in their 60s have reached only the midpoint of a full decade’s worth of sweeping demand,” the report indicated. This bodes well for builders generating age-restricted as well as age-diverse planned communities. Builders able to secure lots in walkable suburban and exurban neighborhoods should also do well, according to the forecast.

But the report queried whether “this fear-fueled … demand for new, single-family, suburban homes with backyards will last.” One factor that could prolong demand for the sector is that “historically attractive mortgage rates — the likes of which homebuying borrowers may never see again,” is like “rocket fuel” for single-family homes.

One interviewee, identified in the report as the chief executive officer of a top-15-ranked multiregional homebuilding firm cautioned, however, that there is a downside. “Until we fully recognize the impact [of COVID-19] on the real economy, past all the temporary rescue measures, we don’t know whether the wherewithal will match up to what people say they want to buy.”

The most promising subsectors include single-family rental (“fair to good”) and senior housing (“fair”).

This sector generated the same score as single-family housing, 3.39, characterizing investment prospects as “fair to good.” “A 10-year, trillion-dollar-plus run that generated more than 3.1 million market-rate multifamily units is now over,” the report said. Multifamily units were financed and delivered “because our customers were stable [and] prospering with a … vibrant economy, record-low unemployment, growing incomes, etc.,” according to a comment attributed in the forecast to the CEO of a top-10 multifamily REIT.

Developers expected that the following decade would focus on the creation of affordable market-rate multifamily units, helping them expand their pool of potential renters, especially those that wanted to give up ownership and become “renters by choice.” However, this effort may be delayed. The CEO of a multifamily portfolio covering numerous U.S. regions indicated in the forecast that “it is fruitless to think about what lies ahead until people achieve a different relationship with COVID,” which, the source said, involves meaningful treatment options and, ideally, an effective vaccine.

Concerning low-income renters over the next decade, “Our industry needs to respond and figure out ways to deliver product that perhaps is less 'amenitized' and more basic, but provides security and doesn’t demand as large a percentage of each household’s income to cover the rent,” according to a report participant identified as the “CEO of a multifamily enterprise whose core customer is at the lower end of the market-rate spectrum.”

This CEO indicated that more needs to be done than simply generating affordable multifamily housing units. “We’ve started reaching out to underprivileged neighborhoods and have begun bringing people from those communities in the door for training. This initiative helps the unemployment in those neighborhoods, issue number one, because they are not trained individuals. I think it’s an investment over the long haul.”

Investment prospects for subsectors include moderate-income/workforce apartments (“fair to good”); low-income apartments (“fair to good”); and high-income apartments (“fair”).

At 2.93, the office sector is characterized as having “poor to fair” investment prospects. “The COVID-19 pandemic introduced a significant disruption to the U.S. office market in early 2020 as strict shelter-in-place mandates rolled through the country beginning in March. That work shifted to primary residences, second homes and, in some cases, workers’ new homes, both in and outside metropolitan areas,” said the report. However, for some context, the forecast noted that “experiences in Asia during multiple pandemics indicate that such arrangements proved to be temporary, although those experiences were relatively short-lived and less extensive.”

“Overall, 92 percent of ‘Emerging Trends’ survey respondents felt that some changes implemented as a result of COVID-19 will become permanent even after we have an effective vaccine/treatment protocol,” the report noted. Some believe that long-term work from home (WFH) trends will permanently reduce demand for office space going forward, but that the degree of the reductions is unknown. “Others think that open offices were already proving to cramp productivity, so the need for more square feet per worker may offset the WFH trends.

“Despite numerous natural disasters, previous pandemics, new technology, and even terrorist attacks, office buildings … have been more than a place to work. ‘Emerging Trends’ interviewees frequently cited the importance of centralized workplaces in establishing corporate culture, brands, training, and mentorship programs.”

Productivity gains from the absence of a commute are also weighing in on the debate about the need for office space. An institutional equity investor commented, “Our research team has done some work — and there seems to be almost an optimal productivity situation where working in the office three or four days a week and then remotely one or two days a week is actually more productive.”

Prospects for subsectors include medical office (“fair to good”); flex office (“fair to good”); and suburban office (“fair”).

Hotels generated a 2.86 score among respondents, indicating “poor to fair” investment prospects in 2021. “An array of factors have contributed to the prolonged downturn in the lodging sector: slow government response to COVID-19, insufficient testing, and declining consumer confidence in the second quarter of 2020 following a resurgence in virus cases," according to the forecast.

“Despite the belief that therapeutics and a vaccine could trigger the start of a sustained recovery, hotel industry leaders interviewed fear that a return to 2019 operating levels will take several years, affecting hotel properties beyond current financial reserves and any existing or future fiscal aid packages,” said the report.

The lodging sector was proactive, disciplined and swift to enact austerity measures that included massive furloughs and temporary closures, according to the publication. “As the United States began reopening, owners strategically reopened on a market and departmental basis; however, staffing continues to remain well below pre-pandemic levels,” said the publication.

“In the short term, guests have demonstrated an appreciation of and a willingness to pay a premium for heightened cleanliness and safety. The question as we advance is whether the elimination of daily housekeeping, reduced full-service dining, increased customer-facing technologies, and a prolonged period of leisure transient demand with flexible booking policies will have a profound impact on the full-service hotel model’s viability and value proposition,” posited the report.

Subsector investment prospects were categorized as “fair” for economy hotels and “fair to poor” for midscale, upscale and luxury hotels.

With a score of 2.69, the lowest among the property sectors covered by the report, retail is considered to have investment prospects that are “poor to fair.” Prior to the pandemic, the retail sector was already struggling. For about 10 years, despite moderate economic growth, retail vacancy had risen as retailers went out of business or moved online. “If it wasn’t a retail apocalypse before now, then this might be the real thing,” said an interviewee identified as a lead U.S. retail real estate analyst at a global brokerage firm. Prior to the pandemic, retailers were already struggling and now many consumers are also struggling financially, further eroding demand.

“Tens of millions of retailers were forced to abruptly close their doors” when the pandemic became evident in March. Many have not reopened or did so just briefly, but these closings “are already devastating the finances of retailers and restaurateurs — and their landlords,” noted the publication.

“These are the ingredients for the most sweeping changes to the retail property sector in modern times. Many retailers will not survive; many shopping centers will close or be converted to other uses. But the coronavirus cannot shoulder all of the blame, since many of the sector’s problems are not new. The United States is significantly over-retailed, with far more space per capita than in any other country," said the forecast.

The report concluded that “households have been reallocating their consumption away from the types of goods traditionally sold in shopping centers. Americans are devoting more of their funds to health care, housing, and recreation, and relatively less to apparel, furnishings, and other retail goods. These shifts reflect not just finances but also changing demographics: aging baby boomers have accumulated most of the big-ticket items they need and so are spending more time and money on experiences like travel and buying less ‘stuff’ in stores.”

Prospects for subsectors are “fair to good” for neighborhood/community shopping centers, but “fair” for lifestyle/entertainment centers, outlet centers and power centers. Regional mall prospects were closer to “poor” than to “fair.”