Top 10 Issues: Making Moves in a Complex Age
(4/17/2024)
1. Geopolitical and the Global Economy
– The conversation has shifted from a focus on global risks such as gas prices and commodities to pressing concerns about economic instability.
– The list of stressors includes inflation, high interest rates, banking debt, and tightening liquidity, as well as the influences of AI, migration trends, hybrid work and the reconfiguring of supply chains.
– Loan delinquencies are now higher than they were at the start of the pandemic, and more defaults are coming.
2. Empty Offices
– At the peak of the pandemic, 62% of all office workers were working remotely.
– Now, 58% of workers are fully back in the office, while 29% are working hybrid schedules and 13% are fully work-from-home.
– Offices will need to be deemed “destination-worthy” and experiential, allowing people to do different type of work throughout the building, with sustainable, automated, and digital components and amenities that employees consider to be worth the commute.
3. Housing Shortage
– The U.S. continues to face an overwhelming housing shortage that has resulted from decades of underbuilding.
– Progress will be bumpy.
– While the market is seeing improvement in supply chain and inflation, developers are dealing with higher interest rates and higher construction costs that are making it more difficult to secure financing along with general economic uncertainty that are causing to push the pause button.
– In addition, uncontrollable operating costs, such as insurance and property taxes, will continue to impact bottom lines.
4. AI 3.0
– Today’s advanced version of AI- “AI 3.0”- is integrating data analysis with new forecasting techniques, including probabilistic modeling and causation modeling, “Will a tenant renew in year three, four, or five? We want to be able to predict with great accuracy what the most probable outcome is likely to be”.
5. Labor Dynamics
– Job market data consistently shows more job openings that available workers.
– Younger generations, including X,Y, Z, are reversing the traditional order, choosing their lifestyles and where they want to live first and the job second.
6. Migration’s Impact
– A great migration shift is being fueled by a fundamental human need: housing affordability.
– Businesses are following suit, moving out of high-cost, high -regulation states in favor of the Sun Belt and the interior of the country.
– Companies are looking for locations that have the workforce and logistics infrastructure – rail, interstates and access to ports.
– Future plants to build EV batteries will be concentrated from the Great Lakes to the South.
7. Domestic Economy
– Because real estate is so focused on the ramifying effects of the housing economy, it is not surprise to feel that we are choking on [the Fed’s] policy.
– But it is important to remember the Fed’s dual mandate: price stability and full employment.
– While it’s always tempting to second-guess public officials… real estate and financial industries need to look at the mirror, too.
– Banks were unprepared for the consequences of the Fed’s tightening.
– Commercial real estate investors accepted cap rate compression to the point that risk premium disappeared.
8. Supply Chain and Logistics
– The galvanizing of a more resilient, efficient supply chain will continue, coinciding with reshoring boom of manufacturing focused on the interior and southern states.
– Cities that are going to benefit that shift are those connected to a port by rail.
– A decade ago, about 60%-65% of all containerized goods were flowing through the West Coast ports of Los Angeles and Long Beach with 30%-35% coming from the East Coast and Gulf Coast ports.
– Now, that flow of goods has flipped.
9. Market Pricing Reset
– Although markets have past its peak for the cycle, it remains to be seem where prices will settle in 2024.
– Although there is some acceptance [among sellers] that prices have dropped… owners are opting to hold rather than sell in what could be trough of the market.
– Debt coming due before 2025 will have “big implications for the transaction market”.
– Will refinancing challenges force lenders holding debt – largely banks – to mark to market, which will have a cascading impact on commercial real estate and financial markets?
10. Infrastructure Investment
– The need for robust infrastructure is now being met with significant funding through both the $1.2T Bipartisan Infrastructure Law and the Inflation Reduction Act, which will allocates $783B to improvement projects.
– Will investment be made with a traditional view of infrastructure, with spending on magaprojects, such as highways, bridges, and pipelines?
– Or will investment focus on forward-looking infrastructure needed to support new technologies, changing social needs, and volatile environmental conditions?
