2023

United States l Canada

EMERGING TRENDS
IN REAL ESTATE®

Emerging Trends in Real Estate® 2023
A publication from:

Emerging Trends
in Real Estate®
2023
Contents
1

Notice to Readers

3	Chapter 1 Taking the Long View
4 Normalizing
7 … Still, We’ve Changed Some
9	Capital Moving to the Sidelines—
or to Other Assets
12 Too Much for Too Many
16 Give Me Quality, Give Me Niche
18 Finding a Higher Purpose
20	Rewards—and Growing Pains—in the Sun Belt
22	Smarter, Fairer Cities throughInfrastructure Spending
24 Climate Change’s Growing Impact on Real Estate
26 Action through Regulation?
35 Chapter 2 Property Type Outlook
36	Multifamily: A Bumpy Ride and a
Bumper Crop47	The Future of Single-Family Housing
50	Industrial/Logistics: Strong Fundamentals Persist
while Capital Markets Adjust53	Office: Desperately Seeking Clarity about
Its Future
65 Retail68 Hotels

73
79

Chapter 3 Markets to Watch
Grouping the Markets

93	Chapter 4 Emerging Trends in CanadianReal Estate93	Costs and Capital: Navigating a Period of Price
Discovery amid Major Market Shifts for CanadianReal Estate95	ESG Performance: A Critical Issue for CanadianReal Estate97	Housing Affordability: A Challenging Issue
for Canada and a Significant Concern for Real
Estate Companies
101

Interviewees

105

Sponsoring Organizations

Emerging Trends in Real Estate® 2023

i

Editorial Leadership Team
Emerging Trends Chairs
R. Byron Carlock Jr., PwC
W. Edward Walter, Urban Land
Institute
Editors-in-Chief
Andrew Warren, PwC
Anita Kramer, Urban Land InstituteAuthor, Chapters 1 and 3
Andrew J. Nelson
Authors, Chapter 2
Garrick Brown, Retail
Heather Belfor and Ahalya Srikant,Industrial
Lesley Deutch, Single-Family
Residential
Paul Fiorilla, OfficeJohn McManus, Multifamily
Residential
Avikar Shah, Hotels
Authors, Chapter 4
Glenn KauthPeter Kovessy
Contributors
Paul Angelone
Lindsay Brugger
John Chang
Mike Hargrave
Roberto HernandezDavid Liggitt
Beth Burnham Mace

Hilda Martin
Onay Payne
Amber Schiada
Luke Smith
Maureen Waters
Carl Whitaker
Cody Young
Senior Advisers
Fred Cassano, PwC, Canada
Braiden Goodchild, PwC, Canada
Miriam Gurza, PwC, CanadaFrank Magliocco, PwC, Canada
Christopher J. Potter, PwC,
CanadaSteven Weisenburger, PwC, U.S.
Project Staff, ULI Center forReal Estate Economics andCapital Markets
Jennifer Milliken, Director
Nolan Eyre, Senior Associate
ULI Editorial and
Production Staff
James A. Mulligan, Senior Editor
David James Rose, Managing
Editor/Manuscript Editor
Brandon Weil, Creative Director/
Cover Designer
Deanna Pineda, Muse Advertising
Design, Designer
Craig Chapman, Senior Director,
Publishing Operations

Emerging Trends in Real Estate® is a trademark of PwC and is registered in the United States and other countries. All rights reserved.
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© September 2022 by PwC and the Urban Land Institute.
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any information storage and retrieval system, without written permissionof the publisher.
Recommended bibliographic listing:
PwC and the Urban Land Institute: Emerging Trends in Real Estate®
2023. Washington, D.C.: PwC and the Urban Land Institute, 2022.
ISBN: 978-0-87420-481-0

ii

Emerging Trends in Real Estate® 2023

PwC Advisers and Contributing Researchers
Aaron Sen*
Abhi Jain
Abhinav Ravi*
Adam Modhtaderi*
Adam Rose*
Alec Watson*
Alex Howieson*
Alex Schraft
Ali Abbas*
Allan Cheng
Alyssa Gilland
Andrea Ades*
Andrew Alperstein
Andrew Popert*
Andrew Simi
Annabelle Lafortune*
Anthony Di Nuzzo*
Ashley Somchanh*
Ashley Yanke*
Avery Parti
Avi Shah
Benjamin Roy
Bill StaffieriBilly Ampatzis*
Blake Byl
Brendan Smith
Brendan White
Brian Ness
Bryan Allsopp*
Calen Byers
Cam Moniz
Camille Matute*Charles Campany
Chris Bailey
Chris Dietrick
Chris Emslie
Chris Kavanaugh
Chris Vangou*
Christine Augusta
Christopher Bailey
Christian Serao
Christopher Emslie
Christopher Mill
Cindy Wu*
Claire Bennet*
Cosimo Pellegrino*
Dan Genter
Dan Picone
Dan Ryan
Daniel D’Archivio*
Daniel Lawson
Danielle Aucoin*
Danielle Desjardins*Darren Speake*David Baldwin
David HughesDavid SwerlingDavid Whiteley*David Yee*
Derek Hatoum*
Donald Flinn*

Doug Struckman
Dylan Anderson
Edouard Godin*
Emily Pillars
Eric Desmarais*
Eric Lemay*
Ernie Hudson*
Evan Cohen
Frederic Lepage*
Gordon Ashe*
Graham McGowan*
Hannah Tam
Henry Zhang*
Hilda Garcia
Howard Quan*
Isabelle Morgan
Itisha Jain
Jake Wiley
Jano Van Wyk*
Jasen Kwong*
Jason Kaplin
Jeffrey Taveras
Jen Lawson*
Jeremy Lewis
Jessica Gordon
John Crossman
John Matheson*
John Mormile*
John Rosano
Jonas Pittman
Jonathan Connolly
Jonathan Osten*
Joseph Moyer*
Joshua Levine
Joshua Rubin
Joy Dutta*
Justin Belanger*
Justin Mukai*
Kartik Kannan*
Keegan Landry
Ken Griffin*
Kendall Breshears
Khaldoon Iqtait*
Kristen Conner
Kristy Romo
Laura Lewis*
Laura Lynch
Lauren Garrett
Leah Waldrum
Lee-Anne Kovacs*
Lee Overstreet
Lily Bannister
Luda Baiden*
Manisha Chen*
Marilyn Wang*
Mario Longpre*
Martin Bernier*Martin Labrecque*Martin Schreiber
Matt Manza
Matthew Berkowitz

Matthew Nichols
Matthew Rosenberg
Max Worobow
Maxime Lessard*
Meredith DeLuca
Michael Loranger
Michael Shea*
Michelle Zhu*
Mike Harris*
Minh Ngo*
Monique Perez
Munezeh Wald
Nadia King*
Natalie Cheng*
Nicholas Mobilio*
Nick Ethier*
Nick Worrall
Nicole Stroud
Nik Woodworth*
Nikki Mills*
Peter Harris*
Philip Heywood*Philippe Desrochers*
Philippe Pourreaux*
Rabiya Adhia*
Rachael Fabian
Rachel Klein
Rahim Lallani*
Renee Sarria
Ricardo Ruiz
Richard Martin*
Richard Probert*
Rick Munn
Rob Sciaudone
Robert Sciaudone
Ron Bidulka*
Ronnie De Zen*
Ryan Dooley
Sabrina Fitzgerald*
Saket Ayala*
Samay Luthra*Santino Gurreri*
Scott McDonald*
Serena Lowe
Seth Promisel
Shauna Peck*
Shivang Mahajan*
Spyros Stathonikos*
Stephan Gianoplus
Steve Hollinger*
Tatiana Smith
Tim Bodner
Tina Raether
Tom Wilkin
Tressa Teranishi*
Trevor Toombs*
Warren Marr
Wesley Mark**Based in Canada.

Notice to Readers
Emerging Trends in Real Estate® is a trends and forecast publication now in its 44thedition, and is one of the most highly regarded and widely read forecast reports in thereal estate industry. Emerging Trends in Real Estate® 2023, undertaken jointly by PwC
and the Urban Land Institute, provides an outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan
areas, and other real estate issues throughout the United States and Canada.
Emerging Trends in Real Estate® 2023 reflects the views of individuals who completed
surveys or were interviewed as a part of the research process for this report. The
views expressed herein, including all comments appearing in quotes, are obtained
exclusively from these surveys and interviews and do not express the opinions ofeither PwC or ULI. Interviewees and survey participants represent a wide range ofindustry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personallyinterviewed 617 individuals, and survey responses were received from more than
1,450 individuals, whose company affiliations are broken down below:
Private property owner or commercial/multifamilyreal estate developer:

35%

Real estate advisory, service firm, or asset manager:

21%

Private-equity real estate investor:

11%

Bank or other lender:

7%

Construction/construction services/architecture firm:

7%Homebuilder or residential land developer:

6%

Investment manager/adviser:

5%

REIT or publicly listed real estate property company:

3%

Private REIT or nontraded real estate property company:

2%

Other entity:

2%

Throughout this publication, the views of interviewees and/or survey respondents
have been presented as direct quotations from the participant without name-specificattribution to any particular participant. A list of the interview participants in this year’s
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 anonymous 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 sincere thanks for sharing valuable
time and expertise. Without the involvement of these many individuals, this report
would not have been possible.

Emerging Trends in Real Estate® 2023

1

2Emerging Trends in Real Estate® 2023

Chapter 1: Taking the Long View

Taking the Long View
“The short-term risks are real, and I’m not making light of any of them.

I don’t think it’s time to panic.”

Interest rates are rising, economic clouds are darkening, andreal estate deal flows are sinking because buyers and sellers
cannot agree on pricing. But for all that, most commercial realestate professionals we interviewed for this year’s Emerging
Trends remain reasonably upbeat about longer-term prospects.
Not everyone is as sanguine as the CEO of an investment
management firm who provided our opening quote, and there
certainly are some troubling risks ahead for the industry. But theconsensus mood seems to be one of cautious optimism that
we will ride out any near-term slump and be well positioned foranother period of sustained growth and strong returns.
It makes sense that real estate experts would take the long view
given the nature of real estate assets: buildings take a long time
to conceive and develop. Even simply acquiring one typicallytakes more time (and effort) than buying just about any othertype of financial asset, and they are usually held for longer durations. Still, the willingness of so many people in the industry tolook beyond some of the cyclical headwinds is striking. Says thehead of advisory services for a commercial real estate (CRE)
analytics firm, “The recession—if we go into one—will obviously
impact some markets worse than others, but it’s just like anything else. We’ll look back in 10 years, and the prices that seemastronomical today will seem like a bargain 10 years from now.”
An Economic Rorschach Test
By one popular rule of thumb, the U.S. economy entered arecession in the first half of 2022, having sustained two straightquarters of (modestly) declining gross domestic product (GDP).
But if we were in a recession at the time of writing, it would be amost peculiar one. For one thing, gross national income—theincome side of the national accounts ledger that is supposed
to square with GDP—has been positive over this same period,
suggesting flaws in how we measure economic output. And
other economic metrics certainly do not indicate a downturn:

Exhibit 1-1 Firm Profitability Prospects for 2023
100%
Good–excellent
Percentage of respondents

But if you have the long view,

80%
60%
Fair

40%
20%
0%

Abysmal–poor

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: Emerging Trends in Real Estate surveys.

●●

●●

●●

Jobs are still growing strongly while unemployment claims
are at their lowest levels since the 1960s;
Home prices and rents are at record levels and are stillrising; andConsumer spending—which accounts for two-thirds of theeconomy—has been at least mildly positive every month thisyear (through July 2022).

This duality likely explains why the National Bureau of Economic
Research—the official arbiter of business cycles—has not
yet called this period a recession. That is not to suggest that
all is copacetic with the economy. Key barometers like thebusiness outlook indices compiled by the Institute for Supply
Management have been trending downward since mid-2021,
Emerging Trends in Real Estate® 2023

3

Exhibit 1-2 U.S. Real Estate Returns and Economic Growth40%
30%
Index change

20%
10%
0%
–10%

–20%
–30%
–40%
–50%

6%
NCREIF
5%
4%
GDP
3%
2%
1%
0%
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023*
–1%
–2%
–3%
–4%
–5%
NAREIT Equity REIT Index–6%

GDP change

50%

Sources: NCREIF, NAREIT, Bureau of Economic Analysis/U.S. Department of Commerce,
PwC Investor Survey.
*NCREIF/NAREIT and GDP projections for 2022 and 2023 are based on the PwC Investor
Survey.

even if they are not technically in the recession range. Declines
in consumer confidence over the last year have been evensharper. All of these positive and negative factors together painta kind of a Rorschach test, where observers can draw their own
conclusions as to the strength of the economy.
The End of the Beginning
But there is one issue on which our interviewees agree: “The existential risk for the real estate economy right now is that Fed action
in response to persistent inflation will tip us into a recession,” says
a senior partner with a leading advisory firm. But can the Federal
Reserve Bank tame inflation without breaking the economy?
Moderating inflation rates this summer led many to believe thatthe worst was over and that the Fed could soon ease up its contractionary monetary policy. Indeed, the consensus of experts weinterviewed this summer was that the Fed would cease tightening
by the end of 2022 and start cutting rates again in mid-2023.
That sentiment now appears optimistic. “Inflation is going to bea little stickier than people think,” said an investment banking
executive we interviewed during the summer, whose views
turned out to be more prescient. Sentiment started changing inlate August when Fed Chairman Jerome Powell gave his annual
speech to fellow central bankers affirming the Fed view that inflation is not nearly under control, jolting markets. Any remaining
doubt about that was quashed by the official Fed commentary
accompanying their September rate announcement projectingthat rates would keep rising through 2023. As Winston Churchill
famously cautioned after the British army won a critical WWII
battle, the victory marked “not the end, not even the beginningof the end, but, possibly, the end of the beginning.”
4

Emerging Trends in Real Estate® 2023

Higher for Longer
With interest rates headed “higher for longer,” the risk of adeeper, full-fledged recession is rising, according to a growing consensus of economists. In an August 2022 survey by the
National Association of Business Economics, only a quarterof economists were even “somewhat” confident that the Fed
could bring down inflation to its target range without causing arecession. Worrying signs out of Europe in early autumn and
expectations of soaring heating bills this coming winter add tothe gloomy global economic outlook.
These conditions would be problematic for property markets:
slowing or falling economic growth dampens tenant demand,
while higher interest rates raise the cost of developing or
acquiring properties. Both factors would cut returns and reducevalues. Indeed, rising interest rates and uncertainty over future
market conditions are already killing deals since sellers have notbeen ready to capitulate to buyers’ growing demands for priceconcessions, as we discuss in our capital markets trend.
New Horizons
Still, not all recessions are alike, and most economists, as wellas Emerging Trends interviewees, expect any recession to berelatively short and shallow. Reflecting the view of several CRE
leaders we interviewed, a senior executive with a global development and investment firm said, “My gut says we’re going tohave a recession, but it’s going to be relatively mild comparedto some of the more severe recessions we’ve had. I don’t see
anything like the 2008 economic downturn going on.”One leading CRE economist went so far as to say, “I think
we’re going into what I would say is a healthy down cycle. It’s acleansing, Schumpeterian idea that every so often, economies—
property markets included—need to cleanse, and it washes out
bad ideas, it washes out unrealistic unsustainable values.”
That reset presents new opportunities, even as it introduces
uncertainty. Says the CEO of a development company, “I think
this is a moment in time. And when I look back historically, and I
did not act in these moments in time, I’ve always regretted it.”
The 10 emerging trends that we expect for 2023 andbeyond follow:

1. Normalizing●●

Property market fundamentals are “normalizing” as somemarkets weaken due to diminishing pandemic tailwinds andthe potential for a cyclical economic downturn.

Chapter 1: Taking the Long View●●●●

Some property sectors may cool, including residential andindustrial, while others may heat up to historical averagelevels, such as hotels and retail.
Returns and prices of most assets are declining as cap rates
rise and transaction volumes fall from record levels, while
rent gains for others are merely moderating as demand
returns to a more sustainable pace.

Defying just about every prediction voiced during the terrifying
and uncertain days of the COVID lockdown that began in March
2020, U.S. commercial property markets actually embarked
on a remarkable run, with some of the strongest returns, rent
growth, and price appreciation rates ever recorded.

Exhibit 1-3 Importance of Issues for Real Estate in 2023
1No
importance3
Moderate
importance

5Great
importance

Economic/financial issues
Interest rates and cost of capital 4.38
Availability of qualified labor 4.26
Job and income growth 4.24
Inflation 4.15
Capital availability 3.88
Global economic growth 3.42
Tariffs/trade conflicts 3.03
State and local taxes 3.02

Not every property type, however: hotels endured their worst
and most sustained downturn in memory, while offices sufferedan unprecedented and significant cut in usage of space. And
not every market: some of the nation’s strongest gateway markets, like New York City and San Francisco, experienced sharp
outflows of residents, businesses, and tenants of all types. But
overall and across much of the United States, property markets
far outperformed expectations and historical norms.
And now, more than two years on, property investors andmanagers are learning anew that whopping growth and profits
eventually fall back to earth—a “reversion to the mean,” to use
finance jargon, or simply “normalizing,” as numerous industry
experts we interviewed put it. Some looming market adjustments
will be cyclical due to the weakening economic conditions
that most economists and real estate professionals expect,while others represent more of a return to normalcy after all the
pandemic-fueled market distortions.
These market reversions will take several forms: prices of mostassets are declining as cap rates rise and transaction volumes
fall from record levels, while rent gains for others are merely
moderating as demand returns to more sustainable levels.
Perhaps the biggest surprise is that these reversals of fortune
are hitting favored property sectors like multifamily and industrial. That does not necessarily mean the market corrections will
be painful. In many cases, recent losses in property value will
only trim already healthy gains. But many indicators suggest thatthe (really) good times may be over, at least for a while.

Federal taxes 2.97
Currency exchange rates 2.69
Social/political issues
Housing costs and availability 4.21
Geopolitical conflicts 3.51
Political extremism 3.47
Immigration policy 3.47
Epidemics/pandemics 3.45
Climate change 3.28
State/local government budgets 3.19
Income inequality 3.17
Federal budget deficit 3.12
Higher education costs 2.94
Diversity and inclusion 2.88
Threat of terrorism 2.87
Real estate/development issues
Construction labor costs 4.51
Construction material costs 4.48
Construction labor availability 4.46
Land costs 3.97
Operating costs 3.72
State and local regulations 3.54
Tenant leasing and retention costs 3.49
NIMBYism 3.47
Infrastructure/transportation 3.42
Property taxes 3.42
Environmental/sustainability requirements 3.19

Housing Set to Cool

Risks from extreme weather 3.02

A finance executive with one national homebuilder told us,“We’re still selling. It’s just not at the pace that it was selling
before [the last two years], which was a pace that you don’t typically see. So, the markets are more normalizing.” Indeed, home

Health and wellness features 2.99
Municipal service cuts 2.89
Health- and safety-related policies 2.76
Source: Emerging Trends in Real Estate 2023 survey.

Emerging Trends in Real Estate® 2023

5

Exhibit 1-4 Emerging Trends Barometer 2023

rising sharply—a topic we explore in “Too Much for Too Many,”
our trend on housing affordability.

excellent

The “Amazon Pause”

Buy

The white-hot industrial market also seems set to cool after several years of unprecedented demand growth and rent gains thathave pushed rents far above prior records. Growth in e-commerce is slowing and giving back some of the market share it
captured from physical retailers during the pandemic. Amazon,
the largest warehouse user in the United States, has delayed
occupying numerous completed projects, trying to sublet many,as it slows its physical growth—what some are calling the“Amazon pause.” Other major retailers also have been cuttingback their distribution expansion plans.

good
fair
Hold

poor

Sell

abysmal
2007

2009

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.

sales—both new and existing—had an extraordinary 12-year
run since bottoming out in the summer of 2010 until the Fed
started hiking interest rates in the spring of 2022.
But it’s not just home sales that are slowing. Virtually all aspectsof the housing market—both for-sale and rental—have been
decelerating. New home prices peaked in April 2022, while
prices of existing homes likely peaked in June after appreciation
started to slow with the rise in mortgage rates. Meanwhile,
apartment rents have continued to push ever higher, but the pacehas been moderating in recent months. Construction starts also
have slowed. The National Association of Home Builders housing
market index has fallen for eight straight months through August2022 to its lowest level since May 2020.

To be sure, the industrial sector still enjoys record-low vacancy
rates, as demand for high-quality, well-located logistics facilities
has been running ahead of the market’s ability to supply them.
And investors are not ready to abandon industrial or multifamily,both of which still reign at the top of the heap in the Emerging
Trends survey. Still, the ratings are a bit less exuberant than lastyear, and these high-riding sectors do not look quite as invulnerable as they had in recent years.
But even recognizing that industrial demand could ease at allfrom its torrid growth is a change—still robust, but a bit closer
to historical patterns. The head of one investment management
firm says, “While we still believe in the fundamentals over thelong term, there’s still cycles within the business and therefore
you could potentially see some oversupply in the industrial market over a short period of time.”
Reversion UP to the Mean, Too

This is not to say that we’re in a housing recession—far from it.
Homes are still selling at a healthy rate by historical levels, andhome prices remain near record levels. And while multifamilyvacancies are at their lowest level in four decades and rents
continue to log new records every month, the rates of increase
have been slowing and are expected to decelerate further,according to many experts we interviewed. “Maybe you don’t
see the 10 percent–plus rent growth in multifamily markets,”says the head of one institutional investment advisory firm. “Theyshould come back to more of a long-term historical average of
3 percent to 4 percent, and maybe offset some of the unaffordability in the country.”
Indeed, housing markets may be partly victims of their own
success as record prices and rents mean fewer households canafford to buy homes or rent apartments, particularly with mortgage interest rates and housing-related expenses like utilities
6

Emerging Trends in Real Estate® 2023

While some sectors will be trending down in some fashion,others will be reverting up to more normal levels. Property
fundamentals have been improving for the battered hotel sector, especially hotels serving leisure travelers, and there seems
to be a growing consensus that the beleaguered retail sector
has been oversold in recent years. Says the head of advisory
services for a real estate firm, “I think we’ve had a little bit of a
reset now where if you survived to this point in retail, the futureprobably looks pretty good for you.”
The “Sugar Rush” Is Over
Property investment returns are primed for a reset. Earnings
have been unusually robust during the two years since COVID19 hit, driven by strong property fundamentals and intense
investor demand—as well as ultra-cheap debt and the federal
government’s three rounds of stimulus spending. Total returns

Chapter 1: Taking the Long View

for the institutional-quality real estate in the NCREIF Property
Index (NPI) soared to over 20 percent in the four quarters
through mid-2022, almost three times the 20-year average.
But returns will be coming down. The 43 economists and analysts surveyed in October 2022 by ULI’s Center for Real Estate
Economics and Capital Markets expect total returns to drop to
3.8 percent in 2023, and recover to a moderate 7 percent in
2024. That is to say, more normal returns.
That outlook tracks with the collective wisdom of respondents
to this year’s Emerging Trends survey. More than half believethat capitalization rates are heading up next year and returns
are coming down, primarily due to rising “interest rates and costof capital,” which was the top economic concern voiced in our
survey. After more than a decade of “lower for longer,” the Fed isfinally normalizing interest rates closer to historical levels. Thoserising interest rates are already driving up debt costs and thus
the costs to acquire and develop property, reducing leveraged
returns.
At the same time, the federal government is done with providing
stimulus, indirectly reducing tenant demand for space. Unlikein the Global Financial Crisis (GFC) and during the pandemic,“nobody’s coming to the rescue, and now we got to take our
medicine, and here it comes,” says the head of research for aninvestment management firm. Thus, the government is turning
off both the monetary and fiscal spigots that had been supporting commercial real estate and the economy overall.
The head of a development company summarized it like this: “Ifeel like we’ve been on a little bit of a sugar high with this stimulus and cheap debt. There’s going to be a slowdown. There’s
got to be this normalization. So, what does that mean? I think it’sgoing to be a little bouncy; it’s going to be a little bit turbulent.
But then we bottom out, and we start back into growth.”

2. … Still, We’ve Changed Some●●●●

The pandemic forced structural shifts in how and where
we live, work, and recreate in ways that seem destinatedto endure.
Online spending is receding from its pandemic peaks but
is not likely to revert to pre-pandemic levels. Business travelis unlikely to recover to pre-COVID levels for at least several
years, meaning business hotels, fine dining, and conference
facilities will continue to face challenges.

●●

The greatest changes may be in how and where we work.
The impact on office use and leasing is still evolving, and asignificant share of the existing stock may need to be repositioned to remain competitive.

Even as property markets begin to “normalize” in many ways aftersome of the disruptions of the past few years, we won’t be resuming our former lives in some key respects. The pandemic forced
structural shifts in how and where we live, work, and recreate inways that seem destinated to endure at least at some level, even if
less extreme than our behaviors during the peak of COVID.
Many activities have already returned to pre-pandemic levels,of course, especially those involving socializing. Americans areback to attending concerts and sporting events, and leisuretravelers, at least, have returned to the nation’s roads andairways. Meanwhile, we are obviously tired of exercising andcooking alone at home, so gym memberships have returned tohistorical levels while restaurant sales are back above groceries, as they had been since 2015 until COVID shut down dining
establishments.
Yet many other activities—and how we use space—seemunlikely to return to the old ways. The pandemic changed us.
Says a director of an investment management firm, “People arelooking to achieve their lifestyle choices more quickly. They’reless focused on their employer and more focused on their personal lifestyle. And that is changing how apartments are being
viewed, how single-family residential is being viewed, how office
is being utilized, and where corporations are heading.”
In-Store versus Online Shopping
Much of our spending shifted online during the pandemic. The
e-commerce share of retail sales (excluding auto-related sales)
shot up from 13 percent in 2019 to a peak of 20 percent during
the initial national lockdown. That drained a lot of spending fromphysical retailers and squeezed the nation’s shopping centers.
The online share inevitably waned as the economy reopened
and more consumers felt comfortable shopping in stores again.
But don’t expect online spending to drop down to pre-pandemic
levels, say many experts we interviewed. While shoppers initiallyresorted to e-commerce due to safety concerns or simply
because the stores were not even open—did we really live
through that?—they still shop online today because of its otherbenefits, including greater convenience, selection, and priceadvantages. Thus, the share we spend online remains highly
elevated at just under 18 percent, nearly five percentage points
above the rate before COVID.

Emerging Trends in Real Estate® 2023

7

Where will it go from here? The fate of shopping centers andphysical retailers hangs on the answer, with downstream
impacts on warehouses and logistics. The retail property sector
fared far better during and since the pandemic than anyone
could have expected, benefiting from both direct government
assistance to retailers and the stimulus payments to households,
who could keep spending, even if out of work.

Business travel will continue to recover over time, but few
expect levels to attain prior levels soon. The USTA study showsbusiness travel flattening in 2023 short of pre-COVID levels.
The greatest real estate impacts will be on business hotels, finedining, and conference facilities. But office demand also could
suffer as firms have less need to lease space to accommodate
client visits.

Those gains could moderate or even reverse if the online
shopping share endures, however, as consumers shift somespending back from goods to nonretail services they avoided
during the pandemic, like travel and entertainment. As one realestate investment trust (REIT) analyst notes, “There’s still very
healthy growth in e-commerce, but it’s no longer the lofty expectations we used to have at the height of the pandemic.”

Work from Home versus Return to the Office

With growth in online spending slowing, physical retailers will
have an opportunity to regain some lost market share, especially those that can “bridge the gap between e-commerce andbricks and sticks. They survived very well in the pandemic andwill probably continue to do well,” says one investment consultant. Other winners will be the resourceful retailers that can
provide consumers with compelling shopping experiences. But
the permanent shift to greater online spending ultimately meansthat fewer shopping centers and retail space can survive.
Business Travel versus Video Meetings
The old Buggles song has it that “Video Killed the Radio Star.”
And indeed, radio began to fade as television ascended in
popularity. Now, in a different era, video meetings just might
kill—or at least greatly reduce—overnight business travel.
According to the U.S. Travel Association (USTA), domestic
business travel spending was 56 percent lower in 2021 than in
2019, while leisure travel was actually up modestly. Excluding
the impact of inflation on spending shows that travel trips felleven more, since the number of meetings and events dropped
by almost 80 percent.
A summer 2022 study conducted by Tourism Economics for
USTA forecasts that U.S. business travel in 2022 will get backto only 73 percent of 2019 levels and will not return to pre-pandemic levels through at least 2026. Firms are restricting travel tosave on costs, and employees are reluctant to travel anyway. Of
greater importance, they have less need to travel since clientsare often unwilling to interact in person, and many industry
conferences have either been canceled or moved online. But
perhaps the core issue is that after working from home for solong, we have learned to conduct business remotely, facilitatedby improved meeting technology.

8

Emerging Trends in Real Estate® 2023

No dynamic touches more property sectors and markets than
how many of us will finally relocate from our home office back to
the company workplace and how often. Two-plus years after the
onset of COVID, most of us are still not back in the office nearly
as often as in the “before times.” Various sources suggest thatless than half of office workers actually come into an office on agiven day, at least in major markets.
That level may finally increase meaningfully this fall, as someleading tech firms and investment banks issued ultimatums fortheir employees to return to the office more often after Labor Day.
As this publication goes to press in late September 2022, it is too
soon to know whether this time will prove more successful thansimilar prior deadlines that passed with little apparent impact.
But will workers return? As the senior leader of a development
company said, “Everyone’s still in a fact-finding mode.” The
contours of the decision are by now familiar: employer demands
for control and building culture, the need for mentoring and collaboration, and workers’ “fear of missing out” will translate into
more in-office work over time. But those factors will be weighedagainst the potential to save on occupancy costs and especiallyworker demands for more locational flexibility. As we continue
to hear, “There’s just been a shift in consumer behavior. Most
people don’t want to commute into the office five days a week,”
in the words of one senior investment adviser.
For now, tight labor markets ensure that employees have theupper hand in these negotiations and will resist employer
desires to have workers return to the office. But that couldchange if unemployment rises in a downturn. Says the head ofreal estate at one investment bank, “I don’t think we’ll know theoutcome of office until we’re through a recession and the power
dynamics between employee and employer change. But we doknow there’s definitely going to be less office demand.”One guess, which seems to reflect the collective wisdom ofexperts we interviewed, is that “probably somewhere between
10 and 20 percent of the stock needs to be removed or repurposed, leaving the 80 percent that really does a better job ofdelivering what tenants want,” according to the head of researchChapter 1: Taking the Long View

at one asset management firm. But there is still considerable
difference of opinion: a “jump ball—everybody’s just guessing,”says one investor. Whatever the ultimate figure, there is little
doubt that a meaningful portion of today’s office stock will berendered redundant and available to be redeveloped—a topic
we discuss in the “Finding a Higher Purpose” trend.
Also uncertain is how to design the space to best facilitate thekinds of collaborative work expected to dominate office work in
the future, which likely will vary across firms and industries andtake years to define. Another critical challenge is accommodating worker preferences for individual workspaces if most people
come into the office on the same three days to be with their colleagues. Flex space might be the answer for many companies
as they try to figure out their space needs.
So far, the impacts on office markets have been relatively muted
during this prolonged discovery period. Firms have held onto
their offices either as a precaution in case they need the spacein the future or because they could not break their lease. Thus,
the level of physical office occupancy (i.e., the share of workers actually coming into the office) is considerably less thanstandard economic occupancy metrics (the percentage of officespace that is leased) as firms figure out what to do.
Tenants cannot afford to keep that empty space indefinitely,
however, so office landlords should not be lulled into complacency by the relatively benign vacancy levels. More firms aredownsizing or not renewing their expiring leases, so vacancy

rates are still slowly rising, in contrast to every other major
property sector. Plus, tenants are dumping unused offices bytrying to sublet the space until their leases expire. Brokers reportthat a record level of office space is available for sublease, andmore is hitting the market every quarter. Much of this space will
eventually turn into outright vacancies as leases turn, unlessfirms eventually reverse course.
But no one we interviewed expects a mass departure from officebuildings. Even under the most pessimistic scenarios, mostknowledge work will occur in company offices, which, after all,were designed to facilitate this high-value work. But it will takemore time for firms to figure out how much space they will need,
how it should be configured, and where it should be located. As
summarized by one economist, “Mixing Greek mythology andbiblical references, it’s probably really more of an Odyssey as
opposed to an Exodus.” The search for a post-pandemic “newnormal” will continue.

3. Capital Moving to the Sidelines—orto Other Assets●●●●

After a robust first half of 2022, real estate property transactions began declining, primarily because buyers and sellers
cannot agree on pricing due to heightened market uncertainty.
Rising debt costs and restrictive underwriting standards arealso limiting transaction volumes.

Exhibit 1-5 Anticipated Changes in Commercial Mortgage Rates, Inflation, Cap Rates, and Expected Returns, Next Five Years
100%
80%

Increase

60%

Remain stable
at current levels

Increase substantially40%

Decrease

20%
0%

2023

Next 5 years
Inflation

2023

Next 5 years

Commercial mortgage rates

2023

Next 5 years

Real estate cap rates

2023

Next 5 years

Investor return expectations

Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on U.S. respondents only.

Emerging Trends in Real Estate® 2023

9

●●The denominator effect may force some institutional investors to reduce their CRE exposure, but any negative impact
could be limited by the growing market share held bynontraded REITs, high-net-worth investors, and other noninstitutional investors.

One of our key themes last year was “Everyone Wants In,”
reflecting the deep and wide investor demand for just about
every type of real estate, except central business district (CBD)
office and regional malls. Sales volumes jumped to over $800
billion in 2021, according to MSCI Real Assets—almost double
the depressed total in the first pandemic year of 2020 andnearly one-third more than the prior $600 billion record reachedin 2019. The surge continued into 2022, with sales volumes in
the first half of the year up 38 percent over the same period lastyear, as even the sharp rise in interest rates did little to dampentransaction volumes.
But these recent volumes do not tell the whole story—andthe story they do tell may be misleading as to where property
markets seem to be heading. Discussions with numerous
participants from all corners of the industry confirm that many
investors have moved to the sidelines—or to other types ofassets like equities and bonds. Indeed, the recent surge may
well reflect a last gasp to get deals done before the expected
increase in interest rates.

Exhibit 1-6 Availability of Capital for Real Estate,2023 versus 2022
Lending source
Nonbank financial 3.05
institutions 3.44

2023
2022

2.99

Debt funds 3.26
Government-sponsored 2.97
enterprises 3.39
2.83

Insurance companies 3.44
2.72

Mortgage REITs 3.42
2.58

Commercial banks 3.63

2.56

Securitized lenders/CMBS 3.61
Equity source
Private-equity/opportunity/ 3.18
hedge funds 3.74

2023
2022

3.09

Foreign investors 3.54
3.00

Private REITs 3.59

2.98

Fewer Investors
Fewer investors and lenders will be providing capital for assets,according to this year’s Emerging Trends survey: expectationsof availability declined for every one of the 13 equity and debt
capital sources. Over the past decade, CRE markets benefited
from a substantial capital inflow as alternative investment classes
have gained wider acceptance and real estate offered compelling risk-adjusted returns.

Private local investors 3.66

Institutional investors/ 2.89
pension funds 3.67
2.73

Public-equity REITs 3.40
1 2
Large
decline3
Staythe same

4

5
Large
increase

Source: Emerging Trends in Real Estate surveys.

Now, some of those inflows look to reverse. Investor interest is still
healthy, but not what it was. “Instead of seven or 10 competing
offers for sale, there’s now two or three, which I think that’s normal,”says the head of an investment firm. “That’s normalizing, too.”
Several forces look to restrict investor demand, starting withthe lower expected returns discussed in our “Normalizing”
trend. Rising interest rates are making acquisition and construction debt more expensive, just when operating incomes seem
destined to slide as the economy weakens in the forecasted
downturn. Indeed, the prospect of lower income and higher
costs is breaking deals, as buyers either seek price breaks orpull out altogether.

10

Emerging Trends in Real Estate® 2023

Note: Based on U.S. respondents only.

Says the regional leader of one global firm, “Cap rates havegapped out as interest rates went up. And suddenly, things didn’t
pencil, and that generated broken deals. The cost of financing
for real estate and everything else went up dramatically. And soeverything has to be repriced, everything has to be reset.”
Also limiting investor demand: debt is getting more difficult toobtain, and the Emerging Trends survey expects underwriting
standards to get even more rigorous. As the partner in one leading advisory firm explains, “This is one of those ‘cash is king’situations where borrowing costs are higher, and if you’re an allcash buyer, those probably represent a disproportionate shareof the people in the market today.”Chapter 1: Taking the Long View

Meanwhile, the same interest rate increases that reduce leveraged returns and thus demand for real estate also make bonds
and other interest-bearing investments more compelling. As thehead of real estate banking at one investment bank explains,“Rising bond yields are going to mean that real estate and otheralternatives are all going to be facing less availability of capitaland some outflows.”
And while interest rates are increasing, equity and bond prices
have been falling, triggering the “denominator effect” for someinstitutional investors with asset allocations that must remain inbalance. The denominator effect can be magnified because
CRE values in a portfolio are generally appraisal-based, which
tend to be backward-looking.
However, the impact on CRE portfolios may not be severe thistime. Many institutional investors have been under-allocated in
CRE, so they will not need to rebalance by selling real estate
assets. Furthermore, a rising share of CRE investors is not governed by fixed asset allocations, including public REITs, private
investment firms, and high-net-worth individuals, and especiallynontraded REITs, which have grown to be among the leading
investors in CRE, with an asset value of almost $300 billion in
2021. In sum, capital availability should decline in the near term,
though the denominator effect may not force sales as much as
in typical downturns.

conviction that these are the right levels.” That translates into a 5
to 15 percent drop in values so far, with more to come. But there
are too few assets trading now to know for sure.
Buyers are concerned about overpaying. Says one banker:“Now is not the time to be a hero—meaning, it’s not the time togo out and be aggressive on buying something. It’s not the time
to be aggressive on borrowing.” On the other hand, sellers don’t
want to sell their assets short and then see them retraded at
higher prices once the markets improve and few suffer from thefinancial distress that forces them to. It all translates into fewer
deals. One senior adviser to institutional investors said, “It’s pencils down in investment committee. We can’t get an acquisition
or disposition approved in investment committee at this time.”
The fundamental issue for many investors is how long the Fed
will keep raising rates. Many people we consulted in the summer
believed that the Fed will finish hiking by the end of 2022 and could
start lowering again by mid-2023. However, Chairman Powell’scomments at the end of August led more observers to believe that
relief will not come until at least 2024 and seemed to precipitatea sharp market selloff. But everyone agrees that deal volumes
will not return until market players better understand the Fed’s
playbook—which, in turn, hinges on when inflation can be tamed.
As the U.S. head of real estate at one investment bank explained,“That’s going to create more clarity, and then some of the volatility
comes down, and that’s the opportunity to start buying.”

Uncertainty = Hesitancy
Perhaps the biggest headwind to getting deals done now isuncertainty over where prices will settle. Reflecting the views ofmany experts we interviewed, one senior investment banker says,“Transactions are being done at cap rates that are anywhere from25 to 75 basis points wider than they were—but there is not any

Deal flow will also require investors to recognize that pricing
expectations have changed. Says one portfolio manager who
wants to put money out now, “I just don’t know that sellers havecapitulated enough to recognize the new environment.”

Exhibit 1-7 Debt Underwriting Standards Forecast
for the United States

Exhibit 1-8 Equity Underwriting Standards Forecast
for the United StatesLess rigorous Remain the same More rigorous

2023 4.1%
2022 20.3

24.8%

2021 3.9

22.3

Less rigorous Remain the same More rigorous

2023 4.4%2022 28.0

28.8%

18.6
73.8

2021 5.0

27.9

34.5

71.1%
61.1

66.8%
53.7

18.3

2020 12.9

55.5

31.6
30.2

67.1

2020 13.1

52.4

2019 24.9

45.0

30.1

2019 21.1

48.7

2018 16.8

47.0

36.2

2018 17.1

51.4

31.5

2017 8.4

44.2

47.4

2017 11.5

54.2

34.3

12.9

2016 34.0

52.4

13.6

2016 35.4

51.7

Source: Emerging Trends in Real Estate surveys.

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

Note: Based on U.S. respondents only.

Emerging Trends in Real Estate® 2023

11

Exhibit 1-9 Real Estate Capital Market Balance Forecast,
2023 versus 2022
Debt capital for acquisitions

2023

36%

53%

11%

2022

5%

28%

67%

Debt capital for refinancing

2023

33%

57%

10%

2022

6%

54%

40%

At the beginning of COVID, several firms set up opportunistic
funds anticipating all the distress that ultimately never came.
Most of those funds eventually just went away or changed theirfocus. Investors waiting for distressed deals in the coming years
may be similarly disappointed.
The research head of one investment management firm says,“A lot of bids have gone away, highly leveraged bids have gone
away, but there’s still a lot of depth to the capital markets. A lotof the nontraded REITs have plenty of money. There’s still highnet worth. The strength of the U.S. dollar, while it’s going up, also
confirms that foreigners like to own U.S. dollar assets. So, there’s
plenty of liquidity.”
A pension fund portfolio manager adds, “We have pulled backon some things. We’re more selective, and things have to be
more compelling. You have to take a closer look, resharpen yourpencils.” But deals will get done. Concludes one adviser, “Ifdeals underwrite and make sense, there is capital that is both
eager and available.”

4. Too Much for Too Many●●

Debt capital for development/redevelopment

2023

43%

49%

9%
●●

2022

19%

54%

27%

Undersupplied

In balance

Oversupplied●●

Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.

More a Lull Than a Crash
If transaction volumes do fall, few real estate people expect acrash or liquidity crunch in property markets. Notably, there arefew signs of distress. Balance sheets are generally strong, leverage is low, and values have not fallen very far, so few assets areunderwater with their debt. Moreover, replacement financing is
generally still available for those who need it, if at a higher priceand with tighter underwriting. Many investors and developers
are willing to look beyond the short-term turbulence to focus on
longer-term opportunities, a theme we introduced in our opening overview. Thus, there are few examples of motivated sellers
in the market.
12

Emerging Trends in Real Estate® 2023

Housing affordability has fallen to its lowest level in over 30
years. Prices and rents have soared relative to incomes.
Spiraling mortgage rates have pushed the homeownershipbar further out of reach for a growing share of households.
The chronic undersupply of housing is the result of government policies that limit new supply or increase construction
costs and is exacerbated by a labor shortage, as well as
NIMBYism.
Simply constructing more housing may be the most obvious
and effective solution, but is far from easy to achieve.

Housing is too expensive. It has been that way for too long—for
too many people neither for-sale nor rental housing is affordable—but prices and rents have soared even further out ofreach over the course of the past year. And even if we experience an economic downturn, as many economists expect, it is
not projected to provide significant relief.
It starts with record home prices. The U.S. median existinghome price jumped by over 18 percent in 2021 alone—thelargest increase on record going back to the early 1950s—
and then tacked on a further 15 percent through mid-2022.
Combined with rapidly rising mortgage rates, housing affordability has fallen to its lowest level in over 30 years relative toincomes, according to the National Association of Realtors.

Chapter 1: Taking the Long View

Exhibit 1-10 Median Price of Existing Single-Family Homes, Nominal versus Real Prices, 1954–2022
20%
15%
Nominal price

10%
5%
0%
–5%
Real price

–10%
–15%
1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

Source: DQYDJ.com based on data from the National Association of Realtors, Robert Shiller, and the Federal Housing Finance Agency; compiled by Nelson Economics.

Though prices began to fall modestly in the summer, as we
discuss in the “Normalizing” trend, prices are still near record
levels nationally.
The rise in mortgage rates alone has had a significant impact.
John Burns Real Estate Consulting calculated that the number ofU.S. households that could afford a $400,000 mortgage—about
the mortgage amount required to purchase the median-priced
home with a 5 percent downpayment—dropped by 16.5 million
due to rising interest rates, just in the first half of 2022.
That hurts. But the fundamental issue is the overall chronic
undersupply of housing, especially at affordable price points.
The challenges are hardly new. Restrictive zoning and building codes block or limit new supply, while NIMBYism delays
and curbs approvals of even as-of-right projects. Affordable
housing developers complain that increasingly complex deals
now require more underwriting from more capital sources. One
developer says, “The average deal for us used to take 90 days
to close, and now it’s over six months.”
Some experts we interviewed believe that the rise of singlefamily rentals (SFRs) also contributes to declining affordabilityof for-sale housing. Proponents argue that SFRs extend theopportunity to live in a single-family house to those who cannot
afford to buy or just don’t want to, while generally expanding the
supply of rental housing. But critics point out that “institutional
capital is driving up prices in the resale market,” in the words of
one housing adviser, by outbidding owner/occupant homebuyers for existing homes.

One reason: existing tax laws are stacked against the individual
homebuyer. Explains one academic, “Investors are allowed to
not only deduct everything, but also they can depreciate theunit. They also have access to lower cost of capital.” In sum,institutional buyers assembling “horizontal apartment” portfolios
can afford to pay more to be the high bidder for homes. And
they do. Investors account for one in five homebuyers, up by athird compared with before the pandemic.
Another supply constraint is homebuilders’ cautious construction pacing, a vestige of the last recession. Explains the directorof an investment institute who developed housing earlier in his
career, “A lot of the homebuilders, when the Great Recession
happened, were stuck with inventory, said, ‘We’re not doing thatagain. We’re going to build 10 new units, and as they sell, we’ll
start the next one, etc.’”
And then labor shortages are compounding the problems. “Theconstruction sector as a whole hasn’t returned to the peak wesaw prior to the Great Recession. We saw a lot of that labor
leave the sector for something maybe perceived more stable,”says the economist for a housing advisory firm.
All these factors are conspiring to limit housing construction far
below population growth. In fact, the number of single-family
housing starts in the last decade (2010–2019) relative to household formations was the lowest since the government began
tracking these trends and half as much or less than in preceding decades, despite the consistent increase in deliveries sincebottoming in 2010. And now both permits and housing starts
have been trending down again in 2022. Plunging homebuilder
Emerging Trends in Real Estate® 2023

13

Exhibit 1-11 Average Cost of Regulation as a Percentage of Total Multifamily Development Cost
45%
Total:
40.6%

40%

35%

30%

0.5%
2.4%

Pure cost of delay (if regulation imposed no other cost)
Cost of land dedicated to the government or left unbuilt

2.6%

Complying with OSHA/other labor regulations

2.7%

Affordability mandates (e.g., inclusive zoning)

3.2%

Cost of applying for zoning approval

4.4%

Fees charged when building construction is authorized

5.4%

Development requirements (layout, materials, etc.) beyond the ordinary

8.5%

Costs when site work begins (fees required, studies, etc.)

11.1%

Changes to building codes over the past 10 years

25%

20%

15%

10%

5%

0%
Sources: National Association of Home Builders; National Multifamily Housing Council.

confidence suggests that that decline will likely continue until theinterest rate environment turns more favorable.

to a report from economists at the Fed, perhaps a reaction to
lockdown claustrophobia.

And the homes that do get built are expensive, particularly since
the pandemic. Construction costs shot up due to supply chain
disruptions and are still worrisome. As one housing industry
adviser notes, “There’s a stress index about global supply
chains, and those stress indices are all indicating that they’remoderating, but they’re still at very high levels.” Finally, highpermitting fees and utility charges and large minimum lot sizes
push developers to build more expensive homes.

The multifamily sector has responded with an unprecedented
increase in new supply. “We’ve built more multifamily housing
units over the last 10 years than we had in any other time since1980,” notes an adviser to institutional investors. But it is still far
less than needed. Vacancies have fallen to their lowest levels
ever while rents are rising faster than ever—even faster thanhome prices. And though not a formal part of the affordability
calculations, other housing-related costs like utilities and maintenance are also rising faster than incomes, further constraining
the ability of households to afford basic shelter.

Renters Priced Out of the Homebuying Market
With a growing share of households priced out of the for-salemarket, demand for rental units is far outstripping new supply.
Though population growth slowed sharply during the pandemic,
demand is also rising from the many young adults eager to start
their own households after moving back in with their parents
during COVID. Further boosting demand is the increasing
number of younger adults choosing to live alone, according

14

Emerging Trends in Real Estate® 2023

Moving to More Affordable
Recent slowdowns in rent growth and home price appreciation,
noted in our “Normalizing” trend, have done little to increaseaffordability. So how to address this? Millions of people havetaken matters into their own hands. As an executive with one
developer notes, “A lot of people are moving to markets whereChapter 1: Taking the Long View

Exhibit 1-12 U.S. Housing Starts per 1,000 Households, 1961–2022
25
Single-family starts

20
Multifamily starts (5+ units)

Single-family average = 1215

10Multifamily average = 4.5

5

2019

2021
2022

2017

2015

2013

2011

2009

2007

2005

2003

1999

2001

1997

1995

1993

1991

1989

1987

1985

1983

1979

1981

1975

1977

1973

1971

1969

1967

1965

1963

1961

0

Sources: U.S. Census Bureau and U.S. Department of Housing and Urban Development; compiled by Nelson Economics.
Note: 2022 figures are through July.

they can go buy a house and it’s a little more affordable.” Thatsolved the issue for many early movers, but prices and rents
have been rising much faster in many of these “Zoom towns,”
reducing their affordability, a topic we take up in our trend“Rewards—and Growing Pains—in the Sun Belt.” So far, migration from the highest-priced markets has not been enough toactually reduce housing costs in those markets, though costs
generally are rising more slowly there.
Demographics and the slowing economy could also help ease
the housing imbalance. The nation’s population is growing at
its slowest pace ever, thanks to both low birth and immigration
rates. And fewer buyers are on the hunt for homes now due
to affordability and concerns about possible job losses in arecession. “The good news is that it is an opportunity for homebuilders and land developers to do a little catch-up. They’vebeen running behind for two years, and they may actually
welcome a little respite to finish the homes that they have sold,”
thinks a senior adviser to many homebuilders.
But these favorable trends alone will not be nearly enough tosolve the affordability quandary. What else would help? As weoutlined in previous editions of Emerging Trends—when housing was less expensive than it is now—there are no easy fixes,
but several obvious policy options would help: notably, lowering
the many obstacles to housing construction, decreasing rising
regulatory costs (stemming from fees and changes to building
codes), and expediting approvals.

Technology can play a bigger role in actually delivering homesby helping bring innovation and cost efficiencies to a sector thathas been notoriously slow to change. Most notable are different
approaches to prefabricated and modular housing in which muchor all of the house is built in a factory and then assembled on
the homesite. These methods can dramatically reduce the needfor labor and shrink production times at more affordable costs.
Promising innovations are also arising from the nascent single-family build-to-rent sector, which is learning how to scale construction
and design to reduce costs and development time, as explainedin our single-family sector overview found in chapter 2.
Government could also expand affordable housing production. Unfortunately, Congress dropped the affordable housing
components of the proposed Build Back Better Act from whatbecame the Bipartisan Infrastructure Law, meaning that no
additional federal help is on the way. But many state and local
governments are stepping into the breach, as we discuss in our
final trend on regulation.
In the end, perhaps the most effective solution is the most obvious: we must construct more housing that is affordable to more
people. As the former homebuilder we quoted earlier puts it,what is needed is “a new way of getting housing out there andget it built more affordably.”

Emerging Trends in Real Estate® 2023

15

5. Give Me Quality, Give Me Niche
Investment demand for commercial real estate assets is still
healthy, if more tentative, as discussed in “Capital Moving to theSidelines—or to Other Assets.” But real estate capital markets
are also becoming more bifurcated between the favored and thescorned as investors, lenders, and developers turn more selective
than they have been in recent years. What assets will find love—and capital—in the coming years?
Investors and developers seem to be preferring three distinct
types of opportunities:

Exhibit 1-13 Share of All CRE Transactions, by Major
Property Sector, 1H 22 and Change from 1H 21

SectorApartments

Share of1H 22 sales

Change from
1H 21

43.7%

+3.6%

Hotel

6.3%

–2.4%

Industrial

21.1%

–0.8%

Office

16.3%

–3.3%

Retail

12.6%

+2.8%

Source: MSCI Real Assets; compiled by Nelson Economics.
●●

●●

●●

The security of major product types with the strongest
demand fundamentals, notably industrial and multifamily
housing, which essentially tie for top investment ratings inthis year’s Emerging Trends survey;
Best-quality assets in sectors undergoing significant
demand disruption, especially retail and office; andNarrowly targeted subsectors (like student housing) andnewer “niche” asset types (like single-family rentals).

There is much less appetite now for riskier opportunistic investments. Our survey also confirms continuing strong interest in
Sun Belt markets, though the rankings are moderately tighter
than last year, as we show in our markets review in chapter 3.
Hot or Not?
The dominant capital market trend is the increasing divergenceof demand among different property types and then withinproperty types, particularly office. As investors get more
selective, they increasingly choose safer sectors with the mostcompelling market fundamentals. Tenant demand continues
to outpace the market’s capacity to add new supply in both
the residential and industrial sectors, which therefore draw thegreatest interest from capital markets. Retail and office, bycontrast, find much less support.
We repeatedly heard some version of that story in interviews
with industry leaders. But that big picture does not fully capture
the range of market currents. Tenant and investor demand forapartments and warehouses is deep at all price points andalmost every market, but the story is more nuanced for office
and retail. Demand for well-located, top-quality office and retailspace is as strong as ever, but tenants, and thus investors, arelosing interest in lower-quality buildings and shopping centers.

16

Emerging Trends in Real Estate® 2023

Bifurcation and the Flight to Quality
The bifurcated demand that started a decade ago in the retailsector and expanded over time has now spread to the hoteland office sectors. However, the dynamics are different foreach sector. The retail bifurcation was driven primarily by yearsof overbuilding combined with the sector’s failure to update ordemolish obsolete centers and then compounded by the growing competitive pressures from e-commerce. The tenant market
could not support all the existing centers, causing a divide
between the best-located centers with the best retailers andeverything else. Investors have followed suit.
A similar divergence is taking place in the hotel sector but
through a very different dynamic. Here, the divide is being
driven by the contrast between the broad post-COVID recovery in the leisure market and the much slower and incomplete
business market recovery. Thus, resorts and destination hotels
are commanding record revenue while many convention andbusiness hotels languish.
And then there is office, where tenants are increasingly choosing newer, more modern buildings and abandoning everythingelse, especially pre-1990 buildings. Unfortunately, for current
owners, the office sector experienced its greatest construction
boom in the 1980s. Now, many of those assets are becoming
functionally obsolete, unwanted by tenants or investors.
Says a senior leader of a global development firm, “If it’s oldclass B office, I’d be worried because that’s the kind of spacethat companies will ultimately shed to move into new space.” But
not just any new space. The top tier of space—which industry
experts say accounts for only about 20 percent of all officestock—is distinguished by several key modern design features.
These include the following:Chapter 1: Taking the Long View

●●

●●

●●

High ceilings and floor-to-ceiling window lines that allow forabundant natural light;

Mainstreaming of Niche Property Types

Sustainable design that minimizes or even zeros out thebuilding’s carbon footprint; andPremium health and safety features, such as efficient HVAC
systems with rapid air-refresh rates.

The U.S. head of real estate banking for another major investment firm sees office building quality more as a competitive
advantage in the war for talent. “Major companies, especially
their headquarters space, think of that as synonymous with theirbrand. And so if they want to attract talent, they want to be at amodern, sustainable building.”“Those rents continue to hold up really well,” says the head of areal estate investment bank. “And everything else continues tobe really, really tough. So it’s going to be ‘trophy and trauma’ inthe business.” It is almost hard to overstate how much that older
office product has fallen out of favor. A global portfolio manager of an investment management firm explains that “office,especially value-add office, has kind of become toxic. The debt
funds were the primary lender to value-add, especially opportunistic office. That’s completely dried up.”
As with failing retail centers, many of these older office assets
will need to be either upgraded or converted, as discussed in
our next trend on repurposing obsolete buildings. The biggest
challenge is the enormous cost of renovating a 40-year-old
building to the health and safety and sustainability features andmodern design standards offered by the top-tier properties.

In last year’s Emerging Trends, we documented the growinginterest by institutional investors in nontraditional CRE producttypes. This year’s survey and interviews reveal an even stronger
interest in niche products. Niche property types occupy five ofthe top-rated six slots for “investment prospects,” as shown inchapter 2, including the two top subsectors, workforce housing(market-rate housing affordable to middle-income households)
and data centers.
This shift partly reflects investor expectations that cyclical trends
will reduce returns in 2022 and 2023, intensifying the eternal
search for yield. That search will favor some of these smaller
product types that generally command higher cap rates andreturns relative to the traditional product types. Why? Exits areless certain because these assets tend to be more thinly traded.
Moreover, there is less reliable operating data, and these products often require more specialized management, raising therisks for investors lacking experience in these sectors.
The significance of these factors is likely to recede as moreinvestors enter these sectors. That potential looks to get a boost
from an unlikely, if wonky, source: NCRIEF’s Property Index(NPI). Pension funds, investment advisers, and other institutional players often construct their portfolios to match the NPImix, a phenomenon known as “benchmark hugging.” The NPI
includes only the five major product types—apartments, hotels,industrial, office, and retail—and a select few subtypes, like flex
space and research and development (R&D) under industrial. Ina revolutionary move for the often-plodding institutional investor
world, NCREIF plans to promote a new, expanded “NPI Plus”
with all product subtypes as its headline benchmark. This subtle

Exhibit 1-14 Net Office Absorption since COVID Onset (April 2020–June 2022) by Building Age
2015–present

86,794,297

2010–2014–75,6162000s–28,007,668

1990s
1980s

–23,240,353–77,454,006

1970s–24,469,540

1960s–12,505,693

Pre-1960 –80,788,619
–100

–80

–60

–40

–20

0

20

40

60

80

100

Net absorption (millions of square feet)
Source: JLL Research. ©2022 Jones Lang LaSalle IP Inc. All rights reserved.

Emerging Trends in Real Estate® 2023

17change will effectively give investors more latitude to pursue lesstraditional asset types.

may need to recognize in order to justify the transformative
investment could be the greatest barrier to project feasibility.

This change comes at a propitious time in the investment cycle
as investors seek assets better positioned to outperform during
more volatile market conditions. These include some of themore established subtypes like medical office, self-storage, andstudent and senior housing with strong demographic tailwinds
supporting rising demand. There also are newer subtypes withgrowing interest, like cold storage warehouse, life-sciences
office, and single-family rentals, generally benefiting from favorable demand shifts. And still others don’t fit neatly into traditional
CRE categories, like media (e.g., movie studios, sound stages,
and recording studios), cell towers, and data centers, but all
benefit from solid demand.

We have too much retail space and too many office buildings,
and not enough residential units or modern industrial space.
That is the inescapable conclusion from our many discussions
with leaders across the industry, as summarized in the preceding pages. There also is not enough developable land on which
to build all the housing and warehouses where needed. Hmmm,
maybe there’s something to that.

Some investors introduce niche products to add diversification
to their portfolios. Says a senior adviser to institutional investors,“I like, within certain traditional segments, playing off the niche alittle bit. Medical office is an interesting offset to traditional office
exposure in a portfolio. And you have the same thing happening
with other major property types like industrial with cold storage
and data centers.”
In summary, real estate investors are viewing calendar year
2022 as a transitional year requiring changes in near-term
investment tactics. Some capital has moved to the sidelines until
there is greater clarity on pricing and future market conditions.
But investors still actively seeking opportunities are generally
seeking the safety of top-quality assets or sectors most likely toride out expected headwinds due to strong demographic support or other favorable demand fundamentals.

6. Finding a Higher Purpose
●●

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18

Long-term demographic trends and more recent structural
demand shifts have rendered countless existing buildings
and properties either redundant or obsolete. Many of thesebuildings may ultimately need to be repurposed or upgradedto meet new market requirements.
Key repositioning targets are concentrated among retail,office, and older industrial structures and sites. Promising
opportunities include residential units and newer or betterlocated industrial stock, as well opportunities to “retrofit for
the future.”
These conversions are often much easier to envision than to
execute, however, often requiring specialized expertise andsubstantial investment to execute. The value loss that owners

Emerging Trends in Real Estate® 2023

The Importance of Older Buildings
In her classic 1961 urban planning treatise, The Death and Lifeof Great American Cities, Jane Jacobs elucidates the criticalingredients for a diverse, vibrant city. Among them is one rulethat may seem puzzling at first: “The district must mingle buildings that vary in age and condition, including a good proportionof old ones.” Why the need for old buildings? Why not all new?
“If a city area has only new buildings, the enterprises that canexist there are automatically limited to those that can support thehigh costs of new construction.” How boring and monotonousthat would be. Jacobs points to all the small local businesses
that occupy these older structures that give the neighborhood
its diversity and vitality.
Although Jacobs doesn’t say it precisely, there is another crucial
observation regarding the importance of older buildings: somany of them find new life with uses different from their originalfunction. Walk around the bustling old port districts of Montreal
or Boston or Portland, Maine, and you will find hundreds of former warehouses that have been repurposed into upscale hotels,
cool offices, hip restaurants, and distinctive retail spaces.
Conversions are hardly limited to old warehouse districts. Every
vibrant downtown is filled with buildings of varying types andvintages that have been converted into new uses. Often theconversions go “upstream,” as lower-value land uses like warehouses convert into higher-value uses like office or retail. But thedirection is often reversed, with old offices converting into artist
space or storage.
Lemonade from Lemons
Demographic trends and structural demand shifts magnified
by the pandemic have rendered countless existing buildings
either redundant (no tenant demand for the current use or at thelocation) or obsolete (unable to lease in its current condition and/or configuration). But many—though not all—of these can beeither repurposed or upgraded to meet new market standards.
The many opportunities include the following:Chapter 1: Taking the Long View

●●

●●

●●

Converting older offices to residential uses, or upgradingthem into modern offices, where feasible and supported by
the market;
Repurposing excess retail space for other uses (including
fulfillment, service office, and residential) or improving with
mixed use (especially residential, office, and hospitality); andScraping buildings to create development land where conversion is not feasible, or where density can be increased,
to site new housing.

These conversions are often much easier to envision than to
execute, however. The notion of converting obsolete malls into
fulfillment centers, for example, has been a point of interest byboth people inside and outside the real estate industry. But thecase for these conversions can be easy to exaggerate. Nearby
residents don’t relish sharing local roads with big-rig trucks serving these logistics facilities, while local governments resist losing
retail sales tax revenue and jobs. And everyone laments losing
what had been a community gathering place.
But the greatest barrier to land use conversions is the value loss
that owners must recognize in order to justify transformative
investment and make projects feasible. Malls, for example, oftencommand the highest values per square foot of any property
type and warehouses among the lowest: converting a mall into awarehouse may require an enormous value writedown.
It is possible to convert malls to uses with higher values thanwarehouses. For example, the Austin Community College converted Highland Mall into a mixed-use campus, while Amazon
purchased the former Lord & Taylor flagship store in Manhattan,
aiming to convert the building into offices, though those plans
have since been frozen as Amazon reevaluates its space needs.
An even more likely step for failing malls is to convert just themost problematic portions. For example, at York Galleria in York,
Pennsylvania, a former Sears was converted into a casino andthen a vacant Bon-Ton department store into a self-storage facility.
What’s Next for Office?
Perhaps the biggest challenge confronting urban landlords andcity leaders is what to do with all that older office space that
increasingly looks redundant, obsolete, or both.
“One of the major problems we have in the office market rightnow is we’ve got a bunch of pre-1980 buildings that are functionally obsolete, and we don’t know what we do with them,” says
the global head of research for an investment management firm.
The instinct of many owners will be to upgrade in order to attract

new tenants. But that approach can be expensive, with the
payoff highly uncertain. Owners of one older high-rise in Boston
invested $300 million to convert the 1 million-square-foot concrete building into a sleek glass-lined tower. Some major leases
have been signed, but significant blocks remain available.
Not every older building would require such extensive improvements to compete for tenants, of course, but even funding
tenant improvements may be too risky in this highly competitive market. A senior executive with one CRE investment firm
believes, “There’s going to be a lot of distress. Even in a great
market, if their debt is coming due, they’re going to be hardpressed to refinance that building, particularly if that building
needs the capital to fit out space, get new building amenities,
all the things that are required as table stakes today in leasing
office space.”
Says one real estate investment banking executive, “It’s all going
to be triggered by when major leases roll or debt matures orthere’s some debt extension test that comes up. Some of thosebuildings will come back to the lenders, but others may be candidates for conversion to other uses.”
One affordable housing developer is optimistic about the potential for more housing. “Anybody who’s sitting in city hall with ahomelessness problem, which is pretty much everybody, needs
to start thinking about how to take some of these office buildings
and repurpose them into all flavors of residential, including somehomeless shelters.”
But as with the aforementioned mall conversions, that would
require a tremendous value decline to make such projects
feasible, among other hurdles. That capitulation could be painful
and really has yet to begin. Half of the industry people surveyed
for Emerging Trends believe that central-city offices are overpriced. But at some point, owners may have no alternative to aserious writedown if office tenant demand keeps falling.
Moving from Here to There
Discussions with experienced practitioners for the upcoming
ULI report, Behind the Facade: The Feasibility of Converting
Commercial Real Estate to Multifamily, suggest several lessons
that can increase the odds of successful conversions. First is theunderstanding that there is no cookie-cutter building to convert,
particularly when converting commercial real estate to multifamily use. Not only is each experience different, but developers ofsuccessful conversions expect that each subsequent one will
be different. Because of the unknowns when taking off a facade
and walls and bringing it down to the concrete, interviewees
stressed the need for an experienced and nimble team that can
Emerging Trends in Real Estate® 2023

19

Exhibit 1-15 Importance of Disrupters for Real Estatein 20231No
importance3
Moderate
importance

5Great
importanceReal estate industry disrupters
Construction technology 3.74
Cybersecurity 3.49
Big data 3.23
Automation 3.15
Artificial intelligence/machine learning 3.09
Internet of things 3.02
5G implementation 3.02
Coworking 2.98
Sharing/gig economy 2.97
Autonomous vehicles 2.77
3-D printing 2.62
Augmented/virtual reality 2.56
Blockchain 2.41
Drones 2.36
Source: Emerging Trends in Real Estate 2023 survey.

adjust in real time. As one developer summed it up: “You go withthe flow of what the building is telling you it wants to do or cando and then merge that with your financials.”
Second, two perceived stumbling blocks of office conversions
to multifamily—large floor plates and office buildings that are notfully vacant—may not be the universal impediments once thought.
They have been successfully addressed enough times to suggestthat there are options to pursue, at least in some cases. The former
by innovative configurations, often by providing bedrooms without
direct natural light, use of internal space for amenities, or creating
a lightwell. The latter typically by the expected departure of a main
tenant but then lease termination negotiations with the remaining
tenants. Of course, the financial viability of these solutions—andthe full conversion process itself—depends on the strength of themultifamily market in the particular location.
A growing number of developers are honing the skills required
to understand which buildings are most amenable to transformation at a feasible price point and to undertake thecomplexities of conversions. Conversions to residential units
20

Emerging Trends in Real Estate® 2023

have become a mainstream development option, and perhaps
even a specialized niche sector. And institutional and private
capital are finding investment opportunities in this area.
Retrofitting for the Future
The obstacles to converting from one property type to anotherare varied and daunting. Many owners will rise to the challenge,
but such undertakings are often not practical—either too expensive or just too difficult. But the need to “retrofit for the future,”
as one real estate adviser points out, provides another set ofopportunities that may be more limited in scope but ultimately
broader in scale. Owners and managers of real estate will needto enhance the resilience of their assets against potential climatechange impacts or otherwise decarbonize their assets asincreasingly demanded by tenants, investors, and regulators,
as we discuss in greater detail below.
But whether a full-scale conversion to another land use or amore limited retrofit to higher building standards, there is acompelling sustainability reason for these projects beyond theirpotential financial feasibility. It has been said that “the greenest
building is one that is already built.” Simply, it is far more sustainable for the planet to reuse existing buildings than to build new
ones. Reason enough to encourage landowners to consider
what reuse options exist before demolishing buildings to makeway for new construction.

7. Rewards—and Growing Pains—in the
Sun Belt
●●

●●

●●

Despite their continued popularity among residents, employers, tenants, and investors, some Sun Belt markets areexperiencing growing pains. “Big city” problems are coming
to these markets known for their affordability and quality of life
after years of continuous economic and population growth.
These destination markets typically offer lower tax rates
and lighter regulatory burdens than many gateway markets,heightening their appeal to many businesses. Conversely,some of these attractive characteristics may limit their capacity to accommodate continued massive population inflows.
These markets will remain popular for both business andresidential in-migration but could see the pace of both occur
at more moderate levels.

Everyone still likes the hot Sun Belt markets. Almost all theEmerging Trends “magnet” markets that shone most brightly
in our last report—the large Super Sun Belt metro areas andthe fastest-growing Supernovas—still shine luminously in theChapter 1: Taking the Long View

CRE galaxy, as we detail in the “Markets to Watch” chapter. But
another year of hypergrowth has brought growing pains and hasslightly dimmed the outlook for some star markets, as indicatedby this year’s survey.
All this growth is bringing big-city problems to some smaller,
vibrant markets that Emerging Trends once described all-inclusively as 18-hour cities. Such problems include those that affect thequality of life (like congestion) and standard of living (like declining
housing affordability). These side effects to unfettered growth bringto mind the old joke about the hot restaurant that is so popular thatno one wants to go there anymore. The Sun Belt markets arestill strong population and business magnets, but they may now
draw fewer and different people as their appeal changes.
Becoming a 24-Hour City
Though still ranked among the highest of all markets, somehigh-flying Sun Belt metros declined in ratings this year. Housing
is more expensive, traffic is getting worse, longtime residents
are getting frustrated, and even some newcomers are finding
the proverbial grass to be not quite as green as they envisioned.
In focus groups with local market experts conducted by ULI
district councils across the United States, participants from theSupernovas and some other Sun Belt markets were likelier thanmembers from metro areas with more sluggish economies tocite issues like living costs, housing affordability, and infrastructure quality as being a regional disadvantage. These issues
were most frequently mentioned as problems in some of thebooming markets, like Austin and Nashville.
Describing the growing pains in her market, a focus group participant commented, “Nashville is like a teenager. We have grown
too quickly and haven’t decided what we want to be when wegrow up.” Like some other Sun Belt markets, this former “18-HourCity” has graduated to a full-fledged 24-hour metropolis, but theregional infrastructure has strained to keep pace.
Too Much, Too Soon
The pandemic supercharged interregional migration patterns
to leading Sun Belt and lifestyle metro areas, as well as intraregional migrations from CBDs to suburbs. Some of this migration
was destined to reverse eventually. Some households left theirinner-city apartments for safer environs until the pandemic wasbetter understood and brought under control. Some young
adults moved back in with their parents until their jobs reopenedor their old neighborhood revived. Many of these migrants have
moved back to their old places.
But beyond these temporary moves, the pandemic accelerated more permanent migration. Some workers were freed tomove wherever they wanted by flexible work arrangementsthat became more commonplace during the pandemic. Many
left expensive coastal markets in search of more affordable“lifestyle” markets that offer what they perceive to be more favorable amenities or superior economic opportunities. A ULI focus
group participant from Salt Lake City said, “Quality of life andaffordability have been great draws to the market. Sustained
high growth will test these factors long-term.”
These migrations certainly caught the attention of investors anddevelopers. Many of these lifestyle markets jumped to the topof the Emerging Trends rankings. A senior executive with one
development firm said, “We are fans of certain ‘lifestyle markets.’
We think they were already on a very good growth trajectory forwork/life balance, and then the jobs have come in a big way.
They were already doing right, and then the COVID tailwinds
really accelerated the growth.”
However, there are signs that the pace of this migration may
ease—even as developer interest and investments are still gaining momentum—risking oversupplied markets. While job growthand income growth in these markets far outdistance national
trends, home prices and rents are growing even faster, compromising the affordability that helped made them draw migrants
in the first place. Inflation rates in Phoenix, Atlanta, Tampa, andother popular Sun Belt metro areas are among the highest in the
country, partly due to surging housing costs, which make up asignificant portion of the inflation calculation.
What happened? For some markets, it was just too much, toosoon. Population in the markets we identified last year as either“Supernova” or “Super Sun Belt” grew by an average of over 5
percent since 2019, almost four times faster than the rest of thenation, primarily due to rapid net in-migration. For some metro
areas, that was just more than they could handle. Homebuilding
has been rapid but not enough to keep up with demand.
Tax Burdens versus Quality of LifeAt the same time, one appeal of these destination markets is theirlower tax rates and perceived lighter regulatory burden. But morerelaxed taxation and regulation come at a cost, as evidenced by
the challenges of accommodating massive population inflows.
Of course, every fast-growing city that successfully morphs intoa major metropolis inevitably experiences growing pains along
the way. A key issue confronting the current generation of hypergrowth markets is whether they will invest in the infrastructure
and regional planning needed to facilitate growth while maintaining the qualities that led to their appeal.

Emerging Trends in Real Estate® 2023

21

One ULI focus group participant in Austin said, “The disadvantages of housing affordability, lack of mobility due to inadequate
infrastructure, and property taxes will likely negatively impact
our market in the coming years.” Similarly, a Boise representative offered that “the rapid increases in cost of living that we’veseen in the region have hindered some of the advantages thearea had for attracting new residents and businesses.”
The Impacts on Migration and Development Opportunities
It is too soon to know which way these sometimes-opposing
winds will blow, but growth is moderating in some of these
Sun Belt markets. Population growth is forecast to be slower
in four of the five Supernova markets over the next five years
than in the years since COVID hit, and brokers already reporthousing price cuts and broken deals in cities like Boise, Denver,and Salt Lake City.
For many participants in the CRE community, any slowdown
would compound concerns about looming oversupply of bothresidential and commercial real estate. The head of an institutional investment advisory firm says they are “paying muchcloser attention to supply in traditionally unconstrained markets,”
especially Dallas, Atlanta, Austin, and Phoenix. “We are probably relatively less attracted to the growth markets despite theirfundamentals, relative to where we were last year. These were
the hot markets, but we’re a little concerned about what it looks
like going forward.”
But don’t count out these markets just yet. In-migration to thesemarkets will continue, if at a slower pace going forward, and willcontinue to attract a disproportionate share of the investment
capital. And any “oversupply” of homes could help ease housing affordability concerns.
Concludes the head of research for an investment management
firm, “We’ve always been about growth markets because we’ve
always believed that population and employment growth arekeys to success. And they can also cover up a lot of mistakes.
So those markets are still a major focus.”

8. Smarter, Fairer Cities throughInfrastructure Spending
●●

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22

Infrastructure spending is back among the top trends in
Emerging Trends, but this time on a more hopeful note.
New federal infrastructure spending provides the opportunity to replace and expand critical urban infrastructure to
rebuild cities and spur new development—and address
historical inequities.

Emerging Trends in Real Estate® 2023●●

After years of uncoordinated local efforts, the new national
programs may provide the leadership needed to transformthe built environment.

The title of the final trend in the 2020 edition of Emerging Trends
captured the sorry record of federal leadership in funding critically needed infrastructure: “Washington Fumbles; States andCities Pick Up the Ball.” Noting that “decaying infrastructure
is a national problem needing a national solution,” our report
predicted that progress “will likely be more influenced by action
at the state and local levels.”
At least seven “infrastructure weeks” came and went between
2017 and 2019 without any tangible movement in Washington,
after which infrastructure completely fell off the agenda. In themeantime, state and local governments took the initiative withefforts destined to be more piecemeal and less coordinatedthan a comprehensive national program.
Three years later, the federal government finally stepped up
with the Bipartisan Infrastructure Law enacted in November
2021. This $1 trillion bill provides $550 billion in new spending over five years and eclipses the $305 billion infrastructurebill that President Obama signed into law at the end of 2015.
This program will be supplemented by additional infrastructure
programs in the Inflation Reduction Act of 2022, as discussed in
the following “Climate Change’s Growing Impact on Real Estate”
trend on resilience.
The main infrastructure bill encompasses a broad range of activities
focused chiefly on transportation—including bridges and roads, rail
and transit, ports and airports—but also provides funding for broadband internet, power, environmental remediation, and resilience,
among other programs. The Inflation Reduction Act adds spendingfor combating climate change and building energy security.
While every program promises to touch some part of the built environment, several stand out as having especially significant impacts
for cities and the potential to advance economic and environmental
justice by investing in traditionally underserved communities.
Reconnecting Communities by Capping Divisive Highways
Of particular note is the “Reconnecting Communities Pilot,”which provides $1 billion “for projects that remove barriers toopportunity caused by legacy infrastructure.” Many highway
projects (and urban renewal programs) of the 1950s and 1960s
bulldozed through Black neighborhoods and other communities
of color, dividing previously thriving places, displacing thousands, and destroying generational wealth. The Reconnecting
Communities Pilot program will provide “dedicated funding forChapter 1: Taking the Long View

planning, design, demolition, and reconstruction of street grids,
parks, or other infrastructure” to reconnect these bifurcatedcommunities. An additional $3 billion was included within the
Inflation Reduction Act of 2022 furthering this initiative.
A growing “cap-and-cover” movement is already underway,
but work by ULI and others show that there is a lot of work to
be done and injustices to reverse. The Rondo neighborhoodof St. Paul, Minnesota, is one glaring example. As explained in
ULI’s Restorative Development: Infrastructure and Land Use
Exchange forum held in February 2022, Rondo was a vibrant
African American community with a thriving business district
before Interstate 94 was constructed through the heart of theneighborhood. According to a leader of the reconnect effort, thecommunity then lost 61 percent of its population and almost halfof its homeownership between 1950 and 1980. As he concludes: “That’s a pretty devastating gutting of a community.”
Minnesota plans to cover part of the highway and build a new
24-acre neighborhood on top of it, including parks and othercultural amenities, in addition to affordable housing and a new business corridor. St. Paul already has received a $1.4 million grant to“develop a comprehensive transportation plan for the Rondo neighborhood to address safety, equity, and quality of life concerns.”
The Reconnecting Communities Pilot program may help thisproject and other similar ones move forward:
●●

●●

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●●

The Texas Department of Transportation is building a deck
above a sunken portion of I-10 separating downtown anduptown El Paso to create, as described in the federal grantapplication, “amenities such as green space, public gathering space, and entertainment venues.”
A community group called Loving the Bronx supports
capping the Cross-Bronx Expressway, which runs throughdense neighborhoods in the South Bronx, with the goals of
improving local air quality and providing new land for development projects.
In Seattle, Lid-5 activists are advocating for the city government to cover and add green space over I-5.
Reconnect Austin is pushing the city of Austin to bury I-35
through the urban core of Austin and dedicate the new landas public space and developable land.
Many projects of note are either in the works or being
actively discussed, including those in Syracuse, New York;
Richmond, Virginia; and Houston.

Expanding Broadband Access
Another program from the Bipartisan Infrastructure Law with significant potential impact on communities and the CRE industry
is the $65 billion to expand broadband access to the 30 million
Americans living in areas without broadband infrastructure.
Recognizing the relatively high cost of service in the UnitedStates, the program also seeks to “lower prices for internet service and help close the digital divide, so that more Americans
can afford internet access.”
The importance of this initiative was anticipated in ULI’s
2021 report Broadband and Real Estate: Understanding theOpportunity: “Availability of widespread, high-speed broadband
networks already has a wide variety of benefits to the real estateindustry, communities, and individuals. . . . Increasing mobility
opportunities can present potential value that real estate owners
and managers can harness for their buildings. Such opportunities include repurposed or reduced parking facilities, denser
projects, and higher rates of return.”
Expanding broadband access to underserved communities isalso critical to increasing opportunities for employees in morecommunities to work from home, as we discussed in our “… Still,
We’ve Changed Some” trend above.
Transportation Infrastructure
We noted in a prior trend that many hypergrowth markets havebeen unable to keep up with building critical infrastructure,
particularly that which is related to transportation. The infrastructure funding bill will provide almost $600 billion in transportation
funding. More than half of that will be allocated to the highway
system, the largest such investment since the Interstate Highway
System began construction in the 1950s.
The Institute’s 2021 report Prioritizing Effective Infrastructure-Led
Development: A ULI Infrastructure Framework highlighted theneed to invest in public transportation: “Increasing access tojobs, economic opportunities, social interactions, and mobility
is essential. Public transportation provides the regional framework for compact, people-centric urban development, enables
significant real estate and value creation opportunities, andmitigates climate change.” The new infrastructure funds morethan $90 billion to modernize transit, improve accessibility, andcontinue existing transit programs.
Finally, the infrastructure bill provides critical funding for building
environmental resilience and expanding water availability, as will
be discussed in the following trend.

Emerging Trends in Real Estate® 2023

23

9. Climate Change’s Growing Impact on
Real Estate
●●

●●

●●

The CRE sector has an important role to play in mitigating climate change. But with climate risks growing, the realestate industry must proactively address the impacts ofclimate change on assets.
Climate change may alter the dynamics of where people
want to live and invest. In addition to the discomfort andhealth risks of living in ever-hotter climates, energy costs risewith temperatures, as do the risks of power outages as morestrain is placed on power grids. Extended drought conditions may limit new development because authorities may
limit new hookups.
Many investors rely on insurance rather than capital improvements to protect their investments, but changing investor
sentiment toward climate risks may force more affirmativechanges.

The earth is getting hotter. The latest global climate report fromthe National Oceanic and Atmospheric Administration (NOAA)
found that July 2022 “marked the 451st-consecutive month withtemperatures above the 20th-century average. And the fivewarmest Julys on record have all occurred since 2016.”
As a result, extreme weather and climate events are becoming
more frequent and more severe. NOAA’s National Centers forEnvironmental Information calculates that the annual numberof billion-dollar events (inflation-adjusted) in the United Stateshas been increasing rapidly in recent decades, rising fromabout three per year in the 1980s to over 20 in the 2020s. Moredisturbing is the increase in severe summer storms, excluding
climate events like drought, flooding, and wildfires. The numberof billion-dollar severe storms has jumped from less than one
per year in the 1980s to 12 in this decade—a 15-fold increase inless than 40 years and trending further upward.
Just in the recent summer of 2022, we experienced five “once-ina-1,000-year storms” in Dallas, Death Valley, central and southern
Illinois, Kentucky, and St. Louis, which recorded the most intense
rainfall in the city’s history. These storms demonstrate that buildings and infrastructure are poorly equipped to withstand thechanging climate—much less what might be coming.
There is still a political divide in the country about what is toblame for climate change, and what, if anything, to do about it.
But there is now growing agreement about its prevalence. Fully
two-thirds of Americans surveyed by the Pew Research Center24

Emerging Trends in Real Estate® 2023

in 2021 believe that extreme weather events across the UnitedStates occur more often than in the past. Close to half say that
it is hitting close to home as their community has recently
experienced severe weather like floods and intense storms(43 percent) or long periods of unusually hot weather (42 percent).
Last year in these pages, we highlighted the role of commercial
real estate in accelerating—or potentially mitigating—climatechange, in a trend we called “Climate Risks Are on Us.” Despite
recent calls by some CRE leaders that we should deemphasize
ESG issues now as we grapple with growing economic threats,
many in our industry are continuing to answer society’s call to doeven more to reduce our carbon footprint. But with climate risks
climbing still further, this year we highlight climate’s impact on us
as owners, managers, and users of real property—and how ourindustry can proactively address the impacts of climate change
on our assets.
Hotter, More Expensive Summers
Several themes stand out. First, climate change may alter the
dynamics of where we want to live. The hottest metro areas may
soon face declining demand—and potentially an exodus—
due to unbearable weather, even as households continue tomigrate from colder climates to warmer metro areas overall.
Large swathes of Texas and the U.S. Southwest have endured
100-degree highs almost every day this summer, with nighttime
temperatures frequently not dipping below 80 degrees. And it’s
not confined to just the Southwest. “Heat domes” have settled
over the Pacific Northwest during the past two summers, bringing heatwaves unprecedented in their length and intensity.
The built environment intensifies climate change as buildings
and roads absorb and retain heat. This “heat island effect”
raises not only daytime peaks but especially nighttime temperatures, which can be hazardous to humans if they cannot cool
down at night. Sun Belt cities like Phoenix and Dallas are working with CRE owners to reduce heat islands by expanding thetree canopy, adding reflective coatings or vegetation to roofs,
and using cool pavements to reduce the heat absorption ofasphalt streets and concrete sidewalks. These approaches areimportant and necessary but may ultimately prove inadequate
to the challenge if climate change keeps ratcheting up temperatures as expected.
Beyond the discomfort and health risks of living in ever-hotter
climates, energy costs rise with temperatures, as do the risksof power outages as more strain is placed on power grids. A
less obvious cost: higher temperatures and ultraviolet exposure
can increase building maintenance costs. Extreme weather
worsened by climate change is even exacerbating inflation as

Chapter 1: Taking the Long View

Exhibit 1-16 Percentage of U.S. Adults Who Say Their Community Has Experienced Weather- and Climate-Related
Events in the Past 12 Months
50%
43%

40%

42%

31%

30%

21%

20%

16%

10%
0%
Experienced severe weather,like floods or intense storms

Experienced long periodsof unusually hot weather

Experienced droughts
or water shortages

Experienced major
wildfires

Experienced rising sea levels
that erode beaches

Source: Pew Research Center, published August 12, 2022.
Note: Based on survey conducted May 2-8, 2022. Respondents who did not give an answer are not shown.

drought and floods reduce U.S. crop yields and close factories
in China as droughts force authorities to ration power. Other
impacts—and strategies for addressing water scarcity—are
highlighted in ULI’s 2022 report Water Wise: Strategies forDrought-Resilient Development.
Water and PowerThe combination of rising temperatures and drought—often
related—may soon limit where we can build. Drought throughout much of the Southwest is prompting water authorities to
cut allocations to several states as water levels in rivers andlakes fall to multidecade lows. Declining water availability could
require reductions in new hookups and compromise hydroelectric power sources. States may be forced to choose between
growing cities and agricultural areas. Some of the fastestgrowing markets in the country—and investor favorites—are
located in areas of the Sun Belt that already suffer from alarming
water shortages. We are already seeing the first instances ofcities pausing all new development because of drought in somewestern states.
Building Resilience
Climate-related programs in the Inflation Reduction Act of 2022
aim to reduce greenhouse gas emissions and could eventually
begin to reverse or at least slow climate change. But improvement will come slowly, and forecasts expect temperatures tokeep rising and weather to become more extreme for the foreseeable future. So how are we to adapt?

The Bipartisan Infrastructure Law highlighted in the preceding“Smarter, Fairer Cities through Infrastructure Spending” trendcontains major programs specifically designed to improve
the resilience of physical and natural systems. These include
funding for water efficiency and drought resilience projects ineight western states and programs to increase the resilienceof transportation systems. The infrastructure law also provides
funding to homeowners for energy efficiency upgrades throughthe Department of Energy’s weatherization assistance program.
Though none of these programs offers direct assistance to owners of commercial real estate, there is plenty of motivation for
the CRE sector to act on its own, given the enormous potential
impacts of unchecked climate change. But it can be a “hard,slow sell” to convince owners and asset managers to undertakeeven cost-effective physical improvements that would protect
their buildings, admits the principal in a CRE investment firm
specializing in improving building resilience. Because extreme
weather events occur so infrequently in any one location, “theodds are low that anything will happen on your watch, especially
if you’re managing or holding the asset for only a few years.”Thus, asset managers, who typically rotate every few years,
often prefer to protect their buildings through insurance rather
than upgrading them to withstand the extreme weather betterbut likely would be more expensive in the short term.
That calculus could change if insurance costs are allowed torise to reflect the full risks of climate change. In many high-riskareas, insurance is subsidized, or insurers are limited in what
Emerging Trends in Real Estate® 2023

25

they can charge, creating a “moral hazard” that encourages
owners to locate in risky regions and not undertake sensible
physical improvements. “I would prefer that they bear the priceof that amenity and location fully, and they don’t,” says one
academic. “But I think we’re moving in that direction. When theinsurance costs reflect the reality, and when the mortgage risks
reflect the reality, the market will start to work.”That would be a step forward but not the total solution. In ULI’s
2022 report Enhancing Resilience through Neighborhood-Scale
Strategies, the global head of ESG strategy for an investment
management firm explained that insurance is not a substitutefor building resilience: “Now investors understand the need tomodel climate risk over a longer period of time. Insurance canprotect us against damage loss but not demographic or investor
sentiment changes.”

Real Estate Association (PREA)—jointly released their ESG
Principles of Reporting for Private Real Estate handbook forreporting ESG factors, as well as diversity, equity, and inclusion(DEI), for private real estate investment managers.
The handbook emphasizes that “[t]he principles presented. . . are best practices only and should not be considered
requirements in order to claim compliance with the ReportingStandards” (of how member firms report their performance andportfolios to their clients and the industry). Nonetheless, theseprinciples likely will be widely adopted by institutional investors, given NCREIF’s and PREA’s influence in their respective
communities. The NCREIF/PREA guidance joins a growing listof standards and tools being developed to help investors andregulators in their quest to accelerate decarbonization in thebuilt environment and promote broader ESG adoption by theprivate sector.

It’s a race against time—and climate change.

10. Action through Regulation?
●●

●●

●●

Pressures for greater ESG disclosure by real estate owners
and investors are intensifying due to efforts both from industry groups like NCREIF and PREA and from government
regulation by the SEC.
As shelter costs increasingly strain household budgets, stateand local governments are resorting to regulation to addressaffordability, including various types of rent control andvacancy taxes.
While building owners and developers benefit from various
government incentives, the industry faces an increasingly
challenging set of environmental and economic regulations.
Will certain regulations end up being counterproductive?

Preceding trends highlighted several areas where private
markets have been slow to fix mounting problems that theproperty sector has played a central role in creating, notably
climate change and housing affordability. Industry groups are
calling for collective voluntary action, which is a start. But, if thegrowing number of regulations being considered at the federal,state, and local levels is any indication, governments are getting
impatient about the limited progress.
ESG Disclosures
Pressures for greater ESG disclosure by real estate owners andinvestors are intensifying. In October 2021, the two primaryindustry groups for institutional investors—the National Councilof Real Estate Investment Fiduciaries (NCREIF) and the Pension
26

Emerging Trends in Real Estate® 2023

Moreover, the impact of this greater disclosure could be felt
more widely throughout the real estate industry due to the market size of pension funds and other institutional investors. “Someof our clients really resist adapting the ESG protocols, but I think
the capital demands it,” notes one senior adviser to institutional
funds.
As investors increasingly demand newer, greener, and moreenergy-efficient buildings, particularly offices—as noted in our“Give Me Quality, Give Me Niche” trend—older “brown” buildings will see their values discounted, and their owners havetrouble selling them. As the head of U.S. real estate for a global
private-equity firm explains, “You can’t sell the building to amajor core fund, you can’t sell the building to [major insurance
firms] or other major players if the building is not sustainable.
The REITs won’t buy your building.”
Even if investor demand increasingly pushes the market to moresustainable buildings, some investors believe that a downturn
might slow progress for a while. Says a senior leader of one
global development firm, “That’s going to keep marching on,
there’s no doubt about it. And it needs to. But in the near term, I
think it’s definitely going to be overshadowed by the economic
reality of the U.S.”
Owners may not have a choice, especially in markets implementing their climate action plans. Buildings in several leading
markets will need to achieve energy efficiency targets andgreenhouse gas emission limits as early as 2024 or face significant fines. The climate impact of buildings will likely become
more transparent across the United States if the Securities andExchange Commission (SEC) has its way. The SEC proposed

Chapter 1: Taking the Long View

new ESG disclosure regulations in May 2022. The amendments
to rules and reporting forms aim “to promote consistent, comparable, and reliable information for investors concerning funds’
and advisers’ incorporation of . . . ESG factors.” In simple terms:
greater disclosure and transparency, as well as enhanced
consistency in reporting that go beyond what industry selfregulation calls for. This would include reporting on greenhousegas emissions and the portfolio’s carbon footprint, as well as theclimate risks an owner or investor may have in their real estate
portfolio.
Not all investors are covered, but as with the NCREIF/PREA
reporting principles, the SEC regulations could have broader
impact given the market size of the entities that are specificallycovered. The proposed changes would apply to “registeredinvestment advisers, advisers exempt from registration, registered investment companies, and business development
companies.” These would include REITs, with additional reporting requirements for funds specializing in ESG investing, suchas green building funds. Indeed, the SEC and European Union
regulators are already launching investigations into companies
accused of misrepresenting their environmental impacts infunds claimed to be “green.”
Still, these are only draft regulations. Indeed, some question whether the SEC has the authority to implement theserules, especially given the recent U.S. Supreme Court decision regarding the EPA’s authority to regulate climate change.
Regardless, few doubt that more regulation is coming, including
at the local level. Several investors we interviewed expressed
concern about being able to comply with New York City’s new
Local Law 97, which mandates that “most buildings over 25,000
square feet will be required to meet new energy efficiency andgreenhouse gas emissions limits by 2024.”
To be fair, building owners and developers may also leveragea host of new incentives from federal, state, and local governments, including billions of dollars in the Inflation Reduction Act,to help buildings hit these aggressive climate goals. But these“carrots” only underscore that the industry faces an increasingly
challenging set of environmental regulations.
ESG Disclosures So Far
A recent survey conducted by RCLCO shows both the progress
and potential for greater industry participation. As of June 2022,
38 percent of real estate companies report having policies inplace to integrate ESG considerations into the investment process. But adoption varies widely by type of firm, with generally
much higher levels from public companies (61 percent) andinstitutional investors (55 percent) than private companies(23 percent).
ESG disclosure will be costly, requiring not only capital improvements in buildings to reduce carbon impacts but also thesystems to measure them and the staff to comply with theproliferation of reporting requirements. Those costs could favorlarger, better-capitalized investors, leading to more industry consolidation. Concludes one senior investment banker, “It’s clear
there’s going to have to be far more disclosure around carbon
footprints and related issues, which is going to inure to the benefit of larger, more established REITs and market participants
who can meet that disclosure obligation and have the resources
to address the carbon offsets or other measures.”
Regulation to Address Housing Affordability and Blight
Rent control. “Regulation is something that should be top ofmind for a lot of property owners. And we’re starting to see
significantly more rent control laws being passed at the local
and municipal levels. That does have trickle-down impacts toindividual property owners.” That warning comes from the headof advisory services for a real estate data analytics firm.
As shelter costs increasingly strain household budgets, somestate and local governments are resorting to regulation toaddress affordability. This takes two primary forms: limits on
how much landlords can increase rents and imposing costs onowners who keep units empty. At present, only California andOregon, plus the District of Columbia, have statewide rent control, although about 25 municipalities in California impose theirown laws. Four other states—Maine, Maryland, New Jersey, andNew York—allow some or all local governments to enact local
own regulations but have no statewide law. Most other stateseither expressly preempt rent control or limit home rules thatwould allow it.
That could soon change, however. As of spring 2022, at least
17 states were considering some form of rent control legislation,according to National Multifamily Housing Council tracking. The
states span all regions of the country and both political parties,
demonstrating the breadth of frustration with rising rents. Severalof these initiatives already failed to pass before the legislatures
adjourned for the session. But the volume and range of these proposals show just how widespread the concerns are, and some ofthese initiatives could be revived if rents do not cool soon.
In addition, many cities are considering enacting their own rent
laws. In November 2021, voters in St. Paul, Minnesota, passed
what some call the strictest rent control in the United States,
limiting annual rent increases to 3 percent with no adjustment
Emerging Trends in Real Estate® 2023

27

for inflation, no exemption for new properties, no allowances forcapital expenditures, and no vacancy decontrol for move-outs.
Cities in both Massachusetts (Boston) and Florida (Miami and
Tampa) are considering either new laws or emergency declarations. However, both states prohibit local rent control, and bothgovernors opposed relaxing state control, reducing the likelihood of ever being enacted.
Vacancy taxes. Vacancy taxes can take various forms, but thegoal is to increase the effective supply of housing by imposing costs on landlords who keep housing units vacant. Anothergoal, which can also be applied to commercial property, is toaddress blight by encouraging property owners to put theirbuildings to productive use. For example, Washington, D.C.,
imposes a tax on vacant buildings of $5 per $100 of assessedvalue, while “blighted” properties are taxed at $10 per $100
of value.
Vancouver, British Columbia, is believed to be the first city inNorth America to impose a vacancy tax, enacted in 2017 tocombat widespread pied-à-terre ownership. While the tax did
raise funds for affordable housing initiatives, skeptics point out
that the tax apparently did not cause empty condominiums to
be converted into active rental units.
Oakland, California, enacted a flat vacant property tax of $6,000
tax on houses and nonresidential properties and $3,000 on condominium units “in use less than fifty days in a calendar year.”Berkeley and San Francisco are considering adopting versions,while several other cities have considered them in recent years

Inclusive and Equitable Growth: The Emergence of Impact Investing within
Institutional Real Estate
In recent years, institutional investors and corporations haveannounced billions of dollars’ worth of capital commitments
targeted at addressing socioeconomic inequity, particularly
with respect to bridging the racial wealth gap. At the sametime, there are very few announcements detailing if and how
those commitments have been met.

It is now equally critical, however, that new capital deployment strategies be developed to support much more thansimple sufficiency; they need to be tailored toward more
equitable societal outcomes and the economic mobility thatis required to achieve them. Scalable solutions must be created that allow more people to thrive, not just survive.

It appears that many of these corporations and investors
are struggling with how, where, and with whom to deploythat capital; industry leaders have not yet coalesced aroundsolutions to address inequity that are innovative, replicable,
and scalable.

The distribution of that prosperity within America has
become increasingly inequitable, and socioeconomic
mobility has become less and less attainable for Americans
in the lower and middle classes. Research from McKinsey
found that, despite the longest economic expansion in U.S.
history through much of the 2010s, the Gini index (a measurethat represents the income inequality or the wealth inequality within a nation or group) reached 0.485 in 2018—themost inequitable level of income distribution recorded in the
United States since the Census Bureau began tracking themetric in 1947, and the highest level of income inequality
among Group of Seven countries. In terms of wealth inequality, the top 1 percent of Americans hold nearly 40 percent of
the nation’s net worth as of 2019, the highest on record since
the Federal Reserve began collecting survey data in 1989.

The 1977 Community Reinvestment Act initiated a wave ofinvestment targeted at meeting some of the basic needs oflow- and moderate-income communities. The passage of theact was an important step aimed at reversing years of intentional disinvestment caused by practices such as redlining
and blockbusting.
In my view, it was a recognition that capital should bedeliberately directed to address the needs of low-income
individuals: all members of society deserve to be affordably housed, have enough food to eat, and have access toemployment that allows them to address at least their mostbasic needs. It is critical that society continue to support its
most vulnerable.

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Emerging Trends in Real Estate® 2023

Research from Opportunity Insights comparing children’shousehold incomes at age 30 to those of their parents at thesame age shows that absolute mobility has declined precipitously. Ninety percent of people born in the 1940s out-earned

Chapter 1: Taking the Long View

but either rejected them or not yet voted on them. Most are in
California (such as San Diego, Long Beach, West Hollywood,and Los Angeles), but the list also includes Honolulu and New
York City.
San Francisco also enacted a commercial vacancy tax onvacant retail stores in 2020 but suspended implementation foralmost two years due to the COVID-19 pandemic. The measure
finally took effect in 2022 for commercial space vacant for morethan 182 days in a calendar year. The tax equates to an averageannual levy of $6,250 for a typical store with a width of 25 feet,rising to $25,000 by year three. Local press accounts find thatthe tax is very unpopular with landlords, who also complain
about the city’s slow and expensive permitting process, but it
is too soon to gauge the program’s effectiveness.

their parents by age 30, while only 50 percent of people bornin the 1980s did the same. The decrease in absolute mobility
has affected people in all socioeconomic classes, with lowerincome Americans being affected most acutely.
A generational wealth gap has emerged. Wealth is now
increasingly held in fewer hands, with millennials and Black
Americans disproportionately affected by this rising inequality. According to research from the St. Louis Federal ReserveBank. in 2016, older Americans had more than 12 times
as much wealth as younger families, up from 7.5 times thewealth of younger families in 1989. The top 10 percent offamilies ranked by household wealth owned 77 percentof America’s wealth in 2016, while the bottom 50 percent
owned only 1 percent. White families owned 89 percent ofAmerica’s wealth in 2016, while Black and Hispanic families
owned about 3 percent each.
Millennials now represent the largest segment of the U.S.
workforce—paradoxically its most diverse, most educated,and yet least financially stable cohort. Their ascendanceas talent and, increasingly, leadership within the workforce
will likely lead to a heightened focus on finding solutions tothese disparities. Their voices have been amplified by social
media, and they are increasingly holding corporations,investors, and governments more accountable for mitigating
negative externalities that have been imposed on society.
Many recognize certain risks that come with wealth andincome disparity; growth potential may be disrupted by social

It is unclear how many local or state governments will follow
these early adopters, but more are sure to follow, particularly if
housing affordability does not improve.
Several industry leaders we interviewed noted that Washington’s
divided political climate was unlikely to yield any significant
changes to the essential tax structures and accounting regulations that govern commercial real estate. However, both federal
and local governments seem more willing to push the industry
to address social issues related to its core function, especiallyclimate change and housing affordability.

unrest and political instability that often accompany inequality
as those on the bottom see less opportunity available to them.
A more promising, evolving school of thought—impact
investing—shifts focus away from simply limiting downside
toward creating upside. While the definition of impact willvary by investor, this deliberately inclusive form of capitalism
focuses on unlocking the potential of people and places thathave been historically overlooked and underserved. Looking
through a dual lens of purpose and profit, measurable impact
and equitable outcomes are central to this investment strategy. This stands in stark contrast to how investors have often
viewed social responsibility in the past—as a tangential andphilanthropic “nice to have,” but not a “must-have.”
Increased transparency has contributed to the evolution of
impact investing. The increases in both regulatorily mandated and stakeholder-driven environmental, social, andgovernance (ESG) disclosures for public companies andpension funds have required that investors spend more time
considering their negative and positive impacts on society
and demanding that their investment managers do the same.
Analyses of ESG-related key performance indicators alongside their returns can now disabuse people of the notionthat purpose-driven investing must equate with concessionary returns. Research now suggests that a company’s
improvement on material industry-specific ESG measures ispredictive of significant future financial outperformance relative to its competitive set.
Continued next page.

Emerging Trends in Real Estate® 2023

29

Furthermore, big data and social media also are helping
shed light on strategies that may contribute to more equitable outcomes. For real estate investors, there now is abetter understanding of the characteristics of places thatare correlated with higher rates of upward mobility. Amongthe most notable, Harvard Think Tank Opportunity Insights
has used anonymized census data, tax records, and mostrecently Facebook data to analyze the characteristics of “highopportunity neighborhoods.” They found a direct link between
economic connectedness (one form of social capital) andhigher levels of socioeconomic mobility for lower-income
individuals. It is important to highlight that the research foundthat simple coexistence did not correlate with mobility; thecorrelation was with true connectedness (i.e., meaningful,ongoing interactions and friendships) across socioeconomic
class lines. The built environment can fundamentally support
or, conversely, limit that sense of connectedness.
A sustainable and scalable solution for bridging wealth gaps
through increased social mobility will require increased participation from the private sector, in tandem with the cooperationof the public and social sectors. Recognizing that government
funding is often inflexible, inefficient to obtain, and insufficient,
it is critical that state, local, and federal governments continue
to focus on lowering the cost of capital for private investments
in low- and moderate-income communities. Institutional investors will likely need to be further incentivized to increase their
allocations outside the major metropolitan areas that havetraditionally been the primary beneficiaries of institutional
capital flows.
Public policy that deconcentrates poverty, reduces barriers to
the creation of affordable and attainable housing, and incentivizes the development of mixed-income neighborhoods withdeliberate infusions of social capital warrants additional consideration. The Economic Opportunity Coalition (EOC) recently
announced by Vice President Kamala Harris’s office is a positive step toward coalescing the public and private sectors to
deploy billions of dollars’ worth of investment into underserved
communities. Notably, the EOC “has committed more than
$3 billion of investments into CDFIs [community development
financial institutions] and MDIs [minority depository institutions],
including $250 million in long-term, low-interest debt and over
$70 million in grants to CDFIs and MDIs.”
The social sector will continue to play a leading role as well,particularly as more foundations and endowments broaden
the scope of their charitable and investment mandates. As

30

Emerging Trends in Real Estate® 2023

reported by Barron’s, some have even shifted from strictly
granting plus or minus 5 percent of annual spending to models in which they allocate increasingly larger percentages of
their assets under management with managers from diverse
backgrounds and/or with strategies that are focused on bridging wealth and gender gaps.
Impact investing can increasingly be informed by data-driven,
evidence-based approaches as a result of the growth of
big data and social science research, but it will need to becomplemented by qualitative input from local, communitybased stakeholders who will be essential in co-creating
sustainable solutions to reducing inequity. The importance ofintentional co-creation cannot be emphasized enough giventhat only 1 percent of real estate assets under management
are deployed by minority-led real estate firms and only 2 percent of real estate development companies are led by African
Americans. Those investors who may be best positioned toco-create sustainable solutions are still typically unable toaccess the capital necessary to scale those solutions. It matters where capital is deployed, how it is deployed, and withwhom it is deployed.
A new generation of impact investors within the real estateindustry is innovating holistic approaches to addressing
inequity. Their impact frameworks and investment strategies
reinforce one another. Investments of financial capital in lowand moderate-income neighborhoods complemented bypeople-focused investments empower individuals to realize
their potential and, in so doing, further contribute to society.
And beyond the moral imperative for investing in social andhuman capital lies a clear economic rationale. These investors
are using data to demonstrate that supporting the financial,physical, and mental well-being of their tenants enhances theirability to deliver market-rate, risk-adjusted returns. Consciously
inclusive capitalism has the potential to turn vicious cycles
of disinvestment that leave many people behind into virtuous cycles of inclusive growth that create a larger pie for all.
Mission-driven, data-informed innovators are leading the way
to a future when we can all do well by doing good.
—Onay Payne is the managing director of real estate, Lafayette
Square Holding Company, LLC.

Chapter 1: Taking the Long View

The Opportunities and Challenges of Climate Risk Analytics
It is clear that real estate investors and developers can nolonger avoid risk related to climate change; in 2021 alone,
the U.S. National Oceanic and Atmospheric Administration
identified 18 separate billion-dollar disasters in the UnitedStates. Many of these types of events—and the material risk
they pose to the real estate industry—are unavoidable in thenear term, irrespective of the emissions scenario. As extreme
weather events continue to grow in frequency and intensity,
the real estate industry must protect the long-term value of
their assets.
Climate risk is typically categorized into two types: physicalrisks and transition risks. While both are critical to address,
acute (e.g., floods and hurricanes) and chronic (e.g., sealevel rise) physical risks present a special concern for the realestate industry given the geographically stationary nature ofmost assets.
An array of climate analytics data, software, and consulting
services has emerged in response to the changing climate andthe attendant shifts in policy frameworks, regulatory environment, and growth in investor focus on environmental, social,and governance (ESG) issues. These data providers offer awider range of commercialized science applications designed
to help institutional real estate managers identify, measure, anddescribe physical risk at the asset and portfolio scales. Whilethese tools offer an opportunity to evaluate current and future
physical risk; the process by which investors integrate the information into investment decisions is currently opaque.
The Challenge of Climate Risk Analytics
Differences in climate risk analytics providers’ input data
and methodology for estimating risk can make it difficult
to compare results of analyses. For instance, within theirproduct offerings, these firms often create summary metrics
that aggregate the risk of multiple individual hazards. Whenaggregated, the weighting factors and hazards included varyby provider. Likewise, when calculating risk, providers may
or may not include government, municipal, or asset-level risk
mitigation considerations.
Some providers, in addition to determining the likelihood ofphysical risk to assets, also calculate value-at-risk (VaR) to
assets, where VaR represents the expected financial loss
stemming from an event. Providers that offer a VaR measuretend to introduce further variation in outputs. This is due tothe differences in how providers source the “value” of VaR.

This figure from an institutional real estate manager depicts a setof aggregate risk scores generated by three different climate risk
analytics providers (vendors A, B, and C) for assets (A to G), demonstrating the challenge of translating complex climate science intobusiness decisions.

Considerations might include market value, the assumed
percentage change in value, capital repair estimates, replacement cost, assumed business interruption loss, or assumed
mitigation costs. Indirect considerations, such as ownership
structure, structure of the capital stack, lease considerations,and insured amount, may or may not be factored in.
Needless to say, it is easy to see why a wide variation inprediction patterns is prevalent across providers.
Improving Decision-Making with Climate Risk Analytics
To overcome these challenges of variability between climate
risk analytics providers’ outputs, it is necessary for institutional real estate managers to carefully articulate their use
case needs—specifically regarding valuation and value-atrisk. The climate risk analytics provider community can, inturn, benefit from sharing more about their approaches andthe strengths and limits of models and physical risk data. To
the extent that these conversations can be continuous andearnest, they will help guide both industries forward.
For more information on how to choose, use, and better
understand climate risk analytics, visit ULI’s Knowledge
Finder site.
—ULI Urban Resilience Program

Emerging Trends in Real Estate® 2023

31

Emerging Proptech Developments
The 2022 Mid-Year Global PropTech Confidence Index showsthat confidence in proptech, as an industry, is at an all-time
low for both investors and founders. This latest sentimentlevel is an abrupt departure from record-high confidence
levels in 2021, following years of unprecedented growth in theindustry, and is in keeping with 2022’s broader sentiment shift
in the capital markets.
Investor confidence has declined considerably, measuring 5.8 out of 10, down from 9.3 in midyear 2021, the lowest
level since we began the index in 2016. According to KBW
PropTech Pulse, proptech firms’ enterprise value-to-sales
multiples were down 40 percent for incumbents and 75 percent for new entrants since the market’s fourth quarter 2021
peak. Transaction volume in the late-stage venture market
has declined as some of the most active investors during
the recent bull run—nontraditional and crossover investors—exited or meaningfully slowed their deal pace amid
well-publicized losses and continued market volatility.
Doom and gloom aside, there are favorable tailwinds for
proptech. Commercial adoption of software and hardware
technology is at an all-time high and overall revenue forenterprise software continues to grow quickly. As real estate
owners, operators, and developers struggle with increasingly
challenging environments of their own, many believe thattechnology can provide an opportunity for revenue generation and cost savings.
The real estate recession during the Global Financial Crisis of
2007–2010 saw some of the fastest growth rates for revenueof property management software systems as the recession
forced chief financial officers to embrace technology as ameans to drive efficiency. It is possible that this trend will only
accelerate during the current environment, as technologicalefficiency compounds over time. In fact, many startups haveexperienced record levels of revenue growth and margin
expansion in the second and third quarters of 2022 despite
the challenging financing environment.
Only time will tell how long it will take for confidence torebound; and while these metrics reflect the current mood of
the industry, they by no means indicate an industry beyond
repair. This economy—record-low unemployment, runaway
inflation, an inverted yield curve, and strong customer sentiment included—presents the opportunity to adapt and share

32

Emerging Trends in Real Estate® 2023

best practices across asset types, sectors, and geographies. It encourages founders to move toward greater capitalefficiency and gives investors a new lens on how to makemeaningful investments.
As the real estate market continues to evolve, technology willplay an increasingly important role. In this section, we will
cover five emerging trends that are fueling new growth andinnovation in the proptech industry moving into 2023:
1. Investor and Regulatory Pressures Driving Increased
Focus on ESG Solutions
The global recognition of the climate crisis has led to over 70
countries setting net zero commitments as well as proposing and passing key legislation to meet these targets. In
addition to environmental pressures, a number of prominentsocial equity movements have catalyzed a shift towards the
public and private sectors including nonfinancial-related
disclosures, such as emissions and diversity data, into theirreporting. Firms are actively searching for an effective way tocollect and share data related to their pursuit. The real estateindustry is no exception to these shifting pressures, and it
faces heavy scrutiny as a significant negative contributor to
the environment.
An initial step for real estate companies with ESG targets is toestablish a baseline and measurement framework to map any
future improvements against. A selection of relevant benchmarks include asset- and portfolio-level energy, water, andwaste data. Several companies have emerged as potential
leading solutions for reporting on such real estate ESG data.
After data collection is completed, real estate owners and/or operators can take action to decarbonize individual assets
or entire portfolios. This solution set is deemed “climate tech”
and has a critical part to play in decarbonizing the global
economy since buildings account for about 33 percent
of global CO2 emissions, based on a report from the IEA.
Energy and HVAC optimization, water and waste management, and renewable energy sources help address emissions
throughout the building life cycle.
2. Increased Adoption of New Construction Technology
Solutions
The construction industry is facing a series of intertwinedpressures—a worsening shortage of skilled labor, volatilematerial prices, evolving contracting structures—that areChapter 1: Taking the Long View

contributing to an increase in demand for and adoption of a
new array of compelling construction technology solutions.
The shortage of skilled labor has led many companies toturn to digital-first labor marketplaces to meet demandfor projects, and to robotics and automation solutions toaddress both labor scarcity and inefficiencies. For example,
construction and facilities management firms may employ
solutions that leverage artificial intelligence (AI) and robotics
to boost the productivity of a skilled painter more than 10times within certain applications.
Similarly, the spike in prices of materials and ESG pressures
to reduce the carbon emissions impact of the built environment are driving advancements in steel and concrete
production. The continued growth of modular and prefabricated construction methods is aiming to make a dent
in rising construction costs and a structural shortage of 4
million homes in the United States, while heavy equipment
and parts marketplaces seek to wring greater efficiency outof valuable production assets. And as the majority of largescale construction projects shift to design-build contracting
frameworks, platforms are making it easier for builders,developers, architects, and other stakeholders to streamline
decision-making and bring in projects on time and underbudget.
3. Growing Demand for Data Interoperability,
Infrastructure, and Intelligence Tools
As the level of technology adoption within the real estateindustry and built environment has grown, the demand fortools to coordinate and build upon the data and capabilities
produced by this increasingly robust yet fragmented solution set has grown as well. As they have in other technology
categories, data infrastructure and interoperability layers
are beginning to gain prominence in proptech as the sector
continues to grow and mature. These layers help to 1) normalize data flows between software systems (e.g., ensuring
the real-time, automatic updating of floor plans across all
reliant systems), 2) ease new vendor integration challenges
into a real estate firm’s existing tech stack (e.g., reducing
the need for implementation consultants and engineers tointegrate a new vendor technology into a building), and 3)
enable customers and/or third-party vendors to create andbuild upon the capabilities of existing tools via a few lines of
API code.

4. Emergence of New Asset Management Technology
Stack for the SFR Market
The single-family rental (SFR) housing market has been oneof the fastest-growing segments of the real estate industry
over the past decade and a half. Kick-started during the
Global Financial Crisis of 2007–2008, the industry has
rapidly grown and institutionalized, with the largest players controlling many tens of thousands of homes each.
Of the total SFR market, valued at $4.7 trillion, institutional
ownership is projected to grow from 5 percent market share(700,000 homes) in 2022 to 40 percent market share (7.6
million homes) by 2030 according to Yardi Matrix, 2022.
In order to service this explosively growing institutional
investment, a new technology and service stack is emerging to power all stages of the asset management life cycle,
for all sizes of market participants. From acquisitions toleasing to work order and facilities management solutions
targeting large and midsized owners and operators to fullservice acquisitions and property management solutions
for longer-tail players, a new tech ecosystem designed
around the nuances of single-family and scattered-site
rental housing stock is rising to power the continued growthof this exciting asset type.
5. Increasing Globalization of Proptech Solutions
Proptech growth over the past decade has historically been
confined to its roots in the mature markets of North America,
with expansion prioritized to other English-speaking regionsof the globe. However, in the last few years, technologicaladvancements including the internet of things (IoT), bigdata, and the cloud have catalyzed supply-side capability
and ambition to expand into mature international proptech
hubs earlier than predecessors. The supply is coupledwith an increasing demand for innovation and proptech
from leading real estate owners, operators, and developers
across Europe, Asia, and Latin America who have tracked
proptech’s success across North America and prepare tofoster growth of compelling foreign technologies or similar
local solutions. This confluence of demand and supply-side
appetite and technological advancements has led to a newwave of proptech companies expanding to new international markets easier, quicker, and more successfully thanever before.

Continued next page.

Emerging Trends in Real Estate® 2023

33

As proptech internationalizes, local solutions emerge, often
adapting models pioneered in more mature markets, andestablished solutions expand more quickly into new geographies. As this happens with greater frequency, best practices
for cross-border expansion surface. The top four driversof cross-border business success include the following: 1)
establishing a local presence (people and office); 2) building
a local ecosystem (network of “influencers”), whether that bea champion customer, investors, and/or local brokers andadvisers; 3) tailoring the business model, including performing a cost/benefit analysis for the new region, assessing local
competitors, and developing a region-specific go-to-market
plan; and 4) localizing the product including user interface,
workflows, language, currency, data sovereignty, and security, to name a few.
—Maureen Waters, founder of Metaprop

Metaverse Poised to Help Shape the Future of Real EstateBusiness leaders are closely monitoring the potential impact
on the real estate industry of the metaverse—a digital platformthat may profoundly change how businesses and consumers
interact with products, services and each other. Metaverse
properties, like any other type of real estate, can be bought,
sold, purchased and leased. This could open up real estate
investing to a new pool of investors.
Real-world activities such as conferences, trade shows, exhibitions, weddings, sporting events, and other social gatherings
could all be enhanced with the metaverse. Thus far, no one
is predicting that the metaverse will replace brick-and-mortar
properties, but the platform could, down the road, affect how
people interact with physical locations.
One of the biggest areas that the metaverse could affect is theworkplace. The metaverse can enhance collaboration, complement the physical office, and improve the overall workplace

34

Emerging Trends in Real Estate® 2023

experience at a time when more workers are demanding flexible work arrangements. The metaverse could also be useful in
helping firms build their employees’ professional skills at a time
when everyone is hunting for employees.
Like any new technology, the metaverse has potential risksof which companies should be wary. Among them are data
privacy and cybersecurity risks. As firms pursue applications,they should conduct a thorough assessment of their organizations’ vulnerabilities to the metaverse and how to manage
them. For example, metaverse real estate buyers and sellers
are unlicensed virtual brokers and property managers who
are not required to obtain real estate licenses. Companies willneed to vet potential partners and work with someone they
trust as they outline a long-term plan.
—PwC

Chapter 2: Property Type Outlook

Property Type Outlook“We don’t see significant sales of assets taking place, but we do see a lot

pickiness, selectivity when it comes to new opportunities.”

Real estate capital markets are still open for business. Investors
are still buying, lenders are still lending, and no one seems tobe panicking just yet. But everyone is being more careful about
which deals they do until there is more market clarity.
Reflecting the more cautious mood, the average rating for allproperty types together in our Emerging Trends survey fell morethis year than in any year since the GFC. But that overall trendmasks diverse underlying dynamics. Though the rating fell for
15 of the 25 property subsectors, they rose for the other 10, so
sectoral preferences are moving in different directions, even if
the general mood is less exuberant this year.
In this environment of economic and market uncertainty, investors seek properties with the strongest operating performance
while shunning weaker sectors viewed as riskier. This flightto safety is shown in the nearby graph, as “investment prospect” ratings for the top two major property sectors have been
separating from those for the bottom two sectors, meaningthat investors are more selective. The trend for “development
prospects” shows a comparable widening spread. In fact, thegap between the preferred sectors and shunned sectors is
wider now than it has been for at least 15 years, which suggeststhat investors perceive a narrowing range of compelling market
opportunities.
The industrial/distribution sector has again come out on top of
the major property types this year, followed closely by multifamily housing. These two property sectors have ranked at or near
the top of the Emerging Trends surveys almost every year goingback to before the global financial crisis of 2008–2009, but themargin of preference for them over other property sectors has
been increasing steadily for six straight years.

more choosiness,

Exhibit 2-1 Rating Spread between Emerging Trends
Top Two and Bottom Two Property Types, 2007−2023
1.0
Difference between top 2 and bottom 2 sectors

0.9
0.8

Average 2007–2023: 0.53

0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0

2007

2009

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate annual surveys; compiled by Nelson Economics.
Note: Based on “Investment Prospects.” Includes industrial/distribution, multifamily housing,hotel, office, and retail for all years, plus single-family housing from 2016 onward.

On the other hand, office and retail remain out of favor withsurvey respondents. Office actually displaced retail as thelowest-ranked property sector this year. Retail had registered
the lowest ranking of any property type for over a decade but
seems to have at least stabilized, while the future for the officesector is uncertain at best.
In between these two extremes are the hotel and single-family
housing sectors in a virtual tie, though their fortunes havereversed in the last year. Interest in hotels rose more over the lastyear than any other major property type as tourists—if not business travelers—returned to the roads and airways. By contrast,
prospects fell for housing as rising mortgage rates have cooledbuyer interest in new homes.
Emerging Trends in Real Estate® 2023

35

Exhibit 2-2 Prospects for Major Commercial Property Types, 2019–2023
Investment prospects

Development prospects

3.69
3.79
Industrial/distribution 3.76
3.65
3.57

2023
2022
2021
2020
2019

3.67
3.83
Industrial/distribution 3.73
3.66
3.62

3.67
3.73
Multifamily housing 3.39
3.55
3.52

3.52
3.61
Multifamily housing 3.33
3.36
3.29

3.33
3.31
Hotels 2.86
3.22
3.19

3.34
3.85
Single-family housing 3.48
3.39
3.48

3.32
3.82
Single-family housing 3.39
3.37
3.52

3.05
2.74
Hotels 2.59
2.94
3.21

2.86
2.84
Retail 2.69
2.77
2.85

2.51
2.49
Retail 2.54
2.45
2.44

2.72
3.07
Office 2.93
3.24
3.24

2.34
2.69
Office 2.67
3.00
2.92

1
2
Abysmal Poor

3
Fair

4 5
Good Excellent

12
Abysmal Poor

2023
2022
2021
2020
2019

3
Fair

4 5
Good Excellent

Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.

Beyond the major property types, 2023 may be known as theyear that “niche” property types came into their own. Five of thesix highest-rated property subtypes would be considered niche,
led by workforce housing and data centers, as well as life-sciences facilities, medical office, and single-family rental housing.
These sectors generally command greater returns than traditional product types due to higher cap rates. But investors also
value the strong demographic tailwinds supporting these niche
sectors at a time of expectations of cyclical market challenges.

Multifamily: A Bumpy Ride and a
Bumper Crop●●36

Demographics: A four-generation surge of household
formation and housing preference will buoy fundamental
apartment demand through and beyond 2030.

Emerging Trends in Real Estate® 2023

●●

●●

●●

Technology impact: Exponential advances in technology,
data, and artificial intelligence capability and applications
will have impacts on building-cycle, property operations andmanagement, and resident experience cost-versus-value
models.
Capital liquidity: A post-pandemic-era flight to safety willcontinue to divert yield-seeking capital into residential rental
real estate vehicles.
Policy constraint: Policymakers’ ever more restrictive land
use barriers will spread sharper supply-versus-demand
mismatches to more cities, straining market-based solutions
and sculpting evolving geographies as people seek refuge
from high-cost locales.

In its broadest sense, a housing shortage in the United States
describes a lack of sufficient access to income-matched apart-Chapter 2: Property Type Outlook

Exhibit 2-3 Commercial Property Price Index, by Sector
280
260
240
220

Apartment

200
180
Industrial

160

Office–CBD

140
120
100
80

Office–suburban

60
40
1Q 2005

1Q 2007

1Q 2009

1Q 2011

1Q 2013

1Q 2015

1Q 2017

1Q 2019

Retail

1Q 2021 2Q 2022

Source: RCA CPPI, MSCI Real Assets.
Note: 100 = December 2006.

ment rental housing. Today, with more than one out of threeof America’s 44 million renter households earning less than
$36,000 a year, roughly every other rental household puts
more than 30 percent of their earnings toward rent. And oneout of every four households spends 50 percent or more of
their wages on housing. Those percentages reflect divides
that deepen because not enough new apartment units arecoming online.
A present that is polarized grows more so over time. For marketrate property investors, developers, owners, and managers,
what lies ahead is the brightest beacon of prosperity. But for
those who live and reside below the cutline of wherewithal andsocial mobility, the future of apartment rentals holds more questions than answers.
With 1.3 million new U.S. households projected each year
through 2035, apartment industry trade groups—the National
Multifamily Housing Council (NMHC) and the National
Apartment Association—calculate that the United States needs
4.3 million newly built apartments between now and then.
That level of new development would work out to 331,000 new
multifamily rental units annually. This would expand the existing apartment rental stock in the United States by more than 20
percent in just over a decade. What makes this goal plausible

are two strong tailwinds: household demographics and an
unprecedented global embrace of apartment development by
the investment community.
Still, the throes of land use policy drag on development. But
beyond local policy barriers, tugging housing to its future, area trio of macro forces—work/life balance, an urgency to stall
the climate effects of global warming, and an array of technologies—in business management, livability, and construction.
Can this darling of real estate asset classes sustain its hold on
global investment inflows, unleash construction’s modern manufacturing era, turn the tide on local political will, and win over thehearts, minds, and pocketbooks of consumer households to pull
off such a feat? If you had to guess today—with residential rental
vacancies at historical lows of 6.2 percent and occupancy rates
and median asking rents for vacant units at historical highs—theanswer would be a cautious “yes.”
However, a gigantic hurdle stands in the way of telling fleeting trends apart from ones that will last: the pandemic and its
aftermath. During that two-year span—depending on whether
the data source is a private one like Apartments.com or Zillow ora public-sector one like the U.S. Bureau of Labor Statistics—rentEmerging Trends in Real Estate® 2023

37

growth spiraled upward nationally in ranges from just under 10
percent to just shy of 25 percent.

Exhibit 2-4 Apartment Investment Prospect Trends

excellent

The Pandemic: This Time Is Different

Lower-income
apartments

Senior housing

With the pandemic and the cascade of economic and social
policies it set off, five macro apartment industry tailwinds
reached gale-force levels:

good Moderate/workforce
apartments

fair

●●

Single-family
rentalStudent
housingHigh-income apartments

poor
2007

2009

●●

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.

●●

Apartment Buy/Hold/Sell Recommendations
Buy

Hold

Sell

Moderate-income 52.7%
apartments

38.4%

8.8%

Single-family rental 42.3

40.7

17.0

Lower-income 38.1
apartments

48.8

13.1

High-income 27.0
apartments

50.3

22.7

Senior housing 19.0

56.9

24.1

Student housing 19.0

56.9

24.1

0%

20%

40%

60%

80%

100%

Opinion of Current Apartment Pricing
Under
Overpriced
pricedFairly priced

Moderate-income 52.7%
apartments

38.4%

8.8%

Single-family rental 42.3

40.7

17.0

Lower-income 38.1
apartments

48.8

13.1

Senior housing 32.5

56.2

11.3

High-income 27.0
apartments

50.3

22.7

Student housing 19.0

56.9

24.1

0%

20%

40%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on U.S. respondents only.

38

Underpriced
Over priced

Emerging Trends in Real Estate® 2023

60%

80%

100%

●●

●●

One, there was a preexisting multigenerational avalancheof both rent-by-choice and rent-by-necessity demand for
multifamily rental units.
Two, demand gathered speed and sweep as people soughtlarger living spaces to balance remote work and household
life, and more outdoor living options.
Three, constrained construction of new supply, and a pricerun-up on the single-family for-sale front, spilled over into
expanded apartment demand.
Four, construction capacity to add new supply stalled as
COVID aftershocks played out.
Lastly, compounding the effects of these four dramatic
imbalances came the rocket fuel of a global capital rotation
toward de-risked assets (i.e., the safe haven of U.S. residential real estate).

Outsized demand, a sudden spike in remote work mobility,
constricted supply, and floods of money with nowhere better togo—a grand slam of anomalies.
The U.S. apartment property sector—providing shelter to 37 million residents in 21.3 million structures of five or more household
units, and contributing $3.4 trillion annually to the U.S. economy,
according to the NMHC—morphed quickly into an investment
asset class pressure cooker. Inflated property valuations, compressed cap rates, and a sea change from individual owners to
medium and large-sized corporate owners became a new norm
seemingly overnight.
This time period veers wildly from a steady slope of otherwise
well-entrenched trends across the structural demand front.
Operational modernization kicked into super-fast-forward mode
toward self-service, and a robust new-development pipeline atleast. According to a recent Bloomberg report, “After dipping in
2020, the number of new units authorized in multifamily buildings took off, running 37 percent higher over the past 12 months[as of June 2022] than in the same period in 2018/2019.” As of
August, 862,000 apartments were under construction, up 25
percent from a year ago.

Chapter 2: Property Type Outlook

At the same time, COVID’s aftermath sharply defined conflicting
forces—which together destine virtually all of America’s newly
developed and built apartment communities for a financiallyprivileged professional class. Rather than causing an expansionof rental housing stock, however, higher-income households’
come-lately demand for rental neighborhoods instead served to
crowd out moderate- and lower-income households in supplyconstrained areas.

The Push and Pull of Trends: Rentership Rising
Broad-stroke household demographics point irrefutably to strong
secular demand for multifamily rental apartment development.
During the 2022-to-2035 stretch that lies ahead, 275 million
adults —the total of all the adult-aged generational cohorts—willcontinue to make shelter decisions, especially as U.S. domestic migration and mobility continues at over 27 million movers(approximately 8 percent) each year. Financial factors—given thatrunaway costs and high mortgage interest rates will price morehouseholds out of homeownership as an option—will determine
many of their decisions, as has long been the case.

“It’s been virtually impossible to build affordable,” says the chief
executive of one of the apartment industry trade groups. “You
can’t build ground-up affordable because of the price of land,
and the regulations that govern that, and everything the NIMBY
activists rule . . . it all puts a real damper on the industry’s ability
to produce.”

What is different over the past several years has been growth indiscretionary rental households, also known as rent-by-choice
households. According to Harvard’s Joint Center for Housing
Studies (JCHS), the number of renters making at least $75,000
jumped by 48 percent over the decade ending just before thepandemic, to 11.3 million. With this increase, the share of renterhouseholds in this income group rose from 20 percent to26 percent.

In mid-2022, yet another freshly drawn inflection point—coinciding with the devastation wrought by the Russia-Ukraine war
and an aggressive U.S. monetary and fiscal tightening effort todial down inflation—quickly spread the pain of a cost-of-living
crisis across America’s households. In addition, it casts a new
cloud of uncertainty over the near-term outlook for market-rate
residential investment.

Younger, older, and more economically, racially, and culturally
diverse households together will bend the economic and culturalarc of rentership upward. (American Community Survey data

Exhibit 2-5 Owners and Renters: Select Household Characteristics
Race/Ethnicity

White

Owners

Asian

8.2%

51.8%

Age

Renters

Hispanic

75.1%

Renters

OwnersBlack

Under age 35

9.9%

15.5%

20.3%

35–44

45–54

19.0%

34.4%

55–64

65–74

22.8%

19.9%

19.7%

75–84

4.7%

5.4%

85+

19.1%

15.6%

10.2%

13.7%

10.1%

8.9%

3.5%

4.8% 2.8%

Source: Pew Research Center analysis of U.S. Census Bureau data.
Note: Data as of 2019. Race and ethnicity categories reflect U.S. Census Bureau terminology. Black or African American adults and Asian Americans do not include Hispanics.
Hispanics/Latinos are of any race.

Emerging Trends in Real Estate® 2023

39

notes that people of color represent 91 percent of total household
growth between 2009 and 2019, and fully 85 percent of renterhousehold growth in that period, according to the JCHS.)
Apartment industry leaders now recognize a blurring of behavioral lines across generations. When it comes to housing typeneed or preference, generational cohorts—generation Z, millennials, generation X, and empty-nester baby boomers—act more
like each other than not.
“Our customer experience research shows it’s more appropriate to classify people by [buying pattern] behaviors than bygenerational cohorts,” says the CEO of one of the nation’s top
20 privately held multifamily developers. “You’re going to findpeople in gen Z and millennials and even gen Xers that havevery similar behavioral components and some of that is stageof life, but not all of it is.”Consumer-driven trends—a desire for indoor/outdoor living,health and well-being features and functionality, designs fora nimble work/life balance at home, holistic home technology
solutions for everything from package delivery management,
to smart locks, privacy, and security systems, to self-service
access to concierge and other community amenities—are
becoming non-negotiable standards as technologies improve.
“Since COVID, we were able to pivot to a technology footprint
for our business model that reduces reliance on people andimproves the customer experience,” said the CEO of a publicly
traded, top-10-ranked multifamily apartment owner-developer.
“So, it was an acceleration of what we’ve seen in other sectors
to a self-service business model. The core of it is, ‘How do you
interact with your customer?’ and if that gets disrupted or therules of the road change, ‘How quick can you adapt?’”
Capital Calculus
As COVID dynamics shifted multifamily property ownershipfrom individual owners to business and investor enterprises,transaction volumes, multifamily loan originations, and property
valuations surged. Yield-thirsty investors greenlighted a boom in
new construction, with 420,000 completions estimated for 2022,
up from 364,000 in 2021.
“Wall Street investment giants were raising massive amountsof capital, buying every apartment they could,” says the chief
executive of a top-10 multifamily real estate investment trust(REIT), speaking of the pandemic-era capital pivot into apartments. “And so, all of a sudden, they became the market
themselves. When you’re buying apartment portfolios at $20

40

Emerging Trends in Real Estate® 2023

[billion] or $30 billion at a clip, you’re establishing what the market floor is. It was, ‘We’re going to buy apartments everywhereat a 3.5 or 4 capitalization rate.’ They didn’t differentiate one
property from another.”Class A property investments align with rent-by-choice higherincome households and a swelling population of aging Americans
ready to downsize and simplify. B and C value-add investments
suit a growing market of younger and mid-career households
stuck in the limbo of scarce supply, high prices, and high interest
mortgages that will delay their becoming homeowners.
Closing a gaping, and widening, chasm in new investment
and development would well serve households in the 80 to
120 percent range of area median household income levels—
the wage range of many essential workers such as teachers,
sanitation workers, law enforcement officers, and fire andmedical first responders. Furthermore, addressing this “missing
middle” household income level does not preclude the needfor additions to and preservation of properties for lower-income
households.
The Great Bottleneck: Local Ballot Boxes
Apartment stakeholders’ number-one nemesis, blocking privatesector market solutions to deep and growing mismatches
between demand and supply, is a many-headed hydra—a bevy
of deep-rooted restrictive land use, permitting, and regulatory
cost burdens that thwart higher-density multifamily development. On top of these longstanding challenges, a growing
push for rent regulation is adding uncertainty to the market.
For example, while 26 states prohibit local municipalities from
implementing rent control laws, five states permit localities toenforce rent control—New York, New Jersey, California, Oregon,
and Maryland—as well as Washington, D.C. Regulations being
proposed throughout the country would allow landlords to boost
monthly rents by no more than 2 percent to 10 percent. Arizona,
Florida, Hawaii, Illinois, Kentucky, New Jersey, New York,
Washington, and Massachusetts have all introduced proposals
to add or expand rent control protections.
“The problem of impact fees and NIMBYism really dominates
many markets and makes it too expensive to develop,” theCEO of one of the nation’s largest property management
organizations says. “I think we’re still stuck in the past. Somepolicymakers are not in tune. Voters who may not be well versedin these issues elect government officials who then become ahuge wall to economic solutions. I don’t see solutions for all thishappening in my lifetime.”

Chapter 2: Property Type Outlook

Exhibit 2-6 Prospects for Commercial/Multifamily Subsectors, 2023 versus 2022
Development prospects

Investment prospects
Moderate-income/workforce apartments

2023

Data centers

2022

Data centers

Life-sciences facilities*
Medical officeSingle-family rental housing

Single-family rental housing

Warehouse

Warehouse

Medical office

Manufacturing

Senior housing

Senior housing

Manufacturing

High-income apartments

High-income apartments

Neighborhood/community
shopping centers

R&D

Flex

Lower-income apartments

R&D

Flex

Lower-income apartments

Student housing

Upscale hotels

Midscale hotels

Midscale hotels
Luxury hotels

Neighborhood/community
shopping centersStand-alone retail*Student housing

Upscale hotels

Economy hotels

Luxury hotels

Stand-alone retail*Economy hotels

Lifestyle/entertainment centers

Lifestyle/entertainment centers

Urban/high-street retail

Urban/high-street retail

Suburban office

Suburban office

Power centers

Outlet centers

Outlet centers

Central-city officeCentral-city office

Power centers

Regional malls

Regional malls

AbysmalFair

Excellent

2022

Fulfillment
Moderate-income/workforce apartments
Life-sciences facilities*

Fulfillment

2023

AbysmalFair

Excellent

Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
*First year in survey.

Emerging Trends in Real Estate® 2023

41

Emerging Trends in Senior Housing
Major factors influencing senior housing continue to evolve.
Some trends are well known while others are developing. In
2022 and into 2023, senior housing trends include the following:
1. The growth of the sector into new product types differentiated by rate and service offerings as the sector continues
to mature and evolve.
2. The articulation of a new value proposition for senior housing as the proverbial “fountain of youth” for future baby
boomer residents who seek a high quality of life, wellness,longevity, and a sense of purpose.
3. The recognition that senior housing is truly part of thehealth care continuum.
4. The gradual recovery of occupancy from the nadir reachedduring COVID-19, boosted by a recent slowdown in inventory growth and strong post-pandemic demand patterns.
5. Outside exogenous factors including the national andglobal economies, inflation, and rising interest rates, which
present new challenges for senior housing.
6. Staff recruitment and retention as well as rising expenses
associated with labor shortages, insurance, food, energy,
and other goods and services. Collectively, these aresqueezing operator margins, investment returns, and debt
issuance.
7. And, of course, U.S. demographic patterns, which arepushing greater numbers of individuals into the 75-plus
cohort, creating a captive pool of potential new residents
for senior housing.
These and other topics will be explored below.
Sector maturation. It is an exciting time in the senior living
industry as the sector matures and product offerings become
increasingly differentiated. Much like the hotel industry, withofferings from Motel 6 to the Ritz-Carlton, operators, developers, and capital providers are increasingly segmenting
the senior housing market by both price point and service
offerings. “Active adult” offers amenitized rental housing forthe “younger old” cohort seeking community involvement,
lifestyle, purpose, and connection. The “Forgotten Middle,”a term coined by the National Investment Center for Seniors
Housing & Care (NIC) in its 2019 seminal study that assessedand quantified the need for more affordable housing and care
options for middle-income seniors, offers care and hous-42

Emerging Trends in Real Estate® 2023

ing options for the value-minded older adult consumer. And“ultra-luxury retirement communities” offer older adults highend concierge lifestyle living options with wellness centers,
five-star culinary options, entertainment, and A-list cultural
events. And, of course, the traditional senior housing productremains, with a price point that falls between the two andoffers a value proposition of security, socialization, engagement, room and board, care coordination, and lifestyle.
Wellness value proposition. Many operators increasingly
recognize that senior housing provides an environment thatcan promote and support health and wellness, enticements tothe baby boomers as they age and seek the aforementioned
proverbial fountain of youth. Furthermore, the movementof many operators to incorporate wellness programs into
their offerings has the ability to be a significant competitive
advantage as potential residents seek communities that holdpromise to improve the quality of their life through programs
focused on the intellectual, physical, social, spiritual, vocational, emotional, and environmental dimensions of wellness
as defined by the International Council on Active Aging.
Senior housing as part of the continuum of care. Simply
stated, senior housing operators influence social determinants ofhealth for hundreds of thousands of older Americans. Operators
can help manage chronic illness and keep older adults
healthy—they have 24/7 eyes on residents and can systematically monitor changes in conditions. Properly managed, thiscan result in fewer resident hospitalizations, reduce federal andstate-level health care spending, and act as a catalyst for futurebusiness opportunities and collaborations. Further, thoughtfulcare intervention can provide support to the overall health careecosystem through the support and creation of conscientious
awareness and follow-through. And, once senior housing is fullyrecognized as part of the health care continuum, senior housing
operators will be able to participate in the revenue streams associated with a capitated risk-sharing model of care.
Tailwinds for occupancy recovery. Two tailwinds support
an ongoing occupancy recovery for senior housing. First, on
the supply side, the number of senior housing units underconstruction in the second quarter of 2022 for the 31 NIC
MAP Primary Markets was the fewest since 2015. And thatpattern may remain in place—at least in the near term—
because senior housing starts continue to linger at moderatelevels and remain well below their peaks seen in the 2016–2018 period. This is because rising prices for materials andChapter 2: Property Type Outlook

Senior Housing Fundamentals, Primary U.S. Markets, 1Q 2007–2Q 2022
17,00095%
Occupancy

Inventory growth

12,000

90%
85%

2,000

80%

–3,00075%–8,00070%–13,000

65%

Units

7,000

–18,000
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Occupancy rate

Absorption

60%

Source: NIC MAP Data Service, ©2022 National Investment Center for Seniors Housing & Care Inc. (NIC).

inflation, labor shortages in the building trade industries, andthe change in Fed policy of higher interest rates are collectively affecting plans for new development; many projects
increasingly do not pencil out for reasonable returns.
Second, demand is also a tailwind for an ongoing improvement in occupancy. Indeed, demand, as measured by thechange in occupied inventory or net absorption, was robustin the second quarter of 2022, increasing at its strongest
pace ever recorded by NIC MAP Vision except for the postpandemic boost in demand in the last half of 2021. Since therecovery began in the second quarter of 2021, 78 percent of
the units placed back on the market have been reoccupied.
As a result of these conditions, the occupancy rate for senior
housing—where senior housing is defined as the combinationof the majority independent living and assisted living properties—rose 0.9 percentage point during the second quarterof 2022 to 81.4 percent for the 31 NIC MAP Primary Markets.
This marked the fifth consecutive quarter in which occupancy
did not decline. At 81.4 percent in the second quarter, occupancy was 3.4 percentage points above its pandemic-related
low of 78.0 percent recorded in the second quarter of 2021
but was 5.8 percentage points below its pre-pandemic levelof 87.2 percent in the first quarter of 2020.
Outside influencing factors. Looking ahead, several exogenous factors will influence the strength of net move-ins anddemand. These include demographics (as discussed further
below) as well as the following:●● The broad performance of the U.S. economy,●● Consumer confidence (which is very low, according to a

University of Michigan survey),●● The rate of inflation (the Consumer Price Index increased

by 9.1 percent from year-earlier levels in June 2022, resulting in the largest increase since 1981),●● Interest rates (rising as the Fed tightens monetary policy

and increases the Fed funds rate),●● The pace of sales for residential housing (slowing fromhigher mortgage interest rates),●● The stock market (considered in a bear market),●● Pent-up demand for senior living settings (strong throughthe second half of 2022),●● Development currently underway (moderately paced com-pared with history),●● New competition in the form of recently opened properties

since the pandemic began, and●● Local market area demand and supply pressures.

Continued
continuednext
nextpage.
page
Emerging Trends in Real Estate® 2023

43

Senior Housing Rent Growth and Employee Pay Increases, Primary U.S. Markets, 2007–2022
12%

10%

10%
Pay increases, assisted living employees

Rent increases

8%

8%
Independent living rent growth6%

6%
Assisted living rent growth

4%

4%

2%

2%

0%
2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

–2%

2019

2020

2021

2022

Employee pay increases

12%

0%
–2%

Source: NIC MAP Data Service, ©2022 National Investment Center for Seniors Housing & Care Inc. (NIC).
Note: Rent growth is change in annual asking rent. For 2022, wage growth is as of first quarter and rent growth is as of second quarter.

Staffing challenges. Of importance, labor also is a key
consideration, with an increasing number of operators citing
labor shortages as a potential limiting constraint on growth.
In the WMRE/NIC Investor Sentiment Survey conductedin June 2022, just under half of respondents (41 percent)reported that labor shortages have caused a reduction in
the number of operating units/beds in their portfolios. Thisis presenting challenges for operators seeking to maintaincensus, much less grow and expand.

Expenses, margins, and returns. Rising wage costs associated with temporary agency workers, overtime hours, andsick leave associated with COVID-19 have combined withdollars expended on personal protective equipment and rising insurance costs to put significant pressure on expenses.
Rent growth, while rising, has not been sufficiently able tooffset expense growth for many operators. As a result, net
operating income has been hard to achieve for many—but
certainly not for all—operators of senior housing properties.

Indeed, the U.S. jobless rate was low at 3.6 percent inJune 2022 and was only 0.1 percentage point above thepre-pandemic level of 3.5 percent seen in February 2020.
Furthermore, tight labor market conditions are pressuring
wage rates up quickly, especially for workers in skilled nursing and assisted living properties.

COVID was particularly hard on the senior housing sector.
Many investors had reduced their appreciation expectations
for senior housing as the impact of the coronavirus weighedheavily on their view of the sector. According to NCREIF
Property Index (NPI) investment return data, short-term total
returns for senior housing were low at 1.08 percent in the firstquarter of 2022 compared with the broader NPI, which saw
total returns of 5.33 percent in the first quarter. Appreciation
returns for the NPI dwarf those of senior housing, since the
NPI was boosted in part by outsized returns in industrial properties (10.96 percent). The senior housing income return inthe first quarter was 0.91 percent, its best showing since late
2020. This was stronger than industrial and nearly on par withapartments, and slightly less than the NPI (0.99 percent).

While good for employees, low jobless rates present challenges to employers who must staff their businesses. Surveys
conducted by the NIC among C-suite operators of senior
housing and care properties highlight strategies to combat
labor shortages and include raising wages, offering flexible
work hours, higher pay frequency, improving the work environment and culture, recruitment programs comparable withthose used to market to new residents, and collaboration witheducational institutions.

44

Emerging Trends in Real Estate® 2023

Nevertheless, on a longer-term basis, the 10-year return forsenior housing was the strongest of the main property types

Chapter 2: Property Type Outlook

except for industrial. For this time frame, the income returns
for senior housing (5.47 percent) surpassed the NPI (4.83
percent), while the appreciation return (4.49 percent) was
slightly less than the NPI (4.61 percent).
Demographics favor senior housing. The demographics
supporting senior housing cannot be denied, as the number
and share of older adults continue to grow. For example, thenumber of persons 82 and older—often the age at which aperson moves into senior housing—is growing at an accelerating pace. In 2022, there were 10.6 million Americans
aged 82 and older; by 2026, this figure is projected to growto 12.3 million, and by 2030 to 14.8 million, according to the
U.S. Census Bureau. Further, in the not-very-distant future,
the ratio of adult children family caregivers (those aged 45
to 64) who are available to take care of aging parents (thoseover 80 years of age) will continue to shrink at a precipitouspace from 7:1 in 2015 to 6:1 in 2022 to 5:1 in 2026 to 4:1 in
2031 and to 3:1 in 2044.
With fewer family members and spouses available forcaregiving—divorce rates are high for older adults—congregate settings will indeed get a further boost in demand.
In addition, the increasing segmentation and differentiationof senior housing in serving the vast numbers of seniors in
the middle-income cohort will add a large demand pool for
operators to serve, as will the movement of “younger old”
adults into the active adult segment. With an industry penetration rate of roughly 11 percent of U.S. households, thepenetration rate does not need to increase dramatically foroccupancy to rise to pre-pandemic levels.
Looking ahead, many reasons exist to be optimistic about theoutlook for senior housing, but the path forward may be a bit
bumpy due to the prevailing winds in the broader economy.
Inventory will continue to expand, although at a reduced pacein the near term, which should act as a tailwind for occupancy
improvement. And, while demand may also be affectedby economic headwinds, the value proposition of senior
housing—security, socialization, engagement, room andboard, care coordination, and lifestyle—remains in place andultimately should win the day by attracting new residents tosenior housing properties. In addition, the movement of many
operators to incorporate wellness programs into their offerings
has the potential to be a significant competitive advantage
as potential residents seek communities that hold promise toimprove the quality and length of their lives.

Exhibit 2-7 Prospects for Residential Property Types,
2023 versus 2022
Investment prospects
Manufactured-home communities2023

Age-restricted housing

2022

Master-planned communities
Single family–moderate/workforce
Single-family lots*
Single family–high income
Multifamily condominiums
Vacation homes
AbysmalFair

Excellent

Development prospects
Single family–high income
Master-planned communities
Age-restricted housing
Manufactured-home communities

2023

Single-family lots*

2022

Single family–moderate/workforce
Multifamily condominiums
Vacation homes
AbysmalFair

Excellent

Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.
*First year in survey.

—National Investment Center for Seniors Housing & Care (NIC)

Emerging Trends in Real Estate® 2023

45

Student Housing: Improvement in Fundamentals
For those active in the student housing sector, fall 2022’s
massively improved performance has shaped up to be
essentially a best-case scenario. At a minimum, it has been
the rebound that many had hoped for. At best, it has beensomething of a renaissance after two very challenging years
due to the COVID-19 pandemic.
Rent Growth and Occupancy Levels Not Seen inat Least a Decade
Heading into the final month of the fall 2022 leasing season,
both rent growth and occupancy sit at all-time highs. The
former sits right at 6 percent—almost three times greater thanthe 2010s’ decade norm—while the latter clocks in above 90
percent–plus. That is the earliest the sector has ever crested
above that 90 percent threshold on record. By the semester’s
start, it is almost a foregone conclusion that the year will kickoff with never-before-seen occupancy rates. With student
competitive housing (in other words, nearby conventional
multifamily housing properties that compete with purposebuilt assets) also seeing record rent growth and occupancy
rates as well, there is less pressure on purpose-built offcampus housing space than in years past.
Investment from Institutional Players Solidifies
Student Housing as a CRE Sector

the time of acquisition, that left only one publicly traded realestate investment trust (REIT) in the student housing space.
Yet another massive announcement followed in 2022 withBlackstone’s acquisition of American Campus Communities,
which closed in early August. Although the acquisition leaves
no publicly traded REITs in the sector—a development that
lends itself to some challenges in terms of reporting andbenchmarking—the more important takeaway is that institutional capital continues to flow into the sector.
Will Fall 2022 Be a Flash-in-the-Pan Rebound, ora Positive Shift in Long-Term Expectations?
While somewhat more difficult to measure, the return to amore normal campus life for students, university employees,
and industry professionals alike has been widely welcomed.
After all, record leasing activity and record rent growthindirectly point to improved qualitative aspects of student
life such as on-campus activities and in-person classes.
Only time will tell whether the 2022 rebound is a short-lived
bounce back or a resetting of baseline expectations for the
coming few years. Though with supply easing and students
who elected to take a gap year being reintroduced to thepipeline of prospective student renters, it is reasonable tosuggest that the coming few years could see sustained performance readings.

Back in 2018, there was a big splash in the student housing
space when Greystar completed its acquisition of EDR. At

U.S. Annual New Supply of Student Housing, Fall 2014–Fall 2022
New beds delivered

70,000

Historical average since 2014:
50,306

New beds delivered

60,00050,00040,00030,00020,00010,000
0

Fall 2014

Fall 2015

Fall 2016

Fall 2017

Fall 2018

Fall 2019

Source: RealPage Market Analytics.
Note: Data reflect purpose-built off-campus student housing, and year-over-year production from July to July.

46

Emerging Trends in Real Estate® 2023

Fall 2020

Fall 2021

Fall 2022

Chapter 2: Property Type Outlook

In recent years, one of the more remarkable trends in thestudent housing space has been the sheer consistency ofnational supply totals. Although campus-level construction
figures are often capricious—it is not uncommon to see a hugewave of deliveries followed by years with no construction—the
United States averaged roughly 50,000 new beds per year
over the past few years, with relatively little deviation from year
to year. But the pandemic bred a lot of uncertainty. And, as aresult, fall 2022’s expected delivery total (fewer than 30,000
new beds) will easily be the lowest figure in at least a decade.
Not much is expected to change in 2023 either.

not be discounted. For one, inflation remains at its highest
level in 40 years. Although there does not appear to be acorrelation between rising inflation and increasing missed
payments (and eventually evictions) thus far, that does notmean that the broader inflation story should be dismissed. In
addition, demographic trends such as fewer 18- to 24-yearolds moving into the collegiate ranks alongside declining
total U.S. enrollment levels suggest longer-term pressure
on the student space. Still, it is worth noting that the core
set of major U.S. campuses—primarily large, state-funded
institutions—do not seem to be seeing a decline, unlike theirsmaller counterparts (e.g., small liberal arts schools andsome smaller private institutions).

Despite Positive Signals, Be Aware of Headwinds
and Risks—RealPage Inc.

Construction Levels at Decade Lows

Although fall 2022 performance is a welcome sight forindustry professionals, external risks and headwinds should
U.S. Student Housing Effective Rent Change
by Distance from Campus, Fall 2019–Fall 2022

U.S. Student Housing Pre-Lease Occupancy
by Distance from Campus, Fall 2019–Fall 2022

7%

100%

6%

95%

5%
0.5 to 1 mile

90%

4%
3%

Less than 0.5 mile
Greater than 1 mile

85%

Less than 0.5 mile

2%
Greater than 1 mile

1%

80%
0.5 to 1 mile

0%

Fall 2019

Fall 2020

Fall 2021

Fall 2022

75%

Fall 2019

Fall 2020

Fall 2021

Fall 2022

Source: RealPage Market Analytics.

Source: RealPage Market Analytics.

Note: Data reflect purpose-built off-campus student housing.
Rent change data is year-over-year from July to July.

Note: Data reflect purpose-built off-campus student housing.
Pre-lease occupancy data is as of July for each year.

The Future of Single-Family Housing
The early 2020s have been a transformative time for the housing
industry as the pandemic caused people around the world toreevaluate both where they live and how they live. The UnitedStates experienced “the Great American Move” in which households and businesses relocated to more affordable places, often
to buy or rent a home with additional space and a yard, andfarther from employment centers. Builders across the country
could not keep up with the new demand—and supply chaininterruptions, labor shortages, and permitting delays during the
COVID-19 pandemic did not help matters. As a result, homeprices escalated at historic rates; the median new home price inthe United States increased 22 percent since the start of 2020and existing home prices increased 58 percent.

Emerging Trends in Real Estate® 2023

47

Today, the single-family housing industry is on the other side of
the rapid run-up in demand and prices—inflation and the rapid
escalation of mortgage rates have resulted in a cooldown of thefor-sale housing market. Every housing metric is indicating asoftening, and builders are starting to recalibrate their businessplans in the face of slowing demand. As the housing market
resets, we should start to witness the true impact of the pandemic on home design, location preferences, amenities, andfinancial preferences.
How People Live
Home offices and flex spaces are nothing new, but the desire formore functional spaces grew tremendously during the pandemic-related lockdowns. Builders have not had time to create
new designs, but they are modifying current ones. The CEO of alarge private homebuilder noted that consumers prefer a higher
bedroom count (for offices and additional space), so in many
instances he is choosing existing plans with those features.
His team also puts in “reading nooks” and “drop zones” where
they can, often using space taken away from larger spaces.
Architects are reporting similar adjustments. Three significant
trends include the following:
●●

●●

●●

More function in the same-sized home. Spaces added
include an extra bedroom and additional flex or officespaces. To fit in the extra functions, architects are taking
space from typically large areas like the kitchen or dining
room and “right-sizing” the home office (which does notneed to take up a whole bedroom) and making additional
flex spaces (like in a hallway or loft) that serve as additional
work space.
Balance between public and private spaces—open greatrooms are not going away. Instead, they are being pairedwith more private spaces like prep kitchens, drop zones,
retreats, and nooks.
Outdoor spaces taking a larger share of space and homeowner spending. This often takes the form of “nodes”—small
patios, decks, and balconies off the primary living areas
instead of relying on one larger yard.

Despite the overwhelming desire for outdoor and indoor space,density continues to rise as a way to improve affordability. Over62 percent of architectural designers for production builders
are working on denser projects in 2022, compared with only
10 percent with lower-density projects. One of the most successful active-adult brands in the United States has reported
overwhelming demand for its cottage product—1,200- to
1,400-square-foot homes—and the builder is phasing out its
48

Emerging Trends in Real Estate® 2023

Exhibit 2-8 Single-Family Renters: Preference to Own
or Rent

35+65G

Single-family renters
who prefer to rent
35%Single-family
renters who
would preferto own65%

Source: New Home Trends Institute by John Burns Real Estate Consulting LLC.
Note: Data collected in April 2022 survey of 1,160 single-family renters with a household
budget for rent of over $1,000.

larger (65-foot-wide) lots. Buyers like the low maintenance andcompact design of these homes.
Technology also will affect the way people live, and fasterthan most people believe, according to the CEO of a nationalfirm specializing in residential architecture. Homes have notchanged significantly over the past few decades, and hebelieves there are “aspirationals”—people who value time morethan money and innovation over sameness—who are waitingon the sidelines for innovation. He is focused on designing the“thoughtful home,” infusing floor plans with performance capabilities that will save homeowners time, make life easier, andperhaps help homeowners live longer. Homebuilders are often
willing to embrace new technology depending on the cost, butmore often, buyers will choose their own technology after theypurchase the home.
Where People LiveThe pandemic brought massive migration across the UnitedStates as people reevaluated where they wanted to live based on
cost, weather, community, and family. Builders noted the large
number of Californians who moved to Florida, and also took noteof apartment dwellers becoming homebuyers because theywanted yards. A large private builder in the South experienced
the same and furthermore found that new in-migrants had sufficient cash for larger homes and more upgrades.
The ability to work from home accelerated the migration.
According to a 2022 John Burns New Home Trends Institute(NHTI) survey, only 49 percent of workers expect to come into
the office every day versus 66 percent of workers who expected
to come into the office every day prior to COVID.

Chapter 2: Property Type Outlook

Exhibit 2-9 Reasons Renters Continue to Rent, Basedon Rental Households That Believe Homeownership
Is Important

Exhibit 2-10 Footprint Allocated to the Home’s Outdoor
Space, 2021 versus 2020
58%
47%

Need to save for
downpayment

67%

35%

Life circumstances (e.g., waiting
for marriage, planning to relocate,desire to downsize, etc.)

37%

Cannot afford mortgage
payments

34%

7%

11%

Lack of supply (e.g., nohomes that fit my needs)

7%

28%

0%

Require the flexibility tomove if desired/needed

19%

Cannot take on themaintenance responsibilities

13%

10%

20%

Same
footprint

Slightly lessfootprint

Much lessfootprint

Source: 2022 Annual Survey of Architecture. conducted by the New Home Trends Institute/
John Burns Real Estate Consulting LLC and Pro Builder.​16%

Would rather spend moneyon other things (e.g.,
hobbies, travel, etc.)0%Much more Slightly more
footprint
footprint

30%

40%

50%

60%

70%

Source: New Home Trends Institute by John Burns Real Estate Consulting LLC.
Note: Data collected in a survey of 1,347 U.S. homeowners and renters ages 18 and over withhousehold income of over $50,000. Survey fielded July 12–17, 2022.

Buyers are also searching for the right community. With suchhigh levels of new residents, a CEO of an amenity planningand lifestyle design company noted how amenities played amore direct role in connections. New residents want to be connected—especially via the outdoors—with their neighbors andamenity programming. Lifestyle directors can make an outsized
impact in new communities. Her focus for new communities is
to make outdoor spaces livable all year long, with heating andcooling elements to make residents comfortable.
Historically, affordability has played a key role in housing purchase decisions, and the rise in home prices along with higher
mortgage rates has brought affordability to the forefront. Over 67
percent of households who rent cite the lack of a down payment
as the biggest hurdle to homeownership. Builders have always
struggled to provide affordable housing, but the rise in the costof materials over the past two years has impeded any progress.
However, some builders are starting to report lower costs—
especially labor—as the market cools.
The key to improving affordability, according to the CEO of anational firm specializing in residential architecture, is lowering

the cycle time for building homes. Just as Henry Ford slashedthe time needed to build a Model T from 12 hours to 96 minutes through process improvements, the same innovations
and improvements should be focused on housing. If we could
reduce cycle times in half to build a house, builders could offer
homes for less, thus improving affordability across the board.
Single-Family Rentals
The rise of the single-family rental business has huge implications for traditional builders. There are positive implications—ahedge against slower demand from consumers of for-sale housing, as many builders report that they are receiving multiple calls
each day from single-family rental operators who want to contract builders to build homes. There are negative implications as
well: as single-family rentals become more prevalent, they could
become a competitor to traditional for-sale homes. The nascentstage of the industry makes the future hard to determine, but
one ought to consider the following:
●●

●●

●●

Nearly half of all master-planned communities are planning abuild-for-rent section.
Thirty-five percent of single-family renters with budgets of$1,000-plus per month rent by choice.
Single-family renters with rent budgets of $1,000-plus permonth prefer to rent for more flexibility, as well as for lessmaintenance and fewer financial responsibilities, than theywould have as homeowners.
Emerging Trends in Real Estate® 2023

49

●●

Renters of single-family homes can have private yards, no
one living above or below them, pets, and garages—theprimary features that motivate people to own.

As the industry grows, the single-family rental space can serve
as a “living laboratory” for reducing cycle times, according to
the CEO of a national firm specializing in residential architecture. As single-family rental operators design new floor plans
and build hundreds of houses at a time (with no option choicesfrom consumers to manage), the industry can modernize andbecome more precise. The repetition will allow for innovation
and ultimately reduced cycle times that could, in the end, solve
the problem of affordability faster than expected.
So, it is possible that the housing issues raised by the pandemic
could result in industry improvements that outlive it.

Industrial/Logistics: Strong Fundamentals
Persist while Capital Markets Adjust
With today’s supply chain volatility and red-hot inflation, it may
come as a surprise that industrial rent growth in 2022 is on track
to break the previous year’s all-time high. Resilient consumption
supported demand for logistics real estate through the first halfof 2022, requiring more space to move goods quickly and holdhigher inventories. The urgency to secure more space, pairedwith delays in supply and rising replacement costs, pushed
rents to historic highs while vacancies fell to record lows. At thesame time, capital market dynamics began to shift, marked byrepricing and a pullback in volume.

focused on supply chain optimization and less on absorbing additional space, other users are stepping up to secure
additional space. E-commerce will continue to drive logistics
demand for the foreseeable future with growing diversity.
Demand Still Outpaces Inventory
Given persistent stock-outs, rapidly rising prices, and unreliable supply chains, the need for higher inventories increased.
Inventory growth was rapid in the six months from February
through July 2022, up 9 percent on a net basis for wholesale
and retail. Although inventories are up, they continue to lag
sales. The July 2022 inventory-to-sales ratio for all retailers(excluding automobiles) was almost 4 percent below average
2019 levels.
While inventories are growing, they are still too low overall. The
Institute for Supply Management (ISM) Manufacturing PMI andServices PMI ask about inventory levels: sentiment was below
50 until July 2022, when the services inventory sentiment tippedslightly above. Meanwhile, the Manufacturing PMI customers’
Exhibit 2-11 Prospects for Niche and Multiuse Property
Types, 2023 versus 2022
Investment prospects

2023
2022

Infrastructure
Self-storage
Urban mixed-use properties

E-Commerce Holds Strong, Despite a Return to In-Store
Shopping
Consumer spending patterns returned to in-store shopping
as local economies reopened, but the future of retail still relies
on e-commerce. Why? Because consumers prefer the convenience and choice of shopping online. The number of people
who used same- or next-day delivery held steady in 2021 during the holiday season, compared with a decrease in people
who purchased goods online and picked them up in store.
And e-commerce supply chains are being built to accommodate faster delivery timetables, which attracts sales because
consumers appreciate the speed. More than 90 percent of consumers expect delivery in three days or fewer, and 30 percent
expect same-day delivery. In addition, the COVID-19 pandemic
forced many physical stores out of business, limiting the numberof retail options close to home.
The pandemic’s impact on the growth of e-commerce extends
across retailer and product categories. While Amazon is now
50

Emerging Trends in Real Estate® 2023

Suburban mixed-use properties
Agricultural land
AbysmalFair

Development prospects

Excellent
2023
2022

Infrastructure
Self-storage
Suburban mixed-use properties
Urban mixed-use properties
Agricultural land
Abysmal
Source: Emerging Trends in Real Estate surveys.
Note: Based on U.S. respondents only.

Fair

ExcellentChapter 2: Property Type Outlook

inventories remained below 50, meaning that there is still a needfor higher inventories, despite substantial inventory building
in recent months. This aligns with what some major retailers
noted during recent earnings calls: their inventories are not yetback to pre-pandemic levels, and they are focused on carrying
more product to improve customer service. The end goal is toplan for long-term capacity to shield from future supply chain
disruptions. Supply chain volatility should persist, so securing
inventory in response to changes in consumer behavior willcontinue to be a challenge. Cyclical trends will only affect thetiming of this goal.

Exhibit 2-12 Industrial/Distribution Investment
Prospect Trends

excellent

Fulfillment

good
Flex

R&D

fair

Manufacturing
Warehouse

Oversupply Risk Is Low, Even as Supply Pipeline Builds
The pipeline of space under construction reached a record highof more than 620 million square feet as of the second quarterof 2022. At the same time, supply chain bottlenecks delayeddeliveries. Strong demand propped up the proportion of space
pre-leased on completion—at roughly 65 percent as of the second quarter of 2022, compared with a historical average closer
to 40 percent, according to JLL.
For now, delays in new supply and elevated pre-leasing are
keeping oversupply risk in check. Markets with high levelsof construction include Dallas, Atlanta, the Inland Empire,
Indianapolis, and Phoenix. As supply begins to come online,
rent growth is expected to decelerate—first, in untested sub­markets with elevated pipelines. Higher-barrier locations, on
the other hand, may sustain higher rent growth for longer.
Construction Is Battling Supply Chain Issues
Real estate developers across the United States are confronting
rising construction costs. Steel, concrete, and roofing materials
contribute up to 80 percent of typical shell costs. Market pricesurges since the end of 2019 for these, and other major categories, caused finished construction costs to spike by 50 percent.
“Construction durations in the broader industry have increasedby two to three months, on average, since 2019, due to longer material lead times and increasing contractor backlogs,”
according to a construction director at a large industrial owner.
Advanced material procurement strategies and construction
technology can resolve some ongoing construction issues.
Developers are moving upstream in the value chain by leveraging direct partnerships with national material suppliers to
pre-secure and prioritize long-lead building materials andmitigate material shortages where possible. Developers arealso introducing modularized construction systems to expedite
repeatable project elements, such as office tenant improvements and in-warehouse restrooms, which reduce on-site
construction timelines. Finally, traditional means of construction

poor
2007

2009

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.

Industrial/Distribution Buy/Hold/Sell Recommendations
Buy

Hold

Fulfillment 37.8%
Manufacturing 35.6

Sell
40.8%

21.4%

54.1

10.3

Warehouse 33.9

51.9

14.2

Flex 31.4

44.1

24.5

R&D 30.2
0%

51.3

20%

40%

18.5

60%

80%

100%

Opinion of Current Industrial Pricing
Under
Overpriced
pricedFairly priced

Underpriced
Over priced

Fulfillment 56.9%

37.9%

5.2%

Warehouse 43.4

53.2

3.4

R&D 42.1

53.5

4.4

Flex 36.0

56.0

8.0

Manufacturing 27.4

65.7

7.0

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on U.S. respondents only.

execution are being improved by optimizing schedules directlywith general contractors and trade partners in real time, before
delays are felt.
Labor Challenges Persist
Industrial labor shortages continue to consternate users of logistics facilities. “Labor is always up amongst the top two things
companies look at when they move into an area,” according
Emerging Trends in Real Estate® 2023

51

Exhibit 2-13 Industrial Inventory: Selected Sentiment Indexes, January 2019–June 2022
70
Services PMI

NeutralIndex change

60
50
40
30
Manufacturing PMI

20
10
Jan 19Jul 19Jan 20Jul 20Jan 21

Jul 21

Jan 22June 22

Source: Institute for Supply Management (ISM); used with permission of ISM.
Note: PMI was formerly known as the Purchasing Managers Index. The Services PMI covers transport and communication, financial intermediaries, business and personal services,computing and IT, and hotels and restaurants.

to an expert at a commercial brokerage firm. Labor shortages
intensified in rural areas because of local market overcrowding:
rapid growth of logistics facilities heightened competition for an
already-thin labor force.
Manufacturing relocation adds another layer of competition insmaller markets, where some companies are diversifying production locations by moving to secondary markets in the UnitedStates to offset risks with supply chain disruptions.
As labor continues to stress industrial real estate users, automation is expected to rise. Some industrial property owners
and developers are using virtual-reality technology to train
employees about safety and career advancement on site, andcompanies with robotic in-warehouse transportation are using
it to solve labor shortages.
“This [technology] can save three times the walking time thata human being would need to cross through a warehouse,”
explains an industrial investment expert.
Automation Is Increasing Supply Chain Visibility andEfficiency
The modern economy requires technology for increasingly
complex supply chain operations. In addition, supply chain
disruptions increased the need for companies and governments
to monitor the flow of goods. Increased scrutiny of supply chain
externalities requires ways to measure metrics, such as carbon
emissions and truck serial numbers. Without an infrastructure
to track these statistics at scale, industrial real estate customers
struggle with supply chain accountability, according to an indus52

Emerging Trends in Real Estate® 2023

trial real estate investment expert. These factors are augmenting
a growing field of technology focused on enhancing supply
chain visibility.
In the trucking industry, industrial real estate customers arefocused on implementing autonomous trucks for middle-mile
operations. Middle-mile routes—the transport between ports
and warehouses—consist of stretches of open roads with limited human obstacles and pose the lowest barriers toautonomous adoption.
Industrial developers are also monitoring advancements inautonomous or remote-operated machinery with the potential
to mitigate labor shortages and increase safety in some of themost injury-prone construction processes, which include heavyequipment operation, working from elevated lifts, or repetitive
motions. Additional safety-related advancements that are in thestartup phase and show promise include biometric and positioning sensors to monitor worker health and safety, geofencing
positioned near hazards, and fall detection.
Investment Outlook: Rent Growth to Drive Future Returns
Real estate dealmaking has begun to slow as investors growcautious and interest rates rise. Although a marked decelerationfrom the prior year’s growth, the transaction volume for industrial warehouses increased by 11 percent year-over-year as ofthe second quarter of 2022, according to MSCI Real Assets.
The deceleration reflects a slowing in smaller transactions.
Rising financial costs and a growing spread between bid andask prices could add hurdles to investment, thereby reducing

Chapter 2: Property Type Outlook

Exhibit 2-14 Industrial Property Net Absorption and Vacancy Rate, 2010–2022
12%

500,000

10%
Vacancy rate

400,000

8%

300,000

6%
Net absorption

200,000

4%

100,000

2%

0

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022*

Vacancy rate

Absorption (millions of square feet)

600,000

0%

Sources: CBRE, JLL, Cushman & Wakefield, Colliers, CoStar, CBRE-EA, Prologis Research.
* As of second quarter.

transaction volumes and new development in a rising interest
rate environment.
Repricing is taking place across markets, with many sellers
agreeing to renegotiate lower prices because of the interest rateenvironment. NCREIF’s industrial cap rate, however, was still low
at 3.3 percent for the second quarter of 2022. Cap rates could
rise, but there is now more liquidity, pent-up demand, and stronger fundamentals compared with prior cycles, which should
help shield against severe correction.
Even as capital market dynamics begin to shift, the return outlook for industrial is positive. Results from the Emerging Trends
survey echo this sentiment, with respondents placing industrial/
distribution at the top of the list for investment prospects for fourof the last five years. A pullback in development means that rent
growth could remain stronger for longer, given the strength ofstructural demand trends buoying future returns. According toresearch from MSCI Real Assets of surveyed industrial managers, in-place rents were 22 percent below spot market rents.
This spread offers embedded net operating income growth forthe foreseeable future.

Office: Desperately Seeking Clarity about
Its Future
Into the third year of the COVID-19 pandemic, we should haveclarity about the direction of the future workplace. However,what replaces the daily office grind remains murky and will not
be resolved soon. Most companies are still experimenting todetermine what works best for them in relation to what employees are willing to do. An industry consultant says: “We face a
lot of uncertainty for the next three to five years. Everyone is still
sorting this out.” An executive at a large office development firmsays, “I don’t think anyone is at the point now where we can say
with conviction, ‘This is the new normal.’”Some office-using firms have taken an extreme position, either
going fully remote or hewing to the old school by requiring
full-time attendance. But most have embraced a hybrid arrangement—some willingly because it is working for them and others
begrudgingly to avoid a mass exodus of workers—and areexperimenting with hybrid/remote work schemes and testing
new amenities and designs. In the short term, hedging bets
often involves reducing office space moderately, renewing
leases for shorter amounts of time, and embracing flexible
lease strategies such as coworking.
The sector’s traditional long-term lease structures enable theextended experimental phase. Some executives hesitate to eliminate space they once acquired with pride, figuring that officespace represents a small share of expenses. Others are dealing
with bigger fires. “Businesses have a lot of problems now withthe supply chain mess, demand shifts, geopolitical risk—officespace is low on the list of issues to deal with,” said one executive
who advises companies on space. “We still have no idea how tomanage a company where people work two to three days in theoffice. In many ways, it is easier to manage a workforce that isfully remote.”
Continued on page 58.

Emerging Trends in Real Estate® 2023

53

Data Centers: A Resilient Real Estate Asset Class in High Demand
Data centers are essential infrastructure that keeps modern society functioning. Particularly post-pandemic, countless day-to-day
functions in people’s business and personal lives are processedin data centers. While demand for data center infrastructure has
been growing for the last two decades, it has exploded in recent
years, leading to some of the largest developments, leases, andtransactions ever seen in the industry. As a result, the industry’s
supply/demand balance is somewhat strained, with vacancy at
its lowest point in many major markets across North America.
A data center is a building that houses hundreds of cabinets
full of servers that keep a company’s digital infrastructure
running. Streaming digital content, conducting electronictransactions, sending emails, using a smart thermostat, or
scrolling through social media all involve the use of a data
center. Given the immense cost of downtime, data centers
are highly technical and employ infrastructure to keep things
running. Facilities often feature power feeds from multiple
substations, diverse connection points from fiber carriers,
redundant battery backups and diesel generators, androbust cooling systems.

Companies typically prefer to outsource their data center
needs rather than owning and operating their infrastructure,
opting to lease capacity from data center providers or migrate
their operations to the cloud. The migration to the cloud alone
is a major factor in the explosive growth of the data center
industry. To meet the demand for cloud infrastructure, leading cloud providers like Amazon, Google, and Microsoft arebuilding some of the largest facilities or executing substantial
leases from data center providers. Unlike traditional realestate assets, it is more accurate to measure data centers bypower (kilowatts and megawatts) and not by square footage.
While the physical space that a company occupies is part ofits rental rate, the rate is generally structured according to theamount of power the company is using.
Because of the world’s reliance on technology, the data
center industry is more resilient in the face of economic
downturns, enabling it to thrive in the midst of the COVID-19
pandemic. Quarantines forced companies to analyze theirinternal operations and bolster their existing digital infrastructure or shift legacy operations to digital platforms, further

Top North American Data Center Markets by Capacity
VancouverSeattleQuincyMontreal

Portland
Minneapolis

New York City
Northern New Jersey

ChicagoSalt Lake City

Northern
California
Las Vegas

Columbus
DenverNorthern Virginia

Los Angeles
Phoenix

Atlanta
Dallas/Fort Worth
HoustonSan Antonio

Source: datacenterHawk, datacenterhawk.com.
Note: Map depicts the 23 largest data center markets in North America, as measured by power used.

54

Emerging Trends in Real Estate® 2023

BostonTorontoChapter 2: Property Type Outlook

increasing their reliance on data centers. As a result, theindustry witnessed a large spike in demand and development in 2020 and onward.
Demand for data center capacity occurs across North
America but is most heavily concentrated in 10 primarymarkets: Atlanta, Chicago, Dallas, Los Angeles, Northern
California, Northern New Jersey, Northern Virginia, Phoenix,
Portland, and Toronto. Among these 10 markets, there is over
6,100 megawatts of colocation data center capacity commissioned or preleased, and over 9,250 megawatts planned for
future development. This does not include the large amount ofcapacity owned and operated by hyperscale companies likeAmazon, Google, Facebook, and Microsoft in those markets.
Trends in Data Center Supply
Influx of capital into the industry. Data centers are now seen
as a distinct and valuable asset class, resulting in ample capitalflowing in from equity groups. Business and portfolio-level
investment is common, with groups like Digital Bridge, American
Tower, Blackstone, KKR, and IPI Partners acquiring data center
providers in multibillion-dollar transactions. Investors are alsointerested in individual assets, often acquiring stabilized enterprise data centers in sale-leaseback transactions.
Limited options for users with smaller requirements. Dueto demand from hyperscale data center users (i.e., users withrequirements exceeding 5 megawatts), North America’s data
center vacancy level is at its lowest point ever. With the sizeof transactions that occur nowadays, data center assets arequickly occupied by single tenants, leaving little capacity forusers with smaller requirements. Some providers will evenopt out of competing on transactions if the tenant is not a
hyperscale company.
Trends in Data Center Demand
Data center requirements growing. Prior to 2017, leases
above 5 megawatts were uncommon, and leases above 10
megawatts were rarely seen. Since then, however, the industry has witnessed a substantial increase in lease sizes, withleases often exceeding 10 megawatts and some exceeding
100 megawatts. While these leases were becoming morecommon, only five to 20 occurred annually in North America.
In the first half of 2022, however, at least 30 transactions
above 10 megawatts have occurred.
Uptick in demand from enterprise users. While hyperscaleleasing accelerated during the pandemic, enterprise leasing(i.e., users with requirements between 500 kilowatts and 5
megawatts) slowed. The pandemic caused many companies
to shift their focus internally and examine how to maintaintheir operations, putting their need for additional data center
space on hold. With businesses opening back up, however,enterprise leasing is at an all-time high due to the backlog of
expansion that was put on hold during the pandemic and the
additional space that companies realized they needed during
the pandemic.
—datacenterHawk

North American Data Center Capacity Growth and Vacancy Rates
12,00012%
Vacancy rate

Hyperscale companies

10%

8,000

8%
Co-location data centers

Vacancy rate

Capacity (megawatts)

10,000

6,000

6%

4,000

4%

2,000

2%

0

1H 2018

2H 2018

1H 2019

2H 2019

1H 2020

2H 2020

1H 2021

2H2021

1H 20220%

Source: datacenterHawk, datacenterhawk.com.
Note: Unlike traditional real estate assets, data centers can be more accurately measured by power used (kilowatts and megawatts) than by square footage. While the physical space
a company occupies is part of its rental rate, that rate is generally structured according to the amount of power the company uses.

Emerging Trends in Real Estate® 2023

55

Self-Storage Outlook Remains Optimistic Despite Inflation Headwinds
Self-storage properties are set to ride out the current
turbulence, though not free of hurdles. The self-storage
sector entered the second half of 2022 in a favorable position,
emerging from the most difficult period of the COVID-19 crisis
with record-low vacancy and sturdy rent growth. Historically,
the property type has weathered economic headwinds well,and the sector has characteristics that should sustain its
performance through high inflation and rising interest rates.
Elevated living expenses continue to prompt household
relocations, driving demand for storage units across many
regions of the United States. Rising housing costs have also
prompted some individuals to take on roommates, translating
to a residential consolidation process that may generate additional self-storage demand as living spaces become more
crowded. However, property performance could be hinderedby new supply, since the pace of development is likely toaccelerate. The Federal Reserve’s tightening monetary policy
is also complicating the transaction climate for investors, who
maintain an otherwise positive outlook for the sector.
Migration boosts storage demand in high-growth metro
areas, but also stokes inflation. Driven in part by a surgeof cross-country relocations, self-storage vacancy in mostmajor metropolitan areas fell to all-time lows in 2021. Lifestylechanges fostered by the pandemic built upon long-term
demographic trends to drive population growth across the
Sun Belt, a trend that is ongoing. Of this year’s 10 fastestgrowing major metro areas, nine are located in the U.S.
Southeast or Southwest. The creation of self-storage demandassociated with this migration will support continued year-

over-year asking-rent increases, which surpassed 10 percent
in some markets in the second quarter of 2022. However,
the heightened consumer demand associated with these
population gains is also propelling local inflation well above
the national average, with Phoenix topping the list at 12.3
percent year-over-year price growth in June. Rising prices inmany larger Sun Belt metro areas could push some would-be
residents to shift to nearby markets with similar climates anda more stable cost of living. Satellite metro areas, such as
Tucson and Fayetteville, North Carolina, posted self-storage
rent growth more than double that of the national average.
Major southern markets have also been historically popularwith older Americans on fixed incomes, a demographic
group that may increasingly opt to settle in exurban locales
where their retirement savings will go further—an additional
boon to storage use.
An uptick in household consolidation offers potential
upside for self-storage. Following a multiyear high in household formation observed in 2021, the pace is set to slow thisyear as climbing living expenses shift some residential decision-making. Rising vacancies across all apartment classes inthe second quarter of 2022 indicated an increase in household
consolidation, where renters may opt to take on one or more
roommates to manage costs. This process typically bolsters
demand for storage units, as increasingly crowded living situations necessitate storage outside the home. Some residents
may also downsize apartments, creating a similar motivation
for additional storage space. Furthermore, the proportion of the
18- to 34-year-old cohort living with parents bumped up from

Self-Storage Construction Spending, January 2015–May 2022
$6

Spending (billions)

$5
$4
$3
$2
$1
$0
Jan 15

Jul 15

Jan 16

Jul 16

Jan 17

Jul 17

Sources: Marcus & Millichap Research Services; U.S. Census Bureau.
Note: Spending is seasonally adjusted annual rate.

56

Emerging Trends in Real Estate® 2023

Jan 18Jul 18

Jan 19Jul 19Jan 20Jul 20Jan 21

Jul 21

Jan 22

Chapter 2: Property Type Outlook

32 to 34 percent during the pandemic and has yet to revert tothe pre–health crisis rate. Evolving economic concerns may
keep this metric elevated for the foreseeable future as young
adults stay at their family home to mitigate expenses. Whilefewer new households ultimately mean fewer potential new
self-storage renters, this consolidation process can create
new storage needs that may offset the slowdown in formation. Positive effects of these factors on self-storage demand,
however, may be tempered by increased development activity
expected during the forthcoming year.
Construction spending foreshadows accelerating supply additions in 2023. Self-storage completions have beensteadily trending downward following a 2019 peak, when thenationwide two-year completion total exceeded 145 million
square feet. However, the pace of stock expansion remains
markedly elevated when compared with the earlier part ofthe previous decade, and early indicators suggest that the
declining rate of supply growth will reverse next year. After
hitting a half-decade low in early 2021, spending on new
self-storage construction projects has reported consistentmonthly increases thus far in 2022. While remaining well
below the levels seen in 2017 and 2018, which precipitatedthe pre-pandemic development wave, this current uptick inspending implies that additional projects will break ground in
the very near future. These forward indicators arrive as many
major markets report upward-trending vacancy, though themore rapid stock expansions are geared toward chronicallyundersupplied metro areas. In addition, the aforementioned

demand factors should mitigate the long-term upward
impact to availability in even the more generously suppliedmarkets, supporting a favorable revenue growth outlook.
Inflation draws buyers to self-storage, but Fed response
creates capital market headwinds. Vacancy rates remaining consistently below historical averages, in tandem withrecent rapid rent growth, are drawing buyers to self-storage
properties. The sector also boasts advantages as inflation affects investor behavior and consumer sentiment.
Contrasting other property types, where leases may be
determined on a multiyear or even decade-long basis,
asking rents on most storage agreements are calculatedmonth to month, providing facility owners the opportunity torespond to market conditions more rapidly than proprietorsof other asset classes. Though this advantage has attracted
investment capital, keeping transaction velocity historicallyelevated through the first half of 2022, ongoing monetaryshifts have presented some hurdles. Faced with the highest
inflation recorded in four decades, the Federal Reserve has
conducted multiple sharp rate hikes this year, increasing
borrowing costs. Mounting debt service and difficulty gauging first-year returns amid a rising interest rate environment
could weigh on trading activity moving forward. These trends
have already influenced some institutional actors to pause
acquisitions until additional clarity emerges. However, if inflation persists, more action on the part of the Federal Reserve
could extend rate turbulence into 2023.
—Marcus & Millichap

Annual Household Formation and Percentage of 18- to 34-Year-Olds Living with Parents, 2002–2022
35%

2.0

1.5

30%

1.0

0.5

0.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022*

Percentage living with parents

Household formation (millions)Household formation

Percentage of 18- to 34-year-olds living with parents

25%

Sources: Marcus & Millichap Research Services; U.S. Census Bureau.
*Household formation forecast.

Emerging Trends in Real Estate® 2023

57

Continued from page 53.

In a topic with little consensus, there is agreement that generalizing is dangerous. Some functions such as computer
programming or data entry are performed easily at home, while
for other jobs personal interaction is critical to productivity.
“There is no one-size-fits-all solution—not by company, not byindustry, not by location. It all depends on the function withincompanies,” said a senior research executive.
Little Consensus beyond Hybrid
The future of work is hybrid. Surveys indicate that the average
office employee will work in person three to 3.5 days a week,reflecting the tug-of-war between employers and employees.
Many employers want personnel in the office even more to instill
Exhibit 2-15 Office Investment Prospect Trends

excellent

Medical officefairSuburban officeCentral-city office

poor
2009

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.

Office Buy/Hold/Sell Recommendations
Buy

Hold

Medical office 43.6%

Sell
46.3%

10.1%

Suburban office 21.1

52.9

26.0

Central-city office 16.5

64.2

19.3

0%

20%

40%

60%

80%

100%

Opinion of Current Office Pricing
Under
Overpriced
pricedFairly priced

35.9%

14.8%

Suburban office 41.7

45.5

12.8

Medical office 27.8

69.9

2.3

0%

20%

40%

Note: Based on U.S. respondents only.

58

Emerging Trends in Real Estate® 2023

60%

80%

Would a recession change the dynamic? Some say yes.
“Everyone’s behavior is impacted by their wallet,” said one
office company executive. “Views about autonomy will change
when unemployment is no longer 3 percent.” Others disagree,noting that a recession could provide an excuse for companies
to cut costs and reduce office space. “We’re waiting on shoes
to drop,” said a commercial mortgage analyst. “For companies
that are profitable, office space is not at the top of their mind, but
in a downturn we might see some layoffs, which shifts the pressure to optimize expenses as it pertains to office space.”
In the meantime, office usage has stabilized in the low–40 percent range nationally, though it varies significantly by location,according to card security firm Kastle Systems. “The question iswhat is going to unstick that,” said an industry researcher.
Office as Destination

Underpriced
Over priced

Central-city office 49.4%

Source: Emerging Trends in Real Estate 2023 survey.

Employees, however, are happy to avoid time-consuming,
expensive, and stressful commutes and to have flexibility to makedaily schedules that permit a work/life balance. Flexible work
schedules allow for more housing options, since commuting
fewer days per week allows workers to choose housing further
from the office—a significant benefit when housing costs have hit
record levels. The taste of freedom gained during the pandemic
will be difficult to take away. Firms, including Apple, that have tried
to implement stricter in-office policies are getting pushback. “Thelonger people are away from the office, the harder it is to get themback,” said one executive. “The biggest surprise for management
teams is underestimating how hard it is to get people to go back.”More than a third of workers believe that companies demanding
more office attendance are bluffing and will not act if employees do not comply, according to the recent Survey of Working
Arrangements and Attitudes by WFH Research, an academic
team that explores office issues. Workers feel that way because
the labor shortage, especially in high-skill segments such astechnology, gives them leverage.

good

2007

culture and ease onboarding, and to increase collaboration andproductivity. Pro-office voices are growing and companies—
particularly in the financial sector—are increasingly demanding
a full-time return to the office.

100%

Office owners are dealing with the post-COVID paradigm on
several levels. One crucial element is adjusting to changing
demand of the physical space and office locations. Employers
are putting thought and capital into improving the workplace
experience. That involves not just healthy ventilation and lighting, enough space per person, fitness centers, food service,meeting rooms, outdoor shared areas, and quiet space to makeChapter 2: Property Type Outlook

phone calls, but also an array of services. For example, some
employers have apps that help workers plan their day and physical requirements such as food, car service, or seat reservations
while others provide concierge services.

office footprint. “Everybody is coming back to the office, it’s justa matter of when,” said one senior finance executive. “To me,
the question is less about the lasting impact of COVID demand,and more the impact of the macro environment.”“Companies should make the workplace a destination instead of an
obligation,” said a consultant at an architecture firm. This phenomenon is driving a bifurcation in performance between class A offices
and class B/C offices. Demand for new buildings with the latest
environmental standards and the newest amenities remains strong,while older buildings that lack desired amenities are losing ground.

Pro-office proponents note that the total number of office-using
jobs in the United States was 5 percent higher than pre-pandemic levels as of midyear 2022, and the growth is even higher
in Sun Belt metro areas such as Austin, Atlanta, Dallas, Tampa,
and Denver. The argument is that the reduction in demandcaused by WFH will be offset by the growth in the number ofoffice-using employees and the increased space taken up by
design changes, i.e., more collaborative and open space. Not tomention that companies will be hard pressed to cut desks whenon some days the entire workforce will be in the office. The ideathat WFH will be a drag on office demand “is overrated. Looking
at the data, the story is oversold,” said one researcher.

Occupiers are voting with their feet and their wallets. JLL
Research found that between the onset of COVID-19 and thesecond quarter of 2022, buildings delivered in 2015 or laterhad 86.8 million square feet of net absorption, while buildings
older than that had negative net absorption of 246.5 million
square feet. Most negative net absorption (195.5 million squarefeet) was in buildings erected during the 1980s and earlier.
Meanwhile, CBRE Research found that buildings classified as“top-tier” garnered 3.8 percent rent growth in 2021 and 6.7
percent growth through two quarters in 2022, while buildings
classified as “lower-tier” saw rents drop by 3.4 percent in 2021
and 1.1 percent through midyear 2022.
Experimenting with amenities and lease terms has helped
revive the flex/coworking segment. “There’s more of a corporate
footprint in coworking; it provides more flexibility in terms suchas lease length and amount of space—you can take a smaller
footprint than you could elsewhere—and companies can pickup the amenities coworking has to offer,” said a data firm executive. A bank executive said, “It allows us to provide amenity-richspace when we don’t have critical mass in an area.” The newemphasis on flexibility is enabling coworking to recover after
being hard hit by the pandemic.
A related strategy, the “hub-and-spoke” model, which meant setting
up remote offices in suburbs outside a central headquarters, has
not gained traction. Few companies have a large-enough concentration of workers in any area away from a headquarters to justify anentire office. “No one’s figured that out yet,” said a senior researcher.
Impact on CapitalThe overarching issue remains: how much will work-from-home(WFH) change demand for offices? Some industry players maintain that the new flexible work paradigm will be in the rearview
mirror in a few years, since managers want workers in the office
for reasons noted above and eventually will succeed in getting
them back. Proponents also contend that for every company
cutting space, they can point to others that are growing theirSince the start of the pandemic, the U.S. office vacancy rate
has increased by 200 to 300 basis points and sublease space
has increased another 100 to 150 basis points—far from theforecasts of massive space cutbacks. Nationally, net absorption
returned to positive levels in 2022. Much of the vacancy growthhas been concentrated in gateway market downtowns such as
New York City and San Francisco, where vacancy rates rose by
8 to 10 percentage points.
Suburban offices are faring better than downtown offices. Since
early 2020, the office vacancy rate has shot up in downtowns
while increasing only slightly in suburban areas. It’s not thatcompanies are moving offices from urban areas to the suburbs,
but that fewer companies are downsizing in suburbs than inurban areas. “There [isn’t] a flight to the suburbs; it is more thatcompanies are making space adjustments in urban areas,” said
one industry researcher. Some of the suburban growth comesfrom coworking space that provides a harbor for employees to
get away from home or work in small teams.
Whatever the location, a significant amount of office spaceis underused and potentially on the chopping block. Everycorporate pronouncement about a return to the office has acorresponding announcement about permanent remote and/or hybrid options for employees. With daily office usage downfrom pre-pandemic levels, some researchers predict a drop
in demand of anywhere from 10 to 25 percent. For example, areport by a New York University team forecasts that demandfor Manhattan office space will plummet, prompting values todrop by 32 percent over the short term and by 28 percent overthe long term. “Remote work really is a big and important deal,Continued on page 64.
Emerging Trends in Real Estate® 2023

59

The Future Looks Bright for Medical Office
The U.S. health care system supports an insured populationof more than 300 million people and represents over 18 percent of U.S. gross domestic product. The medical real estatethat supports this industry generally falls into two categories:
inpatient, or hospitals, and outpatient, or medical officebuildings (MOBs). Occupied by medical tenants, MOBs are
facilities where services and procedures are performed on
an outpatient basis. These buildings may be on a hospital
campus or attached to the hospital building. They may also
be located out in the community in more convenient areasfor patients to drive to. They might be occupied by practitioners of various types of specialties, ranging from urgent
care to dialysis centers to ambulatory surgery centers and,of course, regular physician offices. They are generally
purpose built for medical use and have features that attract
medical tenants like a covered drop-off or a backup generator for emergency power.
Due to the increasing number of insured people who followed
the introduction of the Affordable Care Act of 2010, as well asan aging population, the already significant demand for medical services has continued to grow. In addition, advancesin medical technologies have enabled the transfer of many
inpatient procedures to lower-cost, more-efficient outpatientsettings. The sector has also been shifting to a retail mindset, where hospital systems and providers look to attract new
patients and build market share in new areas, contributing to
the increased demand for high-quality medical space.

Tenants of medical office buildings tend to sign much
longer lease terms than tenants of other types of commercial real estate—sometimes up to 15 or 20 years—and aremuch more likely to renew since moving too far away would
jeopardize their local patient market share. This patient/provider dynamic and the increasing demand for space haveresulted in remarkably stable performance across the sector.
Renewal rates in the medical office sector are typically 80
percent or more and rent growth is very steady, typicallyranging between 2 and 3 percent per year. These dynamics
also translate into a long-term stable occupancy trend. Evenin the wake of the financial crisis of 2008–2009, occupancy
never fell below 90 percent. After the pandemic-related shutdowns, physician employment recovered remarkably fastand, despite the sudden halt of many services for a period,
renewal rates increased.
Investors have also been shifting their view of the sector. Whereas previously it was considered so niche aninvestment that only specialists would invest in it, it is now
recognized for how insulated it is and how resilient it is duringmarket cycles.
With awareness of the fundamentals of MOBs increasing, sales volume has been growing dramatically over thelast five years. Previously, most of the acquisition activity
was attributable to health care–focused real estate investment trusts (REITs) and smaller, private investors. In recent

Medical Office Transaction Volume and Cap Rates, 1Q 2015–2Q 2022
7.5%

$25
Cap rate average

7.0%

$15

6.5%

$10

6.0%

$5

5.5%

$0

2015

2016

2017

2018

2019

2020

2021

2022

Source: ©Revista, revistamed.com.
Note: Transaction volume is for trades valued at $2.5 million or more; figures are trailing 12 months, indicating annualized volume. Cap rate is average, trailing 12 months.
Data believed to be accurate but not guaranteed and is subject to future revision.

60

Emerging Trends in Real Estate® 2023

5.0%

Cap rate

Transaction volume (billions)

Annual volume$20

Chapter 2: Property Type Outlook

years, many more institutional and diversified investors haveentered the space. Transaction activity over the last year
has grown to an average annual run rate exceeding $20
billion, with institutional private equity accounting for mostof the activity. During this time, there has been significant
compression in capitalization (cap) rates. Average MOB cap
rates have compressed from above 6.5 percent in 2015 to
below 6.0 percent in early 2022. Looking ahead, medical
office transaction activity will face the same headwinds—
rising interest rates, inflation, and a potential recession—as
other real estate. However, with so many entities interested
in investing and solid sector fundamentals, future activity will
likely remain strong.
As of the end of 2021, there were over 36,000 MOBs in the
United States comprising more than 1.6 billion square feet ofspace. This amounts to roughly $498 billion in market value.
On a square footage basis, over half of the sector is owned
by users of the real estate (hospitals, providers, and physician groups). The remainder is owned by REITs and private
investors. This represents a substantial amount of opportunity for investors to take on more ownership.
Inventory growth has remained stable for a number of years,
with typical annual deliveries ranging from 1.5 to 2.0 percent of inventory. Most of the medical offices that are built
are largely preleased before breaking ground; speculative
construction is limited and geographically specific. Althoughhospitals and health systems continue to build and expand
outpatient facilities on their hospital campuses, there is a

growing focus on building off campus. In fact, 76 percent of
the square feet started in the first half of 2022 was not on a
hospital campus.
Historically, most of the construction activity has been selfdeveloped by the hospital system or provider group; that has
been shifting, however, with third-party developers accounting for more activity. Many of these projects developed bythird parties are owned by the developer or partner investor.
In 2021, 45 percent of outpatient square feet started wasdeveloped by third parties.
Looking ahead, many factors will continue to push demand
for medical office space on an upward trajectory—the aging
population and the growing number of insured people
needing care; the increasing move by health systems andhospitals to locate services in more convenient, communitybased areas; and advancements in health care technology
and care delivery that require the space to support it. Withreliable performance and very little speculative construction, combined with the availability of industry-specific data,
medical office has been maturing into an attractive andstable commercial real estate asset class. This has captured
the interest of the broader investment community, and theirappetite for exposure has continued to grow. These dynamics bode well for the future and help insulate the sector
against broader market cycles.
—RevistaMed

Physician Office Employment and Medical Office Building Occupancy, 2010–2022

Physician office employment (in millions)

2.9
2.8

94%

Physician office employment

2.7

93%

2.6
2.5

92%

2.4
2.3
Occupancy rate

2.2

91%

2.1
2.0
1Q 2010

1Q 2011

1Q 2012

1Q 2013

1Q 2014

1Q 2015

1Q 2016

1Q 2017

1Q 2018

1Q 2019

1Q 2020

1Q 2021

Occupancy rate (weighted average)

95%

3.0

90%
1Q 2022

Sources: U.S. Bureau of Labor Statistics; ©Revista, revistamed.com.
Note: Revista data believed to be accurate but not guaranteed and is subject to future revision.

Emerging Trends in Real Estate® 2023

61

Life Sciences
The life-sciences industry is flourishing amid record levels ofventure capital funding, continued investments in researchand development (R&D), and burgeoning investment in local
ecosystems that will bolster long-term industry expansion incore clusters and emerging markets alike.
Commercial laboratory real estate has been in high demand
as life-sciences companies expanded and scaled operations over the last two years, driven by record venture capitalfunding and strong revenue gains among select publiccompanies. Real estate investors followed in similar fashion,
targeting opportunities within the sector as the appetite foralternative real estate investment opportunities accelerated
while the office sector outlook remained uncertain due to lagging return-to-office momentum.
More recently, venture capital flows are being closely
watched as macroeconomic choppiness continues to weighon investors. Uncertain public market performance is driving conservative investment in 2022 compared with moreaggressive activity in 2021 when venture capital flows tobiotech and pharmaceutical startups hit all-time highs. Cashpreservation and cautious expansion activity have coloredthe backdrop of real estate demand for lab space at midyear
2022. Nonetheless, the industry continues to thrive amid anenvironment of uncertainty because of its long-term promise.

Venture Capital on Solid Footing Despite Uncertain
Macroeconomic Environment
Venture capital flows are a key driver of demand for lab
space and are highly correlated with leasing activity; acapital event typically leads to a commercial lab leasetransaction within six to nine months. In 2021, U.S.-based
pharmaceutical and biotech startups received record levelsof funding, totaling $45 billion, far exceeding the average of$15.3 billion annually from 2011 through 2020 and driving asignificant increase in demand for lab space. Capital flows
have cooled somewhat in 2022 but remain elevated against
historical trends with year-to-date funding totaling $22 billion,
above the $20 billion full-year total achieved in 2019.
While the COVID-19 pandemic may have shined a brighter
light on the opportunity to invest in these startups, theindustry had been gaining momentum prior to 2020. The
convergence of science and technology has been theultimate growth driver in this industry for the last decade,leading to quicker development of breakthrough drugs andinnovative therapies. The added volume of funding served
only to accelerate activity faster than what occurred before
the pandemic. This cycle was marked by a stronger appetite for early-stage and preclinical startups, creating frothy

Top Life-Sciences Submarkets versus Top U.S. Life-Sciences Markets Overall, 2015–2022$130
Direct asking rent per square foot$120

University Towne Center (San Diego)$110

Seaport District (Boston)

$100
$90

Torrey Pines (San Diego)

East Cambridge (Boston)

$80
$70
$60

Top U.S. life-sciences markets overall$50

Mid-Peninsula (San Francisco)

$40
$30

2015

2016

2017

2018

2019

2020

2021

2022

Source: JLL Research. ©2022 Jones Lang LaSalle IP Inc. All rights reserved.
Note: Top U.S. life-sciences markets overall include Boston; San Diego; San Francisco Bay area; Greater Washington, D.C.; Research Triangle Park, North Carolina; Seattle; andPhiladelphia, which represent 80 percent of the total U.S. life-sciences market.

62

Emerging Trends in Real Estate® 2023

Chapter 2: Property Type Outlook

market conditions while underscoring venture capitalists’appetite to invest in this innovative sector.
In the near term, investors will focus more on late-stage companies, or companies that have moved through phase-one orphase-two clinical trials, taking a more discerning approach
while the focus remains on preserving cash amid an uncertain
economic environment. Nonetheless, there is more capital to
deploy than ever before as total fundraising among venture
capital firms reached $120 billion in the first half of 2022,
nearly matching the full-year fundraising efforts of 2021. This
capital will drive continued company expansion, new company formation, and steady demand for lab space.
Attractive Property Fundamentals Drive Continued Real
Estate Investment
Real estate fundamentals remain very tight for lab space,despite accelerated development activity over the last two
years. Aggregate leasing activity across the top life-sciences
cluster markets1 reached a new high in 2021, exceeding 18
million square feet, or 15 percent of existing inventory. The
momentum continued through midyear 2022, despite early
indications of macroeconomic challenges playing out insome pockets. While 2021 was an unprecedented year interms of real estate demand, it was more of an outlier driven
by the sense of urgency that tenants felt that space was running out while they were flush with capital.

Developments underway or being converted totaled 26.8
million square feet at midyear 2022, 40.4 percent of which
has been pre-leased. When planned and proposed projects
are included, the volume of development swells to 70 million
square feet. Many of these planned and proposed projects will
not kick off until there is more certainty surrounding economic
conditions or costs moderate amid high inflation. Speculative
development has never been quite this active within thespace. Due to rapid tenant growth, investors and developers had to move quickly to capture demand, especially given
speed-to-market needs of growing companies. A majority ofleasing activity was driven by expansions and new leases,
accounting for 62 percent of leasing volume since the onset ofthe pandemic, reflecting overall industry growth trends.
The quantity of sublease space began to tick up in 2022 as
uncertainty seeped into the market. By midyear 2022, sublease availability climbed to 2.1 percent of inventory, totaling
3.2 million square feet, and up 60 basis points from the mostrecent low in 2018 when sublease availability hit 1.5 million
square feet. The volume of new development boosted overall
lab inventory through this cycle, thus driving only a minimal
increase in sublease availability on an overall basis. This
recent sublease activity is not all unexpected, as the scarcityof space amid a competitive leasing environment last year
drove some tenants to overcommit with intentions to release a
portion of space to the sublease market for a short period oftime, with plans to reabsorb following future expansion activity.
Continued next page.

Life-Sciences Real Estate Supply and Demand, Top U.S. Markets, 1Q 2015–1Q 2022
12%

3.25

2.25

9%

Vacancy

1.75

Completions

Absorption

6%

1.25
0.75

Vacancy rate

Absorption and completions(millions of square feet)

2.75

3%

0.25

22
20
1Q

21
20
1Q

20
20
1Q

19
20
1Q

18
20
1Q

17
20
1Q

16
20
1Q

1Q

–0.75

20

15

–0.25
0%

Source: JLL Research. ©2022 Jones Lang LaSalle IP Inc. All rights reserved.
Note: Top U.S. life-sciences markets include Boston; San Diego; San Francisco Bay area; Greater Washington, D.C.; Research Triangle Park, North Carolina; Seattle; and Philadelphia,
which represent 80 percent of the total U.S. life-sciences market.

Emerging Trends in Real Estate® 2023

63

Lab real estate fundamentals remain relatively tight becauseof steady company formation and expansion over the last
two years, easily keeping pace with robust development
activity. The top life-sciences clusters in aggregate recordedlab vacancy of 5.6 percent at midyear 2022, reflective oftight market conditions. Market equilibrium is generally whenvacancy is between 8 and 10 percent; some of the subleasespace coming online is helping create opportunity for tenants
trying to manage growth in a scarce real estate environment.
New development, scarcity of product, and active tenant demand trends drove rents to all-time highs across thecommercial lab market. Asking rents increased 45.4 percent
on an absolute basis from the first quarter of 2020 throughmidyear 2022, reaching an average of $79.08 per square footon a triple-net (NNN) basis. The core life-sciences clusters
saw rents soar well above the market average: Boston’s East
Cambridge saw NNN asking rates reach $125 per square footat midyear 2022, an increase of 23 percent since 2019; San
Diego’s UTC corridor recorded the highest rate of acceleration, with rents increasing 69.7 percent since 2019 to an
average NNN asking rate of $88.13 per square foot. The paceof rent growth is anticipated to slow amid a potential slowdown but remain strong overall.
Life Sciences Is a Resilient Long-Term Opportunity
Innovation is happening at a more rapid pace than everbefore, opening up limitless possibilities for the advancement of medical and life sciences. Novel therapies within

the realms of personalized and regenerative medicine willcontinue to scale, revolutionizing the industry. The seeds ofgrowth begin with the research and development activities
happening in innovative life-sciences market clusters, wherescience, technology, institutional support, and funding all
meet to drive progress.
The most mature market clusters are generating the greatest level of demand and investment activity, but expansion
into emerging markets is starting to take firmer hold. As
institutions, universities, and local communities invest in thedevelopment of innovation communities, talent pipelines,
and incubator space for growing startups, more markets willcapture the growth of the life-sciences industry.
Top clusters have evolved over several decades, but emerging markets planting the seeds of industry infrastructure today
will see the benefit over the long term. The convergence of
science and technology is happening within innovation communities across markets, with pockets of growth emerging in
Houston, Boulder, Atlanta, and Dallas, among others.
The long-term view on the life-sciences sector is quite positive. The advances in science, the continued flow of capital,
and the development of ecosystems in markets outside thecore clusters will bolster the industry’s steady expansion overthe long term.
—JLL

Continued from page 59.

and its effects are strongly felt in the office real estate sector,”
the report notes.
The ultimate impact of WFH on office demand is likely to fall
somewhere between the extreme estimates, varying by locationand property quality. Demand will be strong in growing markets
with rapid job growth, and for A-quality assets. B/C-quality
assets will see the biggest drop in occupancy and rents. Asking
rent growth will remain weak, and expenses will continue to rise,so net income growth will turn negative in properties that aredated or in need of capital improvements.
Prices Softening
Coming at a time when rising interest rates and mortgage
coupons have put a dent in transactions and pricing in allproperty types, investor concerns about the future of officecount as a double whammy. Property values dropped 10 to64

Emerging Trends in Real Estate® 2023

20 percent as of midyear 2022 and capitalization rates arelikely to keep rising as interest rates, the cost of debt, and risk
premiums all move higher. Office values will fall more thanother property sectors such as multifamily in which rising rents
counterbalance higher cap rates. Plus, debt is becoming moreconstrained as lenders and bond investors are wary of thepotential for increased risk of default if office tenants downsize.
“There is uncertainty in the cost and access to debt finance[for office],” noted one executive.
The Emerging Trends survey confirmed that industry participants are conflicted about pricing, favoring niche sectors suchas medical office, and expecting that suburban offices will retain
value better than center city offices.
Conversions to Rise, but . . .
As tenants eschew older, lower-quality stock, that means that
more office buildings are candidates for conversion. Obsolete

Chapter 2: Property Type Outlook

office buildings around the country are being converted tomultifamily, industrial, medical offices, life sciences, and otheruses. States such as New York and New Jersey are exploring
legislation to ease the entitlement process around conversions.
It makes perfect sense in Manhattan, where the office vacancy
rate has shot up in Midtown as tenants chase new buildingsin Hudson Yards and housing is in critically short supply. For
example, New York developers Silverstein Properties and
Macklowe Properties are converting office towers to apartments,and Hines is converting a tower in Salt Lake City.
Even so, conversions remain sporadic relative to the new
construction—nearly 150 million square feet of office space isunder construction nationally, per Yardi Matrix—due to logistics.
Conversions are costly and the stars need to be aligned with theright building configuration, floor plates, neighborhood amenities, and demand, not to mention considerations such as tax
structure. Each conversion stands on its own. Notes Moody’s
Analytics: “The office-to-apartment conversion trend will likely
be a minor one, unless office values and rents see some major,
permanent decline after the pandemic. Finding an obsolete
office building at the right price and asking rents, with highvacancy and the right floor plates to convert into an apartmentbuilding is great in theory, but hard to execute in today’s market.”
New Phase for Offices
It may be a cliché, but the pandemic exposed cracks and exacerbated trends as much as started them. Dissatisfaction with
offices did not start in 2020. Worker satisfaction was at an alltime low in 2019 because of factors such as densification, small
workspaces, and mismanaged seating. “Job one is to correct
what was broken in the workplace,” said the office consultant.
“We need to get the topic out of cocktail banter and into scienceof how to create the best outcomes.”
The key for office owners is to focus on facilitating the productivity of tenants’ workforces by improving the health, safety, andfunctionality of buildings. “I think we who are now in the realestate industry must realize we are no longer selling a productbut selling a service,” said one analyst. “Those are different
beasts. Any real estate investor that is not taking seriously thepossibility that the market is being fundamentally upended isgoing to get a real shock. Office owners must understand thecustomer like never before; if not, they will have a problem.”RetailIt might be easy to assume that the consensus outlook for theretail sector in 2023 would be glum, given the outsized challenges that retail has faced in recent years and with economic
uncertainty on the horizon. But instead, there is a general senseof wary optimism, though not without considerable concern
about the direction of the overall economy.
A Shift from Structural to Cyclical Challenges
Not surprisingly, when market participants were asked about thegreatest challenges facing retail ahead, economic conditions
garnered the most responses. Oversupply and e-commerce
followed, but we should note that those issues consistently led
survey responses in recent years. “Obviously, we are all hyperfocused on the economy right now,” one top real estate analyst
told us. “But for years, the biggest challenges to retail real estate
have been deep structural ones related to e-commerce. The
question now is whether the pandemic accelerated a lot of
those changes, with much pain, and if we are past the worstof the disruptions.”
This shift in mind-set may be difficult to understand for thoseaccustomed to the popular pre-pandemic narrative of “retailapocalypse.” It reflects not just the depth of the challenges thesector has faced, but the strength of the rebound—albeit anuneven one—that has been taking place since 2021.
As one institutional landlord put it, “Retail has always had to
adapt faster than other property types, simply because theconsumer space is always evolving, and it is doing so at a fasterpace than ever. But as much as those of us in the sector havespoken about retail resiliency in recent years, I am not suremany of us realized the true depth of that resiliency until the
pandemic.”That resiliency is best demonstrated by the wild swing in retaildemand that has occurred since 2020. The sector set records interms of bankruptcies and closures in the wake of the pandemic. COVID-19 accelerated the demise of dozens of chainsthat had already been struggling. Other chains accelerated
right-sizing plans, expanded already planned strategic closures,or withdrew from the marketplace completely.
Meanwhile, the categories hit hardest were those that had been
e-commerce-resistant bright spots of the retail landscape prior
to the pandemic. Service retail from restaurants to fitness clubs
and from experiential to entertainment concepts faced the greatest challenges. Though quick service restaurants (QSRs) withdrive-throughs fared far better than their dine-in counterparts,
more than 110,000 restaurants failed in the first six months ofthe pandemic alone. This sector would not see overall sales
rebound until March 2021 as vaccines became widely available.
For an industry dominated by small business (including franchisees) and already operating on narrow margins, COVID was anunprecedented disaster.
Emerging Trends in Real Estate® 2023

65

Though a combination of government aid (PPP loans), operator grit, and landlord largesse kept the damage from being far
worse, it is critical to remember that the pandemic disproportionately hammered small businesses across all retail sectors.
For many large national credit chains, this would become an
opportunity to aggressively grow market share heading deeper
into 2021.

Exhibit 2-16 Retail Investment Prospect Trends

excellentLifestyle/entertainment centers

good

Urban/high-street
retailNeighborhood/community
shopping centers

This was only further fueled by outsized spending. Monthly retailsales had averaged 2.9 percent annual growth in the 20 years
preceding the pandemic. This metric turned negative for the first
three months of lockdown. But consumers quickly reallocateddollars that would have gone toward services, travel, and entertainment elsewhere (those sectors would not see a rebound in
spending until the arrival of vaccines).

fair
Outlet centers

poor
2007

Regional malls

2009

2011

2013

2015

Power centers

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.

Retail Buy/Hold/Sell Recommendations
Buy

Neighborhood/community 54.7%
shopping centers
Lifestyle/entertainment 23.3
centers

Hold

Sell
36.8%

8.5%

51.4

25.3

Urban/high-street retail 19.0

59.1

21.8

Power centers 11.1

42.1

46.8

Outlet centers 8.5

50.4

41.1

Regional malls 3.2

24.4

0%

20%

72.4

40%

60%

80%

100%

Opinion of Current Retail Pricing
Under
Overpriced
pricedFairly priced

Regional malls 52.9%

34.6%

12.5%

Urban/high-street retail 50.2

41.6

8.2

Power centers 39.0

51.9

9.1

Outlet centers 34.0

60.1

5.9

58.2

8.4

60.0

10.4

Lifestyle/entertainment 33.5
centers
Neighborhood/community 29.6
shopping centers
0%

20%

40%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on U.S. respondents only.

66

Underpriced
Over priced

Emerging Trends in Real Estate® 2023

60%

80%

100%

The impact of an unprecedented $6 trillion in stimulus would
only further fuel what would become a retail sales holiday. By
March 2021, growth was in the double digits, averaging 22.6
percent over the next 14 months. Sales numbers only began tofalter in May 2022 as the impact of inflation started to take a biteout of consumer spending.
The stimulus also led to a surge in asset prices from homes toequities; 2021’s booming stock market led to a round of retail
initial public offerings (IPOs), with multiple newly public retailconcepts announcing robust growth plans. Business investment
surged, as did new business formation. All these factors would
spur retailers to their most aggressive growth levels in the better
part of a decade.
This includes dollar stores and discounters, which have driven
retail growth tallies for the better part of the last decade. But the
automotive, convenience stores, cosmetics, fitness clubs/gyms,
grocery, hobby stores, home furnishings, off-price apparel, petconcepts, shoe stores (athletic), and sporting goods categories
have all accelerated expansion plans.
Grocery remains white-hot, with growth bolstered by aggressive expansion plans from newer market entrants like Amazon
Fresh, Aldi, and Lidl. Off-price apparel has returned to robust
growth, with players like Kohl’s and Burlington experimenting
with smaller-format stores to facilitate expansion into new markets. “Athleisure” and new digital-native apparel brands haveramped up brick-and-mortar growth even as department storesand many legacy players are still facing challenges. Perhaps
most surprising of all is the massive surge in restaurant growth.
Fueled by QSRs and new fast-casual concepts, major chainswere poised to add as many as 7,000 units through midyear
2023. Dominant players like Starbucks, Chipotle, Chick-fil-A,

Chapter 2: Property Type Outlook

McDonald’s, and Dunkin have all ramped up growth, and intensified competition for coffee, chicken, and new Asian concepts
is expected.
Of course, not all retail sectors are in growth mode. Theaters
remain deeply challenged and we anticipate consolidationahead. Retail banking continues to deal with digital disruption,
driving less need for overall branches and smaller footprints.
Drugstore chains are reducing store counts, though online
pharmacy has yet to emerge as a major disrupter. Department
stores, particularly outside of the luxury sphere, still largely needto downsize and evolve their models to remain relevant. But
2021 saw the lowest number of retail chain closures since 2018.
Announced closure plans for 2022 (if they hold) could accountfor the lowest numbers in a decade. New store openings havesignificantly outpaced closures since 2021 (the market recorded
its strongest occupancy growth numbers in five years and thispattern should hold through the remainder of 2022).
Can Retail’s Recent Rebound Withstand a Recession?
The real question is whether the strong rebound can hold heading into 2023 as the economy—coming off stimulus-induced
highs that also unleashed a whiplash of supply chain and labor
disruption, 40-year high inflation, and growing concerns abouta recession—can weather the storm. As one retail real estate
analyst put it, “While there’s still hope the Fed can engineera soft landing, the real question for retail is how well it could
weather a garden-variety recession and whether it would derail
the sector’s recovery.”
As of 2022’s midyear point, that recovery still appears to be
in force. One leasing representative told us, “We’re still seeing
robust tenant activity, but deals are starting to take longer to getthrough committees. We’re expecting things to slow down in themonths ahead, but it hasn’t happened yet.” Meanwhile, a site
selection specialist for a major QSR chain advised, “Our biggest
challenge is still finding quality sites in our target markets. ClassA space is in short supply. Most of what is available is substandard space.”
According to the CoStar Group, by midyear 2022, national
vacancy for community and neighborhood centers had fallen to
6.6 percent, well below the reading of 6.9 percent recorded in
the fourth quarter of 2019. Likewise, power center vacancy in the
United States fell below pre-pandemic levels as of the second
quarter of 2022 (4.7 percent versus 5.3 percent). Unanchoredstrip center vacancy has followed a similar trend. But thisrebound has been uneven; it has overwhelmingly favoredclass A projects, especially those in primary or high-population
growth markets. Above all, it has favored the suburbs.

The pandemic accelerated many of the issues facing urban
retail in high street or central business district (CBD) locations.
With tourism levels still below pre-pandemic norms for many
cities and a diminished pool of office workers, most (though
not all) high street retail districts continue to struggle to return toprevious foot traffic and sales levels. But the most pronounced
issue for urban markets is that of ground-floor amenity retail in
office towers. While workers continue to slowly trickle back to theoffice, daily occupancy levels remain 30 percent to 45 percent
below pre-pandemic norms on any given day in most downtown
markets. This space will remain challenged until either higher
levels of daytime occupancy return or rent models are updated
to deal with this new reality.
Meanwhile, the mall sector continues to face vacancy levels well
above pre-pandemic readings. However, as one mall analyst
told us, “It is important to remember that nowhere is the bifurcation in performance greater than in the mall world. Class A andtrophy malls account for roughly one-third of the inventory, but
80 percent of the sales. Those properties have benefited fromflight to quality as well as been the focus of nearly all the growthfrom new clicks-to-bricks (digital-native brands opening physical stores) and experiential concepts, as well as a substantial
influx of food and beverage concepts.”
The marked increase of clicks-to-bricks comes as welcome news,
particularly to mall, lifestyle center, and high street landlords.
Though a much-discussed trend in industry circles prior to thepandemic, it had accounted for little actual occupancy growth outside of a few key markets. That is no longer the case. Heightened
online competition and rising customer acquisition costs in thedigital arena are part of the story behind this acceleration. But wealso see it as reflective of the natural evolution of retail in the “phygital age.” As one REIT executive put it, “Clicks-to-bricks is finallydriving real growth, and not just in the same handful of high street
and trophy mall locations. It’s only going to intensify going forward.
The new formula for brands is to start online and inevitably mostwill need some sort of physical presence.”
Though class B and C malls remain deeply challenged, another
trend that the pandemic vastly accelerated has been the movement toward mixed-use redevelopment and densification. Of
the roughly 1,300 malls in existence prior to the pandemic, over
500 are undergoing some level of mixed-use redevelopment.
This ranges from full-scale reenvisioning of projects to replacing
vacant department store space with multifamily, hospitality, or
office or medical office. Since 2018, developers have demolished over 130 million square feet of space to make way forredevelopment. The lion’s share of this stock consisted of vacant
department store and mall space.
Emerging Trends in Real Estate® 2023

67

Exhibit 2-17 New Retail Space Delivered and Deliveries as a Percentage of Total Retail Inventory80

New retail space delivered(millions of square feet)70

New space delivered

Deliveries as a percentage of total inventory

0.7%

60

0.6%

50

0.5%

40

0.4%

30

0.3%

20

0.2%

10

0.1%

0

2010

2011*

2012

2013

2014

2015

2016

2017

2018

2019

2020*

2021*

2022**New deliveries as a percentage of
total retail inventory

0.8%

0.0%

Sources: CBRE Econometric Advisors; CoStar Group.
*Indicates market record at the time for lowest level of new construction to come on line.
**Through second quarter.

The other significant factor aiding the recovery of the retail sector has been historically low development levels. The sector has
set records in this regard for three consecutive years and is on
track to do it again in 2022. Less than 30 million square feet of
new retail space came online in 2021, with the market on track
to deliver roughly 20 million square feet in 2022. With roughly
11.87 billion square feet of total retail space in the United States,
this reflects an increase in inventory of 0.25 percent. This metrichas not surpassed the 0.60 percent level in 15 years. Nearly all
new development has been in strong population growth areasin the form of retail’s strongest-performing asset class, groceryanchored centers.
Investment Outlook
Grocery-anchored assets and net lease retail opportunities
have dominated the retail investment landscape for most of
the past decade. Do not expect this to change in 2023. This
year’s Emerging Trends survey respondents overwhelmingly
responded that the best opportunities in retail remain groceryanchored community and neighborhood centers—particularly
those in primary or high-population growth markets in the Sun
Belt or Mountain states.
Meanwhile, net lease retail also remains in high demand, withsurvey participants particularly citing fast-food properties withdrive-throughs, assuming that long-term leases are in place togold standard, national credit tenants. The challenge one broker
told us is one of available product: “Everyone is chasing thesame thing.”

68

Emerging Trends in Real Estate® 2023

Another investor told us, “Stand-alone retail and community
centers are good opportunities, but don’t have pricing discounts. Lifestyle centers are the best opportunities as they
have a mix of high viability with low valuations.”
There is also a growing tide of respondents looking for opportunistic plays that may arise from changes in the debt markets.
While plenty of challenged assets remain across the wide spectrum of retail property types and geographies, the real question
for these buyers is whether tighter debt markets will depress
prices on high-quality assets.
Meanwhile, the trend of mixed-use redevelopment and densification playing out in the mall arena is likely to expand to otherproperty types. Said one acquisitions director, “We are actively
looking for class B properties in class A locations where there
is an opportunity to repurpose lifestyle, power, even groceryanchored centers to mixed-use live/work/play projects.”
We anticipate an uptick in retail investment across the board in
2023. As one institutional investor told us, “Everyone is chasing industrial and multifamily, and there is greater uncertainty
emerging around office. Retail pricing is going to offer better
returns, but you need to know what you’re doing. That said, I
think there is greater clarity in retail now than there has been
in a long time for investors.”

HotelsThe lodging sector has made significant strides in its recovery
since the height of the pandemic, highlighted by strong year-

Chapter 2: Property Type Outlook

over-year improvement in revenue per available room (RevPAR).
The improvement in RevPAR was driven in large part by strong
increases in average daily room rates. Increased levels of both
leisure and group demand and—to a lesser extent—individual
business travel have been instrumental in driving the recovery.
According to STR data, monthly RevPAR had surpassed 2019
levels in every month from March through July 2022.
Following a soft first quarter 2022, group segment performance
improved dramatically year-over-year, suggesting a slow but
steady return toward pre-pandemic levels. The reemergence ofin-person conferences and meetings, along with the beginnings
of a return of the all-important midweek business traveler, has
had a significant impact on recovery in the top 25 hotel markets
across the United States. As a result, year-over-year improvement in key performance indicators has been significantly
stronger in these top 25 markets relative to the rest of theUnited States.
Midweek Travel Starts to Normalize
In the summers of 2020 and 2021, the leisure traveler was
the primary driver of lodging’s initial rebound, predominantly
affecting drive-to markets and resort destinations; however, it
is unclear whether this shift in demand will be permanent asinternational destinations continue to open back up and offer
alternatives for the leisure traveler. These markets significantly
increased in popularity during the pandemic due to their built-in
outdoor activities (e.g., beach, mountains, and so on), which
are conducive to social distancing. As international outboundtravel continues to increase with domestic travelers becoming
more comfortable taking bigger, longer-distance trips again,
this previously built-up demand in drive-to leisure and resort
destinations may be disrupted.
Midweek travel patterns have begun to show promising strides
toward a more sustained recovery, largely propelled by thegroup and business segments. Airlines have reported that while
they still lag pre-pandemic levels, corporate travel spending hasreached its highest levels since the onset of the pandemic. Thatsaid, recent reductions in capacity by many major airlines, due
to an inability to safely staff flights, may have a negative impact
on the timing of recovery for hotels catering to corporate travel inmajor metro markets.
While many organizations and their employees have become
accustomed to working remotely, they have also capitalized on
the opportunity to reconvene in person to work more efficiently
and maintain team chemistry. Organizations are also leveraging the return of in-person group meetings and conferences to

Exhibit 2-18 Hotel Investment Prospect Trends

excellent
good

Limited-service hotels

fairFull-service hotels*

poor
2007

2009

2011

2013

2015

2017

2019

2021

2023

Source: Emerging Trends in Real Estate surveys.
*Starting in 2017, results are the average of investment prospects for three
categories—luxury, upscale, and midscale hotels. Previous years’ results are basedon investment prospects for a single category—full-service hotels.

Hotel Buy/Hold/Sell Recommendations
Buy

Hold

Sell

Upscale hotels 33.6%

53.4%

12.9%

Midscale hotels 33.6

46.9

19.5

Luxury hotels 28.3

51.3

20.4

Limited-service hotels 24.1

47.3

28.6

0%

20%

40%

60%

80%

100%

Opinion of Current Hotel Pricing
Overpriced

Fairly priced

Underpriced

Luxury hotels 40.0%

50.0%

10.0%

Upscale hotels 31.5

51.4

17.1

Midscale hotels 27.3

60.0

12.7

Limited-service hotels 26.2

64.5

9.3

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on U.S. respondents only.

connect with colleagues and clients, all in one place, for the firsttime in more than two years.
To date, remote work has reduced the frequency of traditional
business travel; however, it has also blurred the lines between
work and personal life, which, in turn, has blurred the lines
between business and leisure travel. This has driven an increase

Emerging Trends in Real Estate® 2023

69

in a unique guest demographic—the “bleisure” traveler. Somepeople traveling for work have taken advantage of their newfound flexibility and now consider adding a few days, or evenweeks, to their business trips to further explore a given destination, whether it be on their own, with a significant other, or withfamily. Similarly, workers with the ability to work entirely remotely
may choose to stay in a destination for an extended period andwork from there. This may end up helping to offset any potentially permanent fallout from traditional business travel demand.
Recovery in Top 25 Markets
Hotels in highly dense urban markets experienced the greatest
decline and slowest initial rebound during the downturn. The
initial uncertainty surrounding the pandemic, and the government’s response, resulted in a dramatic shift in demand awayfrom urban cores and toward drive-to leisure markets and resort
destinations, which, as a result, rebounded the most quickly.
With pandemic-related regulations and restrictions largely being
phased out, urban markets are getting closer to fully reopened
and experiencing recent surges in lodging demand, giving pricing power to the operators. So far, the resurgence in demandin these markets is attributed, in descending order, to leisure,group, and business travel.
Inbound international travel has contributed to the recovery inseveral of the top 25 markets and is expected to play an evenlarger part in the recovery through the remainder of 2022 andinto 2023. The U.S. Travel Association predicts that international
arrivals will total 47.9 million by the end of 2022 and 65 million
by the end of 2023, representing 60 and 82 percent of 2019
inbound international traffic levels, respectively. The increase ininternational arrivals in 2022 represents a 117 percent increaseover 2021.
Inbound international travel restrictions were lifted in early summer 2022, but the resultant positive impact on inbound travel
is not expected to really emerge until at least the fourth quarterof 2022. While summer vacationing was a driver of strong hotel
performance domestically for the second summer in a row, thereturn of inbound international travel will be a key driver in propelling the lodging sector’s recovery through the fall months, theholiday season, and into 2023 for top gateway cities.
After recovery in smaller markets outpaced the top 25 markets
in 2020 and 2021, the acceleration in performance has shiftedback to the top 25. Performance in the top 25 markets is trending upward, although recovery is uneven across these markets.
According to CoStar, New York, Boston, and Los Angeles haveexperienced the most robust year-over-year recovery so far in

70

Emerging Trends in Real Estate® 2023

2022, while markets such as San Francisco substantially lag
pre-pandemic performance levels.
New York has benefited from increased demand in all areas,
particularly the early stages of international and business travelin the first half of 2022, followed by international and domestic
leisure over the summer months. Improvement in Los Angeles
was propelled by a higher concentration of luxury rooms, whichwere able to maintain, or even exceed, pre-pandemic rates withless price-sensitive guests. Boston’s demand resurgence took
off in the second quarter of 2022, primarily driven by increased
levels of leisure and group travel. CoStar reports that Boston’smarket RevPAR through the first half of 2022 reached 88 percent of 2019 levels.
San Francisco’s struggles have been primarily tied to slower
recovery in international traffic and recent changes in the techworkforce, the city’s primary industry. Prior to the pandemic,
travelers from China made up the majority of San Francisco’s
international visitations. With nonessential overseas travel stillbanned in China as of the late September 2022 publication ofthis report, it is uncertain when San Francisco will experience
the same benefits from inbound international traffic as othermarkets. The outlook for business traffic in San Francisco also is
unclear, as the tech workforce has largely shifted to hybrid andremote working models.
Condition of the Labor Market
In the early stages of the pandemic and prior to the rollout ofvaccines, thousands of workers in the lodging industry lost theirjobs through furloughs, layoffs, or permanent property closures. The industry had also historically relied on an immigrant
workforce and international contract (temporary visa) workers, which was initially halted by government and international
travel restrictions. This reduction in labor forced properties toadjust their operating models and scale back service offerings,
most notably daily housekeeping, room service, and restaurant
operations.
Following an efficient vaccine rollout nationwide, leisure travelrecovered relatively quickly, driving occupancy and nightly room
rates to levels that allowed properties to once again support anincreased workforce. However, hotel employees did not returnwith nearly the same enthusiasm as travelers did. These former
industry workers had found other jobs and, in many cases,
higher pay, increased benefits, and greater scheduling flexibility.
More than two years later, the effects of the spontaneous displacement of these workers are still being felt in hotels acrossthe United States. According to the Bureau of Labor Statistics,

Chapter 2: Property Type Outlook

July 2022 employment levels in the accommodations (lodging)
sector remained 20 percent below February 2020 (pre-pandemic) levels. Hotel operators introduced incentives such as
sign-on and referral bonuses, increased pay, and expanded
benefits and scheduling flexibility, but they were still unable toattract an adequate number of employees to support the current
consumer demand for lodging.
Higher costs of living further pushed hourly wage workers outof the primary markets, and it remains unclear if they will everreturn. While urban markets are finally starting to see increased
demand for lodging, operators are not able to keep up with theguest volume potential due to continued staffing shortages.
Properties have raised room rates on the reduced demand they
can support, while service offerings remain limited, tainting
guest satisfaction and blurring some hotels’ value proposition.
Capital Markets and Transactions
In the early months of 2022, buyers were eager to capitalizeon the sector’s performance recovery as weekly travel patterns started to normalize and urban markets started to showpromising strides in recovery. The pent-up buyer demand had
begun to translate to increased deal activity in the second halfof 2021 and continued through mid-2022, with many institutional
funds needing to place raised capital. According to Marcus &Millichap, in the 12-month period ending June 2022, the numberof deals completed was up over 40 percent from the prior 12months. Cap rates have compressed for both full-service andlimited-service hotels since 2021, while prices across hotel
asset classes have climbed more than 10 percent, as reported
by MSCI Real Assets.

More recently, transaction activity has started to wane with
the increased cost of debt fueled by higher interest rates. The
Fed’s implementation of tighter monetary policy has prompted
lenders to adjust rates and widen spreads. With speculation of
an impending recession, debt availability has become limited
and heavily dependent on characteristics specific to both theasset and the borrower. In addition, lenders may become more
averse to lodging assets in drive-to leisure destinations andmore enthusiastic about assets in traditional gateway markets,
if group and individual business travel continues to increase.
Borrowers with a proven track record in hotel investment, as well
as strong lender relationships, will have a competitive edge.
The impacts of climate change are becoming increasingly more
apparent with the increased rate of natural disasters, flooding,and abnormal weather patterns. As a result, insurance premiums have risen in regions with high risk. These premiums havebeen more heavily factored into underwriting, affecting both
debt and equity investment decisions in locations where thesehigher risks exist.

Although limited-service hotels represented the bulk of the sector’s deal volume through most of the pandemic, deal flow for
full-service hotels has started to bounce back, particularly withpremium-branded assets in primary metro markets, as well as inresort locales. According to CoStar, transaction volume for fullservice assets in the first half of 2022 increased 7 percent fromthe same period in 2021, compared with a 1 percent decreasein limited-service deal volume. If business travel continues torecover, the focus on full-service assets in historically successful
metro markets is expected to increase, since these investments
often offer more value-add levers for a buyer to pull.
Individual asset deals have also proved more favorable thanportfolio deals. This trend is likely to continue as recovery timelines across individual markets remain uneven. Improvement in
RevPAR is driving down delinquency rates, which, in turn, hasdecreased instances of distressed sales.

Emerging Trends in Real Estate® 2023

71

72

Emerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

Markets to Watch“There’salways a new bull market somewhere. You’ve just got to go find it.”Our report this year highlights two sometimes-contradictory
property market trends: aspects of the industry are “normalizing” or reverting closer to their pre-COVID patterns, while others
appear to have sustained permanent shifts to a “new normal” asthe pandemic induced changes in how and where we use different types of properties. These same patterns are playing out in
how real estate professionals view prospects in the 80 markets
tracked for this report.
Reflecting the “normalizing” trend, almost every market in the
country received lower ratings for both investment and development prospects this year, illustrating that outlooks are darkening

just about everywhere following the brief post-COVID exuberance shown in last year’s survey across a variety of metrics.
Similarly, some of the fastest-growing Sun Belt and other highflying markets in recent years have faded a bit in the Emerging
Trends standings, while many lower-rated markets are improving
their relative status.
On the other hand, the pandemic seems to have reinforcedsome trends, notably the dominance of what we called the“Magnet” markets—many of which are in warmer Sun Belt
regions—at the top of the Emerging Trends “Markets toWatch” standings, at the expense of the older and colder

Exhibit 3-1 Warm versus Cold Climate Markets in Emerging Trends’ 20 Highest-Rated Markets, 2011–2023
16

Number of markets in Emerging Trends Top 20

Sun Belt markets

Trendline

14
12
10
8
Midwest and Northeast markets

6
Trendline

4
2
0

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Source: Emerging Trends in Real Estate surveys; compiled by Nelson Economics.

Emerging Trends in Real Estate® 2023

73

U.S. Markets to Watch
Exhibit 3-3 Homebuilding Prospects

Exhibit 3-2 Overall Real Estate Prospects
1 Nashville

41 Pittsburgh

1 San Antonio

41 Washington, DC–MD suburbs

2 Dallas/Fort Worth

42 New York–other boroughs

2 Raleigh/Durham

42 Deltona/Daytona

3 Atlanta

43 Oakland/East Bay

3 Tampa/St. Petersburg

43 Richmond

4 Austin

44 Cape Coral/Fort Myers/Naples

4 Austin

44 Memphis

5 Tampa/St. Petersburg

45 St. Louis

5 Charlotte

45 Minneapolis

6 Raleigh/Durham

46 Columbus

6 Dallas/Fort Worth

46 Cincinnati

7 Miami

47 Greenville, SC

7 Denver47 Louisville

8 Boston

48 Westchester, NY/Fairfield, CT

8 Houston

48 Northern New Jersey

9 Phoenix

49 Sacramento

9 Atlanta

49 Oklahoma City

10 Charlotte

50 Virginia Beach/Norfolk

10 Washington, DC–Northern VA

50 Baltimore

11 San Diego

51 Washington, DC–MD suburbs

11 Salt Lake City

51 Chicago

12 San Antonio

52 Baltimore

12 Las Vegas

52 Albuquerque

13 Orlando

53 Charleston

13 Phoenix

53 Tucson

14 Houston

54 Cincinnati

14 Seattle

53 San Francisco

15 Northern New Jersey

55 Memphis

15 Inland Empire

55 New York–other boroughs

56 Portland, OR

16 Kansas City, MO

56 Omaha

16 Denver
17 Seattle

57 Knoxville

17 Sacramento

57 Spokane, WA/Coeur d'Alene, ID

18 Washington, DC–Northern VA

58 San Francisco

18 Washington, DC–District

58 Knoxville

19 Salt Lake City

59 Birmingham

19 Miami

59 Des Moines

60 Cleveland

20 West Palm Beach

59 Westchester, NY/Fairfield, CT

20 Los Angeles
21 Las Vegas

61 Tallahassee

21 Jacksonville

61 Birmingham

22 Fort Lauderdale

62 Tacoma

22 Nashville

62 New York–Brooklyn

23 Washington, DC–District

63 Louisville

23 Orlando

63 Tallahassee

64 New Orleans

24 San Diego

64 Chattanooga

24 New York–Brooklyn
25 Orange County

65 Chattanooga

25 Cape Coral/Fort Myers/Naples

65 Madison

26 Inland Empire

66 Omaha

26 Tacoma

66 New York–Manhattan

27 New York–Manhattan

67 Deltona/Daytona

27 Fort Lauderdale

67 Jersey City

28 Philadelphia

68 Oklahoma City

28 Indianapolis

68 Providence

29 Indianapolis

69 Providence

29 Boston69 Honolulu

30 Richmond

70 Des Moines

30 Columbus

70 Buffalo

31 Chicago

71 Gainesville

31 Orange County

71 St. Louis32 Jersey City

72 Albuquerque

32 Philadelphia

72 Gainesville

33 Minneapolis

73 Honolulu

33 Boise

73 Portland, ME

34 West Palm Beach

74 Tucson

34 Los Angeles

74 Pittsburgh

35 San Jose

75 Milwaukee

35 Greenville, SC

74 Long Island

36 Long Island

76 Portland, ME

36 Charleston

76 New Orleans

37 Kansas City, MO

77 Madison

37 Oakland/East Bay

76 Detroit

38 Jacksonville78 Buffalo

38 Portland, OR

78 Cleveland

39 Boise78 Spokane, WA/Coeur d'Alene, ID

39 Norfolk

79 Hartford

80 Hartford

40 San Jose

80 Milwaukee

40 Detroit

Source: Emerging Trends in Real Estate 2023 survey.

Key:

More than 1 standard deviation above mean
Mean

74

Emerging Trends in Real Estate® 2023

Source: Emerging Trends in Real Estate 2023 survey.

+/– 1 standard deviation of mean

More than 1 standard deviation below meanChapter 3: Markets to Watch“Establishment” markets that used to lead in investor preferences. (The Emerging Trends market groupings are shown in
the nearby chart and defined further in the sections below.)

Other trends that play out in the market ratings that follow are
the challenges facing some booming markets as they mature
into larger cities and the importance of housing affordability andinfrastructure investment to continued economic growth.

Emerging Trends in Real Estate 2023 Market Categories
Major group

SubgroupSuper Sun Belt

Magnets

18-Hour Cities

Supernovas
Multitalented Producers
Knowledge and Innovation
Centers
The Establishment
Major Market Adjacent

Boutique Markets

Niche

Eds and Meds

Visitor and Convention Centers

The Affordable West

Backbone

Determined Competitors

Reinventing

Markets
Atlanta
Dallas/Fort Worth
HoustonMiamiCharlotte
DenverFort Lauderdale
Minneapolis
AustinBoise
Jacksonville
ChicagoLos Angeles
Boston
New York–Manhattan
Inland Empire
Jersey CityLong Island
New York–Brooklyn
New York–other boroughs
Northern New Jersey
Chattanooga
Des Moines
Greenville, SC
Knoxville
Baltimore
Columbus
Gainesville
MadisonCape Coral/Fort Myers/Naples
Charleston
Deltona/Daytona
Honolulu
AlbuquerqueSacramento
Spokane, WA/Coeur d’Alene, ID
Birmingham
Indianapolis
Kansas City, MO
BuffaloCincinnati
Cleveland
DetroitPhoenix
San Antonio
Tampa/St. Petersburg
Portland, OR
Salt Lake CitySan Diego
Nashville
Raleigh/Durham
San Jose
SeattleSan Francisco
Washington, DC–District
Oakland/East Bay
Orange County
Washington, DC–MD suburbs
Washington, DC–Northern VAWest Palm Beach
Westchester, NY/Fairfield, CT
Omaha
Portland, ME
Richmond
MemphisPhiladelphia
Pittsburgh
Tallahassee
Las Vegas
New Orleans
OrlandoVirginia Beach/Norfolk
TacomaTucsonLouisville
Oklahoma City
Hartford
Milwaukee
Providence
St. Louis

Source: Emerging Trends in Real Estate surveys; compiled by Nelson Economics.
Note: Bold type indicates the 20 highest-rated markets in Emerging Trends in Real Estate 2023 survey for overall real estate prospects.

Emerging Trends in Real Estate® 2023

75

Changes in Attitudes, Changes in Latitudes

Some Like It Hot

Befitting the changes in economic and market trends andoutlooks that we have highlighted in this report, respondents tothe Emerging Trends survey expressed substantial changes inmarket preferences. Many of the changes were relatively minor,
and nine of the 10 highest-rated markets last year repeated thisyear (Miami moved in as Seattle moved out).

Despite the modest drop in the Supernova ratings this year,
Emerging Trends survey respondents still see the best prospects
in Sun Belt metropolitan areas, which have been growing overtime. The number of Sun Belt markets among the top 20
markets for “overall prospects” has increased from 10 in 2011
to 14 in each of the past two years. At the same time, the numberof markets in cold-weather climates in the Northeast and Midwest
has declined from five to just two (as shown in exhibit 3-1).

But there were some material changes over the year as about aquarter of markets moved up or down in rankings (i.e., relative
ratings) by at least 10 places. And consistent with our “normalizing” trend, many of the markets near the top of the standings
last year have fallen this year, while many previously lowerrate markets have risen: More than half (11) of the 20-highest
rated markets in last year’s survey fell in the rankings this year,
although almost all by less than 10 places. Meanwhile, some of
the markets that were found lower in the rankings in prior years
are now finding more support. Thirteen of the 20-lowest rated
markets in last year’s survey rose in the rankings this year.

These climate preferences are even stronger at the top and bottom of the rankings. The average year-round high temperature
among the five top-rated markets is a balmy 76 degrees, almost
20 degrees warmer than the 57-degree average in the bottom
five markets. Warm temperatures, of course, are not enoughto guarantee market success, nor is a cold climate necessarily
disqualifying. Boston (average high temperature, 59 degrees)
has ranked among the top 10 markets for the last six years, but
Boston increasingly seems to be the outlier. No other northeastern or midwestern market has ranked in the top 10 in the

Exhibit 3-4 Average Ranks by Market Category: 2023 versus 2022
(Lower scores are better)

Change 2022–2023
Percentage of markets in category

Average Rank

Group

Magnets

The Establishment

Niche

Backbone

2023

2022

AverageChange in
Rank

Super Sun Belt

7.4

11.9

– 4.4

71%

Subgroup% ThatStayed Even

% ThatMoved Down

14%

14%

18-Hour Cities

23.9

21.9

+ 2.0

43%

0%

57%

Supernovas

17.6

13.0

+ 4.6

0%

60%

40%

All Magnets

16.2

15.8

+ 0.3

42%

21%

37%

Multitalented Producers

25.8

20.5

+ 5.3

0%

60%

40%

Knowledge and Innovation Centers

29.0

29.8

– 0.8

50%

0%

50%

Major Market Adjacent

32.8

33.8

– 1.0

58%

0%

42%

All Establishment

30.7

30.4

+ 0.3

56%

0%

44%

Boutique

58.7

57.3

+ 1.4

57%

0%

43%

Eds and Meds

53.9

58.3

– 4.4

75%

0%

25%

Visitor and Convention Centers

48.1

50.3

– 2.1

63%

13%

25%

All Niche

51.0

54.3

– 3.3

69%

6%

25%

The Affordable West

67.2

58.0

+ 9.2

0%

0%

100%

Determined Competitors

51.2

54.2

– 3.0

60%

0%

40%

Reinventing

62.6

62.8

– 0.1

50%

13%

38%

All Backbone

60.7

59.1

+ 1.7

54%

8%

38%

Source: Emerging Trends in Real Estate surveys; compiled by Nelson Economics.
Note: Rankings based on Emerging Trends in Real Estate surveys (overall real estate prospects).

76% ThatMoved Up

Emerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

Exhibit 3-5 Population and Economic Growth by Market Category
Population Growth (CAGR)Group

Recent2019–2023

Forecast
2023–2028

Total GMP
2023–2028

Per capita GDP
2023–2028

1.1%

1.3%

3.7%

2.4%

18-Hour Cities

0.4%

0.9%

3.2%

2.3%

Supernovas

1.9%

1.6%

4.6%

2.9%

SubgroupSuper Sun Belt

Magnets

The Establishment

Niche

Backbone

Forecast Economic Growth (CAGR)

All Magnets

1.0%

1.2%

3.7%

2.4%

Multitalented Producers

-0.4%

0.1%

2.2%

2.0%

Knowledge and Innovation Centers

-0.8%

0.2%

1.9%

1.9%

Major Market Adjacent

0.5%

0.5%

2.6%

2.2%

All Establishment

0.0%

0.3%

2.3%

2.0%

Boutique

1.1%

0.7%

2.6%

1.8%

Eds and Meds

0.5%

0.4%

2.4%

2.0%

Visitor and Convention Centers

0.8%

1.1%

3.3%

2.3%

All Niche

0.7%

0.7%

2.7%

2.1%

The Affordable West

0.9%

0.9%

3.0%

2.1%

Determined Competitors

1.2%

0.8%

2.9%

2.1%

Reinventing

0.2%

0.1%

1.6%

1.5%

All Backbone

0.6%

0.4%

2.2%

1.8%

0.5%

0.7%

2.7%

2.1%

Total, all Emerging Trends markets

Sources: Bureau of Economic Analysis, IHS Markit, and U.S. Census Bureau; compiled by Nelson Economics.
Note: CAGR = compound annual growth rate. GMP = gross metropolitan product.

Growth Attracts

last four years to 1.6 percent over the next five—still the highestof any subgroup but slower than before as these markets experience some growing pains that we highlighted in our trends
chapter.

It’s not heat and humidity that investors and developers seek in
the Sun Belt markets, of course, but strong market prospects.
And forecasts for population and especially economic growthshow that are looking in the right places. Population and grossmetro product (GMP) are both expected to grow far faster in the
Magnet markets than just about anywhere else in the nation,
particularly in the northern markets that constitute much of the
Backbone markets.

Also of note is that many of the Establishment markets that lost
population during the pandemic are expected to reverse course
and resume growth over the next few years. This growth will
be slower than in our other market groups but represents thebiggest increase from the recent past to the expected near term.
This reversal perhaps accounts for the modest relative improvement in the 2023 ratings of the markets in this group.

previous two years, and only a scattering of others have placed
over the past decade.

Accordingly, the Magnets have maintained their dominance atthe top of the Emerging Trends ratings. Although their averageranking slipped slightly this year, more markets moved upthan down.
Growth is expected to be greatest in the Supernova subgroupbut moderating from its recent torrid pace. For example, population growth is projected to slow from 1.9 percent annually over the

Affordability Matters, Too
Quality of life and affordability also matter. Many of the markets
that received relatively lower scores this year have inadequate
infrastructure for their population size and growth, here measured
by their transit availability score. The failure to adequately expand
the regional infrastructure was a problem identified by local
experts we interviewed and an impediment to future growth.

Emerging Trends in Real Estate® 2023

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Housing affordability is another constraint on growth. For-salehousing is now less affordable (relative to local incomes) than
the national average in the three market subgroups experiencing the most significant decline in ratings this year, including theSupernova markets, while rental housing is also less affordable
than average (again, relative to incomes) in two of the threegroupings. That is, a lower share of the local population canafford the median-priced home, whether for-sale or rental.
Ironically, the affordability challenges extend to a subgroup
we call the Affordable West. These markets are, indeed, more
affordable than the ultra-pricey West Coast markets, especiallythose in California. But population growth has outpaced housing development, pushing up home prices faster than local
incomes. Much of the population growth in these markets has
been fueled by the in-migration of households seeking more
affordable housing, suggesting that growth could soon slow insome of these markets, absent an easing in home prices.
On the other hand, the three market subgroups that experienced the greatest relative rating improvements over the lastyear all have relatively affordable housing (a higher share of
the local population can afford the median-priced home). This
includes the large Super Sun Belt group, comprising markets
such as Houston, Atlanta, and Dallas/Fort Worth. Though thecost of doing business in some of these metro areas has been
rising, investors like the combination of housing affordability andstrong population and economic growth.
Also gaining strongly this year are the highly affordable Eds andMeds markets. Six of the eight markets in this subgroup improved
their relative rating—with Memphis and Pittsburgh each risingmore than 10 places—and only one market fell modestly.
The situation is the opposite in many of the Establishment markets, which suffer from not only expensive housing but also highcosts of doing business, in addition to slower growth. Continuing
a longstanding Emerging Trends pattern, interest in the gateway
markets is muted. Only three of the eight most expensive coastal
markets rank among the top 20. This represents a significant
comedown from a decade ago when these markets accounted
for seven of the top 10 Emerging Trends markets.

Exhibit 3-6 Quality-of-Life Metrics by Market Category
Housing AffordabilityGroup

SubgroupSuper Sun Belt

Magnets

The Establishment

Niche

Backbone

For-Sale*Rental**Transit Quality†

Cost of Doing
Business††

47.3%

75.8%

3.48

102.8
109.8

18-Hour Cities

41.7%

61.2%

4.78

Supernovas

43.6%

78.9%

2.41

99.8

All Magnets

45.0%

71.5%

3.76

104.7

Multitalented Producers

36.1%

49.7%

5.59

93.4

Knowledge and Innovation Centers

32.4%

42.6%

6.34

119.4

Major Market Adjacent

30.5%

45.0%

6.47

116.3

All Establishment

32.1%

45.8%

6.39

115.5

Boutique

59.8%

88.2%

1.85

94.6

Eds and Meds

56.2%

73.1%

4.05

62.6

Visitor and Convention Centers

36.1%

76.9%

3.48

103.1

All Niche

50.0%

77.1%

3.46

82.2

The Affordable West

34.1%

65.2%

4.27

58.0

Determined Competitors

60.9%

91.8%

2.01

93.6

Reinventing

61.2%

88.4%

3.56

99.6

All Backbone

55.5%

85.3%

3.46

89.6

44.0%

65.4%

3.97

100.0

Total, United States
Sources: IHS Markit and Urban Land Institute; compiled by Nelson Economics.

*Share of all homes likely affordable to a four-person family earning 120 percent of area median income (AMI). **Share of two-bedroom rentals likely affordable to a four-person family earning 80 percent of AMI.
†Ratings are on a scale of 0 to 10, with a higher value indicating better transit access. ††Costs relative to U.S. average, where U.S. = 100.0.

78

Emerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

The More Things Change . . .
Real estate markets are ever dynamic and metropolitan economies even more so. The relative rankings of the markets tracked
in Emerging Trends changed meaningfully this year as economic conditions in the United States appear to be heading fora slide. Nonetheless, many Magnet markets remain among themost favored, even if some of them have slipped a bit this year.
At the same time, real estate professionals appear more willingto consider some markets that had been less in favor in recent
years. The perpetual search for new opportunities ensures constant flux in how markets are viewed over time.

Grouping the Markets
After comprehensively reorganizing how we group our 80 geographic markets two years ago and a lighter refresh last year,
we are continuing with the same groupings this year and turnour focus to how the various groups and some key markets
have changed since our previous report. Additional demographic and economic data and more detailed descriptionsof these market groups are available online, as listed at theend of this chapter.

Magnets
Magnet markets are migration destinations for both people andcompanies, and most are growing more quickly than the U.S.
average in terms of both population and jobs. These metro
areas are also the preferred markets for investors and builders,with the highest average “Overall Real Estate Prospects” ratingsof any group in the Emerging Trends survey by a wide margin.
Collectively, these markets account for almost one-third of the
population base in the Emerging Trends coverage universe, thesecond-largest group in “Markets to Watch.”

Super Sun Belt. These markets are large and diverse but still
affordable, forming powerhouse economies that attract a wide
range of businesses. Despite their large population bases, mostare among the fastest-growing markets in the United States.
Moreover, their economic performance has been solid throughthick and thin. Though every market lost jobs during the pandemic recession, recovery has been much quicker and more
complete in the Super Sun Belt markets. These metro areas
collectively have the highest average rating of any subgroup, as
it did last year.
18-Hour Cities. Metro areas in this category faired relatively
well during the pandemic recession, a testament to their enduring appeal. Though growing less affordable over time, these
medium-sized cities nonetheless continue to attract in-migration
due to lifestyle, workforce quality, and development opportunities, according to ULI interviews. Measured by per capita GMP,
workers here are the most productive of any subgroup in the
fast-growing Magnets category. As a group, the 18-Hour Cities
rate third highest among the 12 subgroups, though the average
market ranking fell this year as four of the markets declined while
three rose.
Supernovas. Like the astronomic source for its name, the five
metro areas in the Supernova category markets have exploded
into prominence over the past decade or so. All are smallermarkets with 1 million to 2 million residents, but their defining
attribute is their tremendous and sustained population and job
growth, which are well above national averages. Despite theirrelatively modest sizes, all the Supernovas have above-averagelevels of economic diversity and white-collar employment, which
explain their strong investor appeal and should help them sustain high growth in the years ahead.

Exhibit 3-7 Population Size and Economic Output by Major Market Category
Magnets

Establishment

Niche

Backbone

Population (000s)
Total

63,996

67,95434,347

31,634

Average

3,368

3,398

1,493

1,757

Share of all Emerging Trends markets

32.3%

34.3%

17.4%

16.0%

Total

$4,015$5,741$1,957$1,766

Average$211.3$287.1

$85.1

$98.1

Share of all Emerging Trends markets

29.8%

42.6%

14.5%

13.1%

GMP ($ Millions)

Sources: Bureau of Economic Analysis, HIS Markit, and U.S. Census Bureau; compiled by Nelson Economics.
Note: GMP = Gross metropolitan product, a monetary measure of the value of all final goods and services produced within a metropolitan statistical area annually.

Emerging Trends in Real Estate® 2023

79

Nashville has repeated as the nation’s top market, the firstmarket to repeat atop the Emerging Trends table since San
Francisco in 2013 and 2014, and Austin repeated as the fourthhighest-rating market. Nonetheless, the glow for this category
has faded somewhat as their unfettered growth has invited
some big-city problems like congestion and rising living costs.
Last year’s shooting star, Boise, fell sharply after two years in
the top 20. Raleigh has continued its modest decline, from the
top-rated market in 2021 to number six in the 2023 survey. But
more broadly, the Supernovas appear to be suffering somegrowing pains, as discussed elsewhere in this report. Housing
construction is not keeping pace with household growth, straining housing affordability, which has been one of thechief attractions.

The Establishment
The Establishment markets have long been the nation’s economic engines. The 20 markets in this category produce almost
43 percent of the GMP in the 80 Emerging Trends markets whileaccounting for only 34 percent of its population base. This primarily reflects the outsized contributions of the nation’s gateway
markets, which we refer to as the Knowledge and Innovation
Centers.
Though growing more slowly than the Magnet markets, theEstablishment markets still offer tremendous opportunities. This
group’s average rating is second among our four major groupings. However, the appeal of these markets to investors anddevelopers has waned in recent years as growth has slowed
across many of these markets while challenges have increased.
Multitalented Producers. Though all the Establishment
markets are large and economically varied, some are morediverse than others, specifically the multitalented metro areasof Chicago, Los Angeles, San Jose, and Seattle. Workers here
tend to be productive, with per capita GMP ranking the second
highest of any of the subgroups. Though their elevated cost of
doing business and getting deals done limits their appeal forsome real estate professionals, the Multitalented Producers

Exhibit 3-8 U.S. Industrial Property Buy/Hold/Sell Recommendations
Buy

Hold

Sell

Northern New Jersey 74%

20%

6%

Miami 73

19

8

New York–Brooklyn 72

23

5

Nashville 69

24

Inland Empire

67

11
12

Charleston 64

24

Orange County 64

28

8Memphis 62

29

10
13

Orlando 62

26

Los Angeles 62

28

11

Boston 61

24

15

New York–other boroughs 61

33

Jacksonville 60

6

17

23

Westchester, NY/Fairfield, CT 59

27

14

Baltimore 59

26

15

Raleigh/Durham 58

26

16

Jersey City 57

34

9

Washington, DC–Northern VA 57

30

13

New York–Manhattan 57

30

13Philadelphia 56

29

15

0%

20%

40%

60%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Cities listed are the top 20 rated for investment in the industrial sector; cities are ordered according to the percentage of “buy” recommendations.

80

8

21

Emerging Trends in Real Estate® 2023

80%

100%

Chapter 3: Markets to Watch

nonetheless continue to attract a disproportionate share ofinvestment dollars.
Ratings for these markets have been volatile in recent years,
primarily due to the changing fortunes of the tech sector, which
figure heavily in these economies, especially Seattle and San
Jose, which both tumbled in this year’s ranking. Together, theratings of these markets fell the second most of any category
after improving more than any subgroup in the Emerging Trends
2022 survey. This subgroup now rates the fourth highest, down
one rung from last year.
Knowledge and Innovation Centers. This grouping serves
as the focus of intellectual capital in the economy, whether insocial media (San Francisco), finance (Manhattan), biosciences(Boston), or think tanks (Washington, D.C.). With the most educated workforces in the United States, these innovation centers
are by far the most productive, with per capita GMP more than
twice that of any other subgroup—along with some of the mostexpensive housing in the country, along with the highest costs ofdoing business.

This group remains somewhat out of favor with investors relative
to its former glory not long ago. Only Boston remains among the
20 top-rated markets. Boston has leveraged its region’s worldclass concentration of higher education to become a world
leader in life sciences.
Major Market Adjacent. This group includes the markets surrounding high-cost CBDs in Los Angeles, Miami, New York City,San Francisco, and Washington, D.C. Though most are suburban in character, some are more urban. Moreover, several are orcontain metropolitan statistical areas in their own right.
Many of these markets benefited from the out-migrationfrom their neighboring CBDs during the pandemic, and theirprospects have improved somewhat in the eyes of survey
respondents. But here, too, there is a diversity in trends as sevenof the 12 markets improved this year and five declined. Most of
the improvement was registered in the New York metropolitanarea, while the declining markets are mainly in California.

Exhibit 3-9 U.S. Multifamily Property Buy/Hold/Sell Recommendations
Buy

Hold

Sell

New York–Brooklyn 70%

25%

5%

Raleigh/Durham 69

20

11
13

Nashville 68

19

Long Island 68

25

8Charlotte

23

10

67

New York–other boroughs 66

32

West Palm Beach 66

21

3
13

Charleston 65

27

8

San Diego 65

28

7

Boston 64

26

10Denver 64

27

10

Greenville, SC 64

27

9Salt Lake City

63

25

12
6

Richmond 63

31

Dallas/Fort Worth 61

31

8

Knoxville 6132

7Jacksonville 60

23

16

Tampa/St. Petersburg 60

21

19

Miami 59

29

12

Philadelphia 58

29

13

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Cities listed are the top 20 rated for investment in the multifamily sector; cities are ordered according to the percentage of “buy” recommendations.

Emerging Trends in Real Estate® 2023

81

NicheAs befitting their moniker, Niche markets are generally smaller orless economically diverse than the Magnets and Establishment
markets but typically have a dominant economic driver that
supports stable economic growth. This group ranks third among
the four major market groups in terms of investor outlooks but far
behind the Magnet and Establishment groups.
Boutique Markets. These are smaller markets with lively
downtowns; diversity in leisure, cultural, and natural/outdoor
amenities; and stable economic bases that withstood the
COVID-19 downturn better than many markets. These markets offer a lower cost of living and cost of doing business in adiverse range of settings, primarily noncoastal. All have populations of less than 1 million, and all maintained their previous
positive in-migration during the pandemic, indicating the appealof these towns. Richmond remains the top-rated market in thissubgroup, but this grouping experienced relatively lower overall
scores this year.

Eds and Meds. Before the pandemic, Eds and Meds markets
were envied for their desirable combination of stability (large
universities) and growth (health care). COVID-19 initially dented
their reputations as both education and medicine suffereddisproportionately during the pandemic. However, demand for
education and health care—and the facilities that house them—has resumed its growth. Ratings for these markets rose the mostof any subgroup this year, tied with the Super Sun Belt markets.
Convention and Visitor Centers. These Sun Belt (or justsunny, in the case of Honolulu and Las Vegas) markets draw
substantial numbers of visitors, whether for conventions or leisure, while several markets in this category also have substantial
bases of retirement/second-home markets. All have significantly
more tourism employment (relative to market size) than the U.S.
average, with Las Vegas the most travel-dependent market in
the country.

Exhibit 3-10 U.S. Hotel Property Buy/Hold/Sell Recommendations
Buy

Hold

Sell

Nashville 51%

28%

21%

Miami 46

32

21

Tampa/St. Petersburg 41

38

21

West Palm Beach 40

24

36Charleston 36

42

22

Austin 34

42

23

Greenville, SC 33

33

33

Washington, DC–District 32

44

24

New York–Manhattan 32

39

30

Orlando 31

31

38

New York–Brooklyn 30

45

24

San Antonio 30

49

21

Boston 29

53

18

Raleigh/Durham 29

48

23

Salt Lake City 29

43

29

Fort Lauderdale 25

47

28

Honolulu 2358

19

Denver 22

56

22

Washington, DC–Northern VA 22

48

30

Washington, DC–MD suburbs 22

52

26

0%

20%

40%

60%

80%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Cities listed are the top 20 rated for investment in the hotel sector; cities are ordered according to the percentage of “buy” recommendations.

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Chapter 3: Markets to Watch

These markets all endured significant challenges resulting
from COVID-related restrictions, particularly those that rely on
air travel, business demand, or both. Several markets in thisgrouping staged a solid recovery over the last year, especially
Deltona/Daytona and Virginia Beach/Norfolk, both of which
improved more than 10 places in the rankings. But Honolulu andCharleston both suffered significant declines. Overall, ratings
increased moderately.

Backbone
The final group comprises a wide variety of interesting andenjoyable places to live and work. Though generally rated
relatively lower in our surveys, many of these metro areas offer
select investment development/redevelopment opportunities.
Although markets in the Affordable West subgroup are growing
sharply, most of the Backbone markets are slower growing but
benefit from moderate housing and business costs.

The Affordable West. Beyond the pricey West Coast markets,several small- to medium-sized cities offer attractive places tolive at a more affordable price. Notably, they are among thefastest-growing metro areas outside the Magnets. Nonetheless,affordability here is fading as this rapid population growth has
pushed home prices relative to income higher than the national
average. Investors seem to have soured on these markets, aseach fell in the rankings this year. Overall, the ranking of thissubgroup declined more than that of any other in the survey andnow has the lowest overall rating.
Determined Competitors. These diverse markets tend to bestrong ancillary locations in their regions, with several successfully revitalizing their downtowns and neighborhoods. These
markets tend to be very affordable with a favorable quality of life.
Significantly, all maintained positive population growth throughthe pandemic. Though population growth is expected to moderate in some of these markets, the overall ratings for this grouprose strongly in this year’s survey.

Exhibit 3-11 U.S. Retail Property Buy/Hold/Sell Recommendations
Buy

Hold

Miami 48%
Nashville 47

Sell
36%

15%

43

10

West Palm Beach 46

35

19Charleston 41

44

15

Austin41

41

18

Greenville, SC 40

35

25

San Antonio 36

41

23

Des Moines 36

18

45Fort Lauderdale 36

44

19

Tampa/St. Petersburg 35

46

19Charlotte 34

53

13

Salt Lake City 32

53

16

Raleigh/Durham 31

51

17
22

Orlando 31

47

San Diego 30

59

11

Phoenix 29

54

17

Chattanooga 28

44

28

Madison 27

45

27

Houston 27

50

23

Jacksonville 27

42

31

0%

20%

40%

60%

80%

100%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Cities listed are the top 20 rated for investment in the retail sector; cities are ordered according to the percentage of “buy” recommendations.

Emerging Trends in Real Estate® 2023

83

Reinventing. Reinventing markets are eastern and midwesterncities seeking to modernize their economic base. Many were
manufacturing centers and are now moving to a more sustainable mix of education, health care, and technology. Though
the economic rebound in most of these markets lags thenational recovery, the federal government’s stimulus programs

have helped cushion the downturn. However, anemic population growth remains a problem. Overall, there was no materialchange in the outlook for these markets, in the view of Emerging
Trends respondents, but Detroit showed a substantial improvement this year, continuing the gains first seen in Emerging
Trends 2021.

Exhibit 3-12 U.S. Office Property Buy/Hold/Sell Recommendations
Buy

Miami 44%

Hold

Sell

28%

28%

West Palm Beach 38

27

35

Raleigh/Durham 38

40

21

Salt Lake City 38

48

15

Tampa/St. Petersburg 37

44

19

Fort Lauderdale 32

43

24

Austin 32

44

24

Nashville 31

56

13

San Diego

30

53

16

San Antonio 29

44

27Charlotte 27

40

32

Greenville, SC 27

50

23

Des Moines 27

964Orlando 26

39

Orange County 26

48

26

Charleston 25

45

30

Dallas/Fort Worth 24

50

26

34

Boise 23

46

31

Las Vegas 23

35

42

Denver 22

50

28

0%

20%

40%

60%

80%

Source: Emerging Trends in Real Estate 2023 survey.
Note: Cities listed are the top 20 rated for investment in the office sector; cities are ordered according to the percentage of “buy” recommendations.

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Chapter 3: Markets to Watch

Exhibit 3-13 Local Market Perspective: Investor Demand
Weak

Average

Exhibit 3-14 Local Market Perspective: Development/
Redevelopment Opportunities

Strong
Weak

Austin4.62

Knoxville

3.39

Nashville

4.42

San Jose

3.37

Dallas/Fort Worth

4.40

Philadelphia

3.33

Tampa/St. Petersburg

4.38

Long Island

3.32

Raleigh/Durham

4.28

Westchester, NY/Fairfield, CT

3.29

Charlotte

4.25

Kansas City, MO

3.26

Boston

4.23

Tallahassee

3.24

Miami

4.22

Cincinnati

3.21

Orlando

4.18

Norfolk

3.20

West Palm Beach

4.17

Pittsburgh

3.19

Atlanta
Fort Lauderdale

4.16
4.14

MadisonMinneapolis

3.17
3.13

Charleston

4.13

Gainesville

3.11

Denver

3.94

Chattanooga

3.09

New York–Brooklyn
San Diego

3.91
3.88

Des Moines
Oakland/East Bay

3.09
3.08

Washington, DC–Northern VA

3.88

Portland, ME

3.05

Salt Lake City

3.87

Honolulu

3.04

Phoenix

3.83

Sacramento

3.03

Seattle3.81

Tacoma2.96

Columbus

3.77

Birmingham

2.95

San Antonio

3.73

Tucson2.89

Inland Empire
Cape Coral/Fort Myers/Naples

3.70
3.70

Spokane, WA/Coeur d'Alene, ID
Chicago2.87
2.84

Orange County

3.67

Oklahoma City

2.82

Washington, DC–MD suburbs

3.66

San Francisco

2.82

Jacksonville

3.62

Detroit2.78

Houston

3.61

Omaha

2.78

Los Angeles

3.61

Louisville

2.76

New York–Manhattan

3.61

Portland, OR

2.74

Greenville, SC

3.61

Memphis

2.74

Boise

3.60

St. Louis

2.74

Northern New Jersey

3.54

Providence

2.62

Jersey City

3.52

Cleveland

2.60

Washington, DC–District
Indianapolis

3.50
3.45

Milwaukee
Baltimore

2.60
2.55

New York–other boroughs

3.44

Albuquerque

2.55

Las Vegas

3.43

New Orleans

2.33

Deltona/Daytona

3.41

Hartford

2.17

Richmond

3.41

Buffalo

2.05

Average

StrongDallas/Fort Worth

4.04

Inland Empire

3.31

Nashville

4.00

Northern New Jersey

3.29

Tampa/St. Petersburg

4.00

Birmingham

3.29

Raleigh/Durham

3.98

Memphis

3.28

Miami

3.91

Washington, DC–District

3.27

Austin3.86

Milwaukee

3.27

San Antonio

3.82

Seattle3.26

Charlotte

3.81

Portland, ME

3.24

West Palm Beach

3.79

Gainesville

3.24

Atlanta

3.77

Norfolk

3.24

Fort Lauderdale

3.77

Washington, DC–MD suburbs

3.21

Orlando

3.77

Jersey City

3.21

Washington, DC–Northern VA

3.73

Pittsburgh

3.21

Kansas City, MO

3.72

Indianapolis

3.18

New York–other boroughs

3.70

New York–Manhattan

3.17

Houston

3.68

St. Louis

3.13

Salt Lake City

3.65

San Jose

3.12

Denver

3.63

Baltimore

3.09

Charleston

3.57

Westchester, NY/Fairfield, CT

3.09

Cape Coral/Fort Myers/Naples

3.57

Los Angeles

3.09

Jacksonville

3.55

Long Island

3.08

Cleveland

3.55

Columbus

3.08

San Diego

3.53

Omaha

3.08

Philadelphia

3.53

Oklahoma City

3.07

Des Moines

3.53

Chicago3.06

New York–Brooklyn

3.52

Louisville

2.93

Phoenix

3.48

Minneapolis

2.89

Madison

3.48

Tucson2.88

Richmond

3.46

Sacramento

2.88

Detroit3.45

Spokane, WA/Coeur d'Alene, ID

2.87

Orange County

3.45

Albuquerque

2.84

Greenville, SC

3.44

Providence

2.81

Chattanooga

3.42

Tacoma2.79

Cincinnati

3.42

New Orleans

2.79

Boston3.37

Portland, OR

2.78

Boise

3.37

Oakland/East Bay

2.76

Knoxville

3.35

Buffalo

2.72

Deltona/Daytona

3.33

Honolulu

2.66

Tallahassee

3.33

Hartford

2.65

Las Vegas

3.31

San Francisco

2.40

Source: Emerging Trends in Real Estate 2023 survey.

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reflect perspective of local market participants.

Note: Ratings reflect perspective of local market participants.

Emerging Trends in Real Estate® 2023

85

Exhibit 3-15 Local Market Perspective: Local Economy
Weak

Average

Austin

4.61

New York–other boroughs

3.54

Dallas/Fort Worth

4.53

Northern New Jersey

3.53

Nashville

4.42

Cincinnati

3.52

Raleigh/Durham

4.35

Westchester, NY/Fairfield, CT

3.47

Tampa/St. Petersburg

4.28

Jersey City

3.44

Charlotte

4.23

Los Angeles

3.44Charleston

4.19

Norfolk

3.42

Fort Lauderdale

4.19

Las Vegas

3.41

West Palm Beach

4.17

Portland, ME

3.40

Miami

4.15

Philadelphia

3.39

Boston

4.13

Deltona/Daytona

3.39

Columbus

4.08

San Jose

3.38

Atlanta

4.08

Gainesville

3.38

Orlando

4.02

Tallahassee

3.33

San Antonio

4.00

Long Island

3.31

Denver

4.00

Spokane, WA/Coeur d'Alene, ID

3.30

Phoenix

3.99

Birmingham

3.26

Washington, DC–Northern VA

3.97

Pittsburgh

3.24

San Diego

3.93

Honolulu

3.22

Jacksonville

3.89

Sacramento

3.21

Salt Lake City

3.89

Omaha

3.20

Houston

3.88

Louisville

3.20

Greenville, SC

3.87

Oklahoma City

3.19

Orange County

3.85

Tucson

3.13

Boise

3.83

Milwaukee

3.09

Indianapolis

3.74

Detroit

3.05

New York–Brooklyn

3.74

Chicago3.05

Washington, DC–District

3.71

Portland, OR

3.02

Seattle3.69

Oakland/East Bay

3.02

Washington, DC–MD suburbs

3.69

Tacoma2.96

Knoxville

3.68

Memphis2.91

Chattanooga

3.67

St. Louis

2.90

Inland Empire

3.64

Albuquerque

2.89

Madison

3.62

San Francisco

2.89

Minneapolis

3.61

New Orleans

2.88

Cape Coral/Fort Myers/Naples

3.61

Providence

2.85

Richmond

3.61

Baltimore

2.85

Kansas City, MO

3.60

Cleveland

2.81

New York–Manhattan

3.55

Buffalo

2.56

Des Moines

3.54

Hartford

2.42

Source: Emerging Trends in Real Estate 2023 survey.
Note: Ratings reflect perspective of local market participants.

86

StrongEmerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

Exhibit 3-16 Local Market Perspective: Local Public andPrivate Investment
Weak

Average

StrongExhibit 3-17 Local Market Perspective: Availability of Debt
and Equity Capital
Weak

Average

StrongNashville

3.88

Oklahoma City

3.25

Austin4.29

Richmond

3.48

Dallas/Fort Worth

3.86

Northern New Jersey

3.24

Nashville

4.29

Cleveland

3.43

Raleigh/Durham

3.83

Portland, ME

3.21

Tampa/St. Petersburg

4.17

San Jose

3.40

Charlotte

3.80

Deltona/Daytona

3.20

Dallas/Fort Worth

4.16

Las Vegas

3.38

Tampa/St. Petersburg

3.77

Tallahassee

3.20

Miami

4.15

Norfolk

3.38

Austin3.68

Washington, DC–MD suburbs

3.20

Raleigh/Durham

4.10

Omaha

3.36

Salt Lake City

3.66

Cleveland

3.19

West Palm Beach

4.09

Madison

3.35

West Palm Beach

3.66

Detroit

3.18

Charlotte

4.02

Boise

3.34

Boston3.65

Long Island

3.17

Orlando

4.00

Deltona/Daytona

3.29

Orlando

3.64

Pittsburgh

3.14

Boston

3.96

Tallahassee

3.27

Miami

3.64

Gainesville

3.13

Des Moines

3.95

Detroit

3.25

Charleston

3.63

St. Louis

3.13

Atlanta

3.95

Chattanooga

3.25

San Antonio

3.63

Sacramento

3.13

Washington, DC–Northern VA

3.93

Pittsburgh

3.20

Denver

3.62

Seattle3.12

Fort Lauderdale

3.89

Gainesville

3.19

Kansas City, MO

3.57

Memphis3.12

Charleston

3.88

Cincinnati

3.16

Washington, DC–Northern VA

3.56

Birmingham

3.11

Salt Lake City

3.86

Oakland/East Bay

3.15

Atlanta

3.51

San Jose

3.09

San Diego

3.85

Columbus

3.14

Fort Lauderdale

3.50

Inland Empire

3.09

New York–Manhattan

3.79

St. Louis

3.11

Knoxville

3.50

Omaha

3.08

Denver

3.78

Honolulu

3.11

Houston

3.47

Norfolk

3.06

San Antonio

3.74

Sacramento

3.09

Des Moines

3.44

Milwaukee

3.00

New York–Brooklyn

3.74

Milwaukee

3.08

Orange County

3.44

Louisville

3.00

Kansas City, MO

3.73

Birmingham

3.05

Chicago3.44

Minneapolis

3.00

Jacksonville

3.72

Portland, ME

3.05

Washington, DC–District

3.43

Providence

2.95

Cape Coral/Fort Myers/Naples

3.71

Memphis3.00

New York–other boroughs

3.43

Indianapolis

2.94

Northern New Jersey

3.71

Indianapolis

3.00

New York–Brooklyn

3.43

Tacoma

2.91

Phoenix

3.68

Portland, OR

2.96

Boise

3.41

Spokane, WA/Coeur d'Alene, ID

2.90

Inland Empire

3.68

Tacoma

2.88

Phoenix

3.40

Los Angeles

2.90

Los Angeles

3.67

Louisville

2.86

San Diego

3.39

Cincinnati

2.88

Seattle3.64

Tucson2.85

Philadelphia

3.33

Baltimore

2.87

Orange County

3.63

Chicago2.84

Greenville, SC

3.30

Tucson2.83

Knoxville

3.63

Oklahoma City

2.81

Jacksonville

3.30

Honolulu

2.78

Jersey City

3.63

San Francisco

2.81

Las Vegas

3.30

Oakland/East Bay

2.76

New York–other boroughs

3.57

Providence

2.81

New York–Manhattan

3.28

Portland, OR

2.71

Philadelphia

3.55

Minneapolis

2.80

Cape Coral/Fort Myers/Naples

3.28

Columbus

2.69

Houston

3.55

Albuquerque

2.79

Richmond

3.27

Albuquerque

2.63

Washington, DC–MD suburbs

3.54

Baltimore

2.77

Jersey City

3.27

Buffalo

2.63

Long Island

3.52

Spokane, WA/Coeur d'Alene, ID

2.73

Chattanooga

3.26

Hartford

2.57

Washington, DC–District

3.50

Buffalo

2.67

Madison

3.25

San Francisco

2.52

Westchester, NY/Fairfield, CT

3.50

Hartford

2.65

Westchester, NY/Fairfield, CT

3.25

New Orleans

2.50

Greenville, SC

3.48

New Orleans

2.46

Source: Emerging Trends in Real Estate 2023 survey.

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reflect perspective of local market participants.

Note: Ratings reflect perspective of local market participants.

Emerging Trends in Real Estate® 2023

87

Exhibit 3-18 Economy
Population distribution(% of total population)

2023 population*
5-year5-yearprojected annualchange projected(000s) % change

MarketTotal(millions)

United States

334.21 8,334.0

Business costs

Ages
0–24

Ages
Ages Ages 65
25–44 45–64 and older

2023
real GMP
per capita

Real GMP per
capita 5-year
projected
annual change

2023 employment*

Industry location quotient***

Real per capita
2023 real income 5-year Cost of
doing
projected
per capita
income* annual change business** Total (000s)

5-yearannualGoodsprojected STEM Office-using producing Tourism
change employment employment employment employment

0.5%

31%

27%

25%

18%

$59,134

2.0%$53,617

2.0%

100.0

153,478

0.4%

1.0

1.0

1.0

Albuquerque

0.92

33.3

0.7%

30%

28%

23%

18%

$45,2511.9%$46,246

1.9%

95.3

405

0.3%

1.0

0.9

0.9

1.0

Atlanta

6.29

380.7

1.2%

32%

29%

25%

14%

$65,0312.4%$54,122

2.1%

97.7

3,000

0.9%

0.9

1.3

0.8

1.0

Austin

2.47

266.8

2.1%

35%

31%

22%

12%

$71,747

3.4%$59,334

2.3%

104.1

1,271

1.9%

0.9

1.4

0.9

1.1

Baltimore

2.84

41.6

0.3%

30%

27%

26%

18%

$66,443

2.2%$57,443

2.4%

109.9

1,426

0.4%

1.1

1.0

0.8

0.9

Birmingham

1.18

19.9

0.3%

31%

27%

25%

17%

$49,992

1.9%$52,522

2.2%

90.3

553

0.3%

0.8

0.9

1.0

0.9

Boise

0.84

86.1

2.0%

32%

29%

24%

16%

$44,242

3.2%$49,325

2.0%

95.5

386

1.5%

1.0

1.0

1.3

1.0

Boston

4.89

106.7

0.4%

29%

28%

26%

18%

$93,0212.0%$70,934

2.2%

121.4

2,820

0.4%

1.3

1.3

0.8

0.9

Buffalo

1.15(25.8)

-0.5%

27%

24%

27%

22%

$53,530

1.4%$52,150

2.7%

98.1

549

0.0%

1.0

0.9

1.0

1.0

Cape Coral/Fort Myers/
Naples

1.23

114.1

1.8%

25%

23%

25%

27%

$43,797

2.9%$66,664

2.4%

101.7

470

1.2%

0.8

0.9

1.1

1.5

Charleston

0.84

52.6

1.2%

31%

28%

25%

16%

$51,247

2.5%$51,930

2.1%

98.3

390

1.0%

0.8

1.0

1.0

1.3

Charlotte

2.75

193.1

1.4%

32%

28%

25%

15%

$61,290

2.5%$55,039

2.0%

97.0

1,306

1.1%

0.7

1.3

1.1

1.0

Chattanooga

0.57

15.9

0.5%

29%

26%

26%

19%

$49,945

1.5%$49,582

2.1%

90.1

270

0.1%

0.8

0.8

1.4

1.1

Chicago

9.43

3.9

0.0%

31%

28%

25%

16%

$67,721

1.3%$57,998

2.2%

103.5

4,702

0.1%

0.9

1.1

1.0

0.9

Cincinnati

2.25

46.1

0.4%

32%

27%

25%

17%

$61,140

2.0%$56,627

2.4%

94.2

1,117

0.6%

0.9

1.0

1.1

1.0

Cleveland

2.07

8.3

0.1%

28%

26%

26%

21%

$58,858

1.2%$55,720

2.1%

93.9

1,067

-0.1%

1.1

0.9

1.1

0.9

Columbus

2.18

85.5

0.8%

33%

29%

23%

14%

$58,478

2.2%$53,762

2.1%

95.0

1,141

0.6%

0.9

1.1

0.8

0.9

Dallas/Fort Worth

8.08

602.6

1.4%

34%

30%

23%

13%

$68,312

2.3%$54,685

1.8%

102.3

4,139

0.9%

0.8

1.3

1.0

0.9

Deltona/Daytona Beach

0.71

42.0

1.2%

26%

22%

27%

26%

$30,606

2.6%$44,163

2.1%

99.3

219

0.5%

1.1

0.7

0.9

1.4

Denver

3.00

161.9

1.1%

29%

32%

24%

15%

$71,669

2.4%$61,527

2.0%

110.7

1,592

0.7%

0.9

1.3

0.9

1.0

Des Moines

0.70

40.8

1.1%

34%

30%

23%

13%

$72,595

2.2%$56,298

2.1%

95.8

385

0.9%

0.9

1.3

0.9

0.9

Detroit

4.35

9.3

0.0%

29%

26%

26%

19%

$56,144

1.5%$53,102

2.3%

100.7

2,016

0.0%

0.9

1.2

1.2

0.8

Fort Lauderdale

1.94

104.8

1.1%

26%

28%

27%

19%

$54,130

1.9%$47,341

1.9%

113.7

886

1.1%

0.8

1.3

0.7

1.0

Gainesville

0.30

10.5

0.7%

38%

24%

21%

17%

$48,980

1.9%$47,644

2.3%

97.0

153

0.4%

1.1

0.8

0.5

0.9

Greenville, SC

0.96

35.7

0.7%

31%

25%

25%

19%

$45,3121.7%$47,069

1.8%

91.3

442

0.6%

0.8

1.0

1.4

1.0

Hartford

1.21

6.8

0.1%

29%

25%

26%

19%

$74,535

1.2%$57,740

2.2%

109.7

633

-0.1%

1.0

1.0

1.1

0.7

Honolulu

0.99

6.3

0.1%

29%

27%

23%

20%

$57,858

1.4%$47,355

2.4%

144.4

451

0.4%

0.8

0.8

0.6

1.5

Houston

7.42

549.0

1.4%

35%

30%

24%

12%

$67,5882.3%$54,593

2.1%

100.1

3,275

0.9%

0.8

1.0

1.3

1.0

Indianapolis

2.17

119.0

1.1%

33%

29%

24%

15%

$63,1092.2%$57,286

2.0%

95.4

1,131

0.7%

0.9

1.1

1.0

0.9

Inland Empire

4.73

244.9

1.0%

34%

28%

23%

14%

$38,044

2.7%$40,832

2.3%

112.7

1,696

1.5%

0.9

0.6

1.0

1.1

Jacksonville

1.71

113.7

1.3%

30%

27%

26%

17%

$48,8812.5%$51,356

2.2%

100.2

778

1.3%

0.9

1.2

0.8

1.1

Jersey City

0.69

5.9

0.2%

31%

33%

24%

13%

$64,541

1.6%$55,210

2.3%

118.5

284

-0.1%

0.8

1.3

0.4

0.8

Kansas City, MO

2.23

95.5

0.8%

32%

28%

24%

16%

$58,534

2.2%$54,535

2.1%

96.6

1,104

0.7%

0.9

1.1

1.0

0.9

Knoxville

0.94

30.9

0.7%

29%

26%

26%

20%

$47,129

1.7%$48,508

1.9%

90.5

425

0.3%

0.8

1.0

1.2

1.0

Las Vegas

2.35

141.6

1.2%

30%

30%

25%

16%

$49,484

2.8%$49,833

2.4%

102.6

1,079

1.2%

0.7

1.0

0.8

2.4

Long Island

2.88(25.8)

-0.2%

27%

25%

27%

20%

$62,3932.1%$65,852

2.7%

118.5

1,333

0.3%

1.2

0.8

0.9

0.9

Los Angeles

9.70(43.0)

-0.1%

28%

30%

26%

16%

$76,977

2.1%$56,608

2.6%

120.3

4,535

0.2%

1.3

1.0

0.8

1.1

Louisville

1.33

34.1

0.5%

30%

27%

26%

17%

$51,7291.5%$54,314

2.2%

91.1

678

0.4%

0.9

0.9

1.3

0.9

Madison

0.69

28.6

0.8%

33%

28%

24%

16%

$69,924

2.6%$60,022

2.3%

98.4

416

0.9%

0.9

1.0

1.0

0.8

Memphis

1.35

22.4

0.3%

32%

28%

25%

15%

$52,613

1.6%$50,440

2.0%

91.0

661

0.3%

0.8

0.8

0.8

0.8

Sources: IHS Markit, U.S. Bureau of Labor Statistics.
*IHS Markit estimate for year-end 2022.
**Cost of doing business: national average = 100. Figures based on MSA-level data.
***Industry location quotient measures industry employment concentration by market—metro industry employment as a percentage of metro total, divided by national industry employment
as a percentage of national total.

88

1.0

Emerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

Exhibit 3-18 Economy
2023 population*
5-year5-yearprojected annualchange projected(000s) % change

MarketTotal(millions)

United States

334.21 8,334.0

Population distribution(% of total population)

Business costs

2023 employment*

Industry location quotient***

Ages
0–24

Real GMP per
2023
capita 5-year
Ages
Ages Ages 65 real GMP projected
25–44 45–64 and older per capita annual change

Real per capita
2023 real income 5-year Cost of
doing
projected
per capita
income* annual change business** Total (000s)

5-yearannualGoodsprojected STEM Office-using producing Tourism
change employment employment employment employment

0.5%

31%

27%

25%

18%

$59,134

2.0%$53,617

2.0%

100.0

153,478

0.4%

1.0

1.0

1.0

Miami

2.65

96.2

0.7%

27%

28%

27%

18%

$58,520

1.6%$49,910

2.1%

113.7

1,254

0.7%

1.0

1.1

0.6

1.0

1.1

Milwaukee

1.56

3.8

0.0%

31%

27%

25%

17%

$59,166

1.7%$57,602

2.4%

97.7

851

0.2%

1.2

0.9

1.3

0.8
0.8

Minneapolis/St. Paul

3.74

127.0

0.7%

31%

29%

25%

16%

$68,896

2.2%$59,118

2.3%

101.8

2,024

0.7%

1.0

1.1

1.1

Nashville

2.09

145.9

1.4%

32%

29%

24%

14%

$65,767

2.7%$58,392

2.2%

96.7

1,122

1.0%

1.0

1.2

1.0

1.1

New Orleans

1.26

7.5

0.1%

30%

28%

25%

18%

$59,075

1.4%$52,817

2.2%

94.2

562

0.3%

1.1

0.8

0.8

1.4

New York–Brooklyn

2.60

45.0

0.3%

32%

30%

24%

15%

$36,697

1.8%$41,948

2.9%

118.5

867

0.9%

2.2

0.5

0.5

0.5

New York–Manhattan

1.50(31.6)

-0.4%

24%

36%

23%

17%

$451,047

1.8%$172,005

2.6%

118.5

2,431

0.2%

1.2

1.9

0.2

0.7

New York–other boroughs

4.20

60.4

0.3%

30%

29%

25%

16%

$34,705

1.7%$35,894

1.6%

118.5

1,217

0.7%

1.6

0.5

0.6

0.5

Northern New Jersey

4.25

77.7

0.4%

29%

25%

26%

20%

$61,485

1.6%$57,237

1.8%

118.5

1,851

0.1%

1.1

1.0

0.8

0.7

Oakland/East Bay

2.79

73.2

0.5%

29%

29%

26%

17%

$78,627

2.2%$68,419

1.4%

131.2

1,183

0.9%

1.1

1.0

1.3

0.9

Oklahoma City

1.47

68.3

0.9%

35%

28%

22%

15%

$56,2282.4%$50,331

2.2%

91.6

672

0.5%

0.9

0.8

1.0

1.1

Omaha

0.98

39.5

0.8%

34%

28%

23%

14%

$63,527

2.3%$58,185

2.1%

97.0

508

0.6%

1.0

1.1

1.0

0.9

Orange County

3.15

61.6

0.4%

28%

29%

26%

17%

$77,832

2.3%$62,180

2.4%

120.3

1,679

0.5%

0.9

1.2

1.2

1.1

Orlando

2.77

238.6

1.7%

31%

29%

24%

16%

$50,9842.7%$44,269

2.0%

102.5

1,378

1.6%

0.8

1.4

0.9

2.1

Philadelphia

6.25

94.6

0.3%

30%

27%

25%

18%

$65,964

1.9%$60,221

2.2%

0.0

2,989

0.3%

1.3

1.0

0.8

0.8

Phoenix

5.12

433.0

1.6%

32%

28%

23%

17%

$51,335

2.8%$46,960

1.8%

103.9

2,317

1.2%

1.0

1.3

1.0

1.0

Pittsburgh

2.35

7.5

0.1%

26%

25%

27%

22%

$61,493

1.9%$59,069

2.3%

99.5

1,163

0.2%

1.2

1.0

1.0

0.9

Portland, ME

0.56

13.3

0.5%

25%

26%

27%

22%

$55,445

1.7%$55,955

2.0%

103.4

297

0.1%

1.1

0.9

1.0

1.1

Portland, OR

2.54

94.2

0.7%

28%

31%

25%

16%

$63,748

2.1%$54,478

2.1%

108.1

1,233

0.6%

0.9

1.0

1.3

0.9

Providence

1.68

22.4

0.3%

28%

26%

26%

19%

$49,007

1.4%$51,868

2.1%

111.1

747

0.0%

1.2

0.8

1.0

1.0

Raleigh-Durham

2.80

195.6

1.4%

32%

28%

25%

15%

$61,840

2.8%$55,912

2.0%

99.3

1,316

1.1%

1.1

1.1

1.0

0.9

Richmond

1.37

47.4

0.7%

30%

27%

25%

17%

$58,778

1.5%$56,701

2.1%

95.6

685

0.7%

0.9

1.1

0.8

0.9

Sacramento

2.44

114.3

0.9%

32%

27%

24%

17%

$56,868

2.5%$53,165

2.2%

115.4

1,076

1.0%

1.0

0.9

0.9

0.9

Salt Lake City

1.30

96.7

1.4%

35%

31%

22%

12%

$74,5143.1%$53,052

2.3%

99.2

789

1.2%

0.8

1.3

1.1

0.8

San Antonio

2.68

193.6

1.4%

33%

28%

24%

15%

$47,5212.5%$46,434

2.1%

96.8

1,115

1.1%

1.0

1.1

0.9

1.2

San Diego

3.28

54.2

0.3%

31%

29%

24%

16%

$71,254

2.3%$55,639

2.5%

128.5

1,541

0.6%

0.9

1.1

1.1

1.1

San Francisco

1.52

11.8

0.2%

25%

31%

26%

18%

$212,848

1.6%$119,414

2.1%

131.2

1,147

0.0%

1.2

1.9

0.6

0.9

San Jose

1.92

46.3

0.5%

31%

29%

25%

15%

$193,308

2.3%$104,890

2.3%

129.8

1,150

0.2%

1.4

1.5

1.6

0.7

Seattle

3.12

130.3

0.8%

28%

33%

24%

15%

$118,988

2.7%$71,689

2.3%

118.4

1,785

0.8%

1.2

1.2

1.2

0.9

Spokane, WA/
Couer d'Alene, ID

0.81

45.3

1.1%

29%

27%

24%

19%

$42,090

1.7%$44,600

1.8%

97.4

344

0.8%

1.1

0.8

1.0

1.0

St. Louis

2.80

17.4

0.1%

30%

27%

25%

18%

$57,157

1.5%$57,085

2.3%

97.3

1,390

0.2%

1.1

1.0

1.0

0.9

Tacoma

0.94

43.3

0.9%

31%

30%

24%

15%

$45,311

1.6%$44,706

2.0%

118.4

332

0.8%

1.0

0.7

1.1

1.0

Tallahassee

0.39

9.7

0.5%

37%

26%

22%

15%

$44,0141.9%$47,896

2.2%

96.2

193

0.5%

0.8

0.8

0.5

1.0

Tampa/St. Petersburg

3.31

176.6

1.0%

27%

26%

26%

21%

$48,430

2.3%$49,039

2.0%

102.1

1,476

0.8%

0.9

1.3

0.9

1.0

Tucson

1.07

47.7

0.9%

29%

25%

23%

22%

$38,037

1.9%$45,527

2.2%

95.6

394

0.7%

1.1

0.9

1.0

1.0

Virginia Beach/Norfolk

1.78

44.5

0.5%

32%

27%

25%

17%

$47,436

1.7%$49,510

2.2%

96.5

790

0.5%

0.9

0.9

0.9

1.1

Washington DC–District

0.65

16.8

0.5%

27%

38%

21%

13%

$197,425

2.2%$75,598

2.1%

117.5

783

0.7%

1.0

1.1

0.2

0.6

Washington DC–
MD suburbs
Washington DC–
Northern VA

1.35

41.0

0.6%

29%

27%

26%

17%

$73,562

2.5%$69,430

2.5%

117.5

598

0.5%

1.0

1.3

0.7

0.8

4.38

201.8

0.9%

32%

30%

25%

13%

$65,105

2.7%$64,177

2.2%

117.5

1,543

1.1%

1.1

1.5

0.6

1.1

West Palm Beach

1.52

78.2

1.0%

25%

24%

25%

26%

$54,780

2.1%$72,469

2.1%

113.7

670

0.6%

0.9

1.2

0.7

1.3

Westchester, NY/Fairfield, CT

2.69

7.0

0.1%

31%

26%

26%

18%

$71,440

1.9%$81,677

2.6%

118.8

1,136

0.3%

1.2

0.9

0.8

0.9

Emerging Trends in Real Estate® 2023

89

Exhibit 3-19 Housing
Households

Single-family market metrics

General market metrics% of all homes
Single-family
likely affordable
homes as% of owner- to 4-person Tenure cost
% of newoccupant family earning proportion
households 120% of AMI (own/rent)** production

Market2023 total*(000s)

5-yearprojected
annual %changeUnited States

130,816.0

0.9%

Albuquerque

381.9

1.2%

67.4%

Atlanta

2,375.4

1.4%

64.2%

Austin

960.0

2.6%

58.6%

Baltimore

1,122.4

0.7%

Birmingham

481.3

0.4%

Boise

310.6

2.3%

71.0%

Boston1,927.1

0.7%

61.7%

Buffalo

493.0

0.0%

Cape Coral/Fort Myers/
NaplesCharleston/North
Charleston

519.2

2.4%

346.8

Charlotte

1,090.2

Chattanooga, TN/GA

233.6

Chicago3,714.8

Cincinnati

898.6

0.8%

67.1%

76.4%

Cleveland

895.6

0.4%

64.7%

64.0%

Columbus

867.2

1.0%

61.8%

68.7%

1.04

Dallas/Fort Worth

2,982.4

1.7%

59.7%

56.6%

Deltona/Daytona Beach

301.0

1.7%

72.1%

49.0%

Denver

1,219.1

1.5%

64.8%

23.5%

1.40

66.1%

52.0%

Multifamily metrics% of workers
with commute Permits
MSA
AllTransit of more than per 100 HH
added
1 hourScore***

1.03

65.3%

3.2

7.3%

128.0

50.1%

1.13

66.2%

40.8%

1.04

67.5%

3.6

5.4%

2.5

14.0%

49.3%

1.50

47.7%

2.8

66.6%

48.5%

0.99

69.2%

58.1%

0.92

47.0%
73.8%

29.2%

1.76

70.8%

1.8

3.8%

30.9%

1.09

32.4%

5.0

14.2%

66.1%

66.6%

0.92

77.6%

3.9

3.1%

73.5%

28.9%

1.21

69.4%

2.1

6.4%

1.8%

66.8%

36.2%

1.06

69.5%

1.5

1.7%

66.0%

63.0%

1.16

65.8%

2.2

0.8%

67.4%

59.0%

1.07

72.2%

0.4%

64.8%

59.5%

0.85

56.2%

0.98
0.88

Affordable andavailable rental% of renter- units per 100 Tenure cost
HH at 80% of proportion
occupant(rent/own)**
AMI
households
34.0%

86

186.9

32.7%

86.6

35.8%

8.2%

109.8

4.2

12.7%

0.1

6.8%

Multi-unitbuildings
as % of new
production

0.97

34.7%

96

1.13

33.8%

79

1.04

32.5%

41.4%

64

1.50

52.3%

162.0

33.4%

63

0.99

53.0%

-

30.8%

93

0.92

26.2%

90.2

29.0%

96

1.76

29.2%

109.6

38.3%

41

1.09

67.6%

130.5

33.9%

94

0.92

22.4%

129.6

26.5%

76

1.21

30.6%

6.5%

111.1

33.2%

80

1.06

30.5%

7.3%

266.5

34.0%

86

1.16

34.2%

1.2

3.9%

145.9

32.6%

95

1.07

27.8%

5.1

13.8%

92.8

35.2%

73

0.85

43.8%

70.1%

2.5

5.2%

89.9

32.9%

92

0.98

29.9%

83.6%

4.7

4.7%

55.7

35.4%

93

0.88

16.4%

60.4%

2.9

4.6%

133.3

38.2%

89

1.04

39.6%

1.01

61.4%

2.8

8.9%

110.7

40.3%

75

1.01

38.6%

1.08

71.3%

2.4

9.5%

350.5

27.9%

40

1.08

28.7%

53.7%

5.3

7.6%

98.3

35.2%

50

1.40

46.3%
27.2%

Des Moines

283.6

1.5%

69.6%

65.9%

1.04

72.8%

2.6

2.5%

156.0

30.4%

88

1.04

Detroit

1,783.1

0.5%

69.5%

57.2%

0.82

62.6%

2.8

7.3%

46.4

30.5%

89

0.82

37.4%

Fort Lauderdale†

782.1

1.1%

59.8%

50.4%

0.94

33.5%

5.2

10.6%

121.10

40.2%

56

0.94

66.5%

Gainesville

124.5

1.4%

59.5%

52.7%

0.97

51.2%

4.0

5.0%

720.0

40.5%

89

0.97

48.8%

Greenville, SC

389.8

1.1%

69.5%

57.4%

0.77

68.5%

0.9

4.5%

385.0

30.5%

92

0.77

31.5%

Hartford

491.4

0.5%

66.4%

66.2%

0.90

64.1%

3.9

5.1%

1299.1

33.6%

75

0.90

35.9%

Honolulu

336.3

0.5%

57.5%

16.1%

1.53

42.5%

6.4

10.6%

-

42.5%

34

1.53

57.5%

Houston2,688.8

1.7%

60.9%

49.9%

0.91

70.8%

2.8

10.9%

105.3

39.1%

79

0.91

29.2%

Indianapolis

865.1

1.4%

65.7%

55.5%

1.03

69.2%

2.4

5.2%

194.8

34.3%

90

1.03

30.8%

Inland Empire

1,475.1

1.4%

64.1%

16.8%

1.40

81.8%

3.8

17.8%

101.6

35.9%

67

1.40

18.2%

Jacksonville

679.7

1.6%

65.3%

44.4%

1.07

63.1%

2.6

6.3%

118.3

34.7%

87

1.07

36.9%

Jersey City††

284.5

0.5%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

126.3

48.4%

0

-

73.0%

Kansas City, MO/KS

897.1

1.1%

65.2%

69.3%

1.01

64.6%

2.3

3.7%

77.0

34.8%

87

1.01

35.4%

Knoxville

387.7

1.1%

69.2%

53.4%

1.11

67.5%

1.1

4.4%

475.8

30.8%

95

1.11

32.5%

Las Vegas

906.7

1.6%

54.8%

23.5%

1.30

82.3%

4.8

4.6%

92.7

45.2%

88

1.30

17.7%

Long Island††

972.2

0.4%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

183.74

48.4%

0

-

73.0%

Los Angeles†††

3,393.6

0.2%

48.7%

17.6%

0.81

34.4%

6.2

13.4%

-

51.3%

34

0.81

65.6%

Louisville

550.2

0.9%

67.4%

55.0%

0.92

83.3%

2.9

4.0%

-24.1

32.6%

96

0.92

16.7%

Madison

299.2

1.1%

61.8%

41.9%

1.09

32.2%

3.0

3.7%

153.1

38.2%

72

1.09

67.8%

Memphis

539.6

0.6%

59.8%

33.2%

0.91

83.8%

2.3

3.9%

158.0

40.2%

33

0.91

16.2%

Miami+

988.0

0.7%

59.8%

50.4%

0.94

33.5%

5.2

10.6%

121.1

40.2%

56

0.94

66.5%

Sources: IHS Markit, and Urban Land Institute, 2022 Home Attainability Index.
— = data unavailable*IHS Markit estimate for year-end 2023.
**Tenure cost proportionality – This metric illustrates whether rental and ownership costs in a region are proportional compared with the median for the Index dataset. A score of 1 indicates costs
are proportional (for example, both rental and ownership costs are 5% higher than the median). A score greater than 1 indicates that homeownership is comparatively more expensive than rental;
a score less than 1 indicates that renting is disproportionately expensive.
***MSA AIITransit Score - This metric assesses the quality and reach of the region’s transit system. Regions with higher AllTransit scores provide households with better transportation
alternatives beyond the automobile and put more employment opportunities within reach. Ratings are on a scale of 0 to 10, with a higher value indicating better transit access.

90

Emerging Trends in Real Estate® 2023

Chapter 3: Markets to Watch

Exhibit 3-19 Housing
Households

Single-family market metrics

General market metrics% of all homes
Single-family
likely affordable
homes as% of owner- to 4-person Tenure cost
% of newoccupant family earning proportion
households 120% of AMI (own/rent)** production

Multifamily metrics% of workers
with commute Permits
MSA
AllTransit of more than per 100 HH
added
1 hourScore***

Market2023 total*(000s)

5-yearprojected
annual %changeUnited States

130,816.0

0.9%

66.1%

52.0%

1.03

65.3%

3.2

Affordable andavailable rental% of renter- units per 100 Tenure cost
HH at 80% of proportion
occupant(rent/own)**
AMI
households

Multi-unitbuildings
as % of new
production

7.3%

128.0

34.0%

86

0.97

34.7%

Milwaukee

664.3

0.5%

59.8%

69.2%

0.98

66.4%

4.6

4.0%

105.1

40.2%

89

0.98

33.6%

Minneapolis/St. Paul1,487.5

1.0%

70.4%

54.9%

1.05

45.4%

3.7

5.6%

111.4

29.6%

73

1.05

54.6%

Nashville

832.9

1.7%

65.6%

29.3%

1.25

70.9%

1.7

8.8%

141.7

34.4%

77

1.25

29.1%

New Orleans

517.8

0.6%

63.7%

47.8%

0.92

78.7%

3.4

8.3%

189.4

36.3%

89

0.92

21.3%

New York–Brooklyn††

1,018.6

0.6%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

183.74

48.4%

0

-

73.0%

767.9

-0.1%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

183.74

48.4%

0

-

73.0%

1,569.5

0.5%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

183.74

48.4%

0

-

73.0%

Northern New Jersey††

1,590.0

0.7%

51.6%

31.9%

1.11

27.0%

6.9

22.0%

183.74

48.4%

0

-

73.0%

Oakland/East Bay††††1,006.3

0.7%

55.0%

10.0%

1.69

18.7%

6.8

17.7%

102.36

45.0%

0

-

81.3%

Oklahoma City

580.8

1.2%

64.4%

64.1%

0.84

96.4%

1.7

3.9%

124.39

35.6%

97

0.84

3.6%

Omaha

391.5

1.1%

65.8%

69.8%

1.01

54.8%

2.7

2.8%

102.41

34.2%

87

1.01

45.2%

Orange County†††

1,075.9

0.6%

48.7%

17.6%

0.81

40.0%

6.2

13.4%

-

51.3%

0

-

60.0%

Orlando1,054.4

1.8%

62.0%

36.2%

0.95

57.4%

3.3

8.2%

142.35

38.1%

77

0.95

42.6%

Philadelphia

2,472.3

0.7%

67.2%

59.9%

0.95

51.2%

5.3

11.5%

157.53

32.8%

72

0.95

48.8%

Phoenix

1,945.7

2.0%

64.4%

29.4%

1.29

75.0%

4.1

7.7%

78.06

35.6%

83

1.29

25.0%

Pittsburgh

1,030.1

0.3%

69.6%

61.8%

0.81

76.5%

3.3

8.1%

251.62

30.4%

90

0.81

23.5%

Portland, ME

243.7

0.9%

72.1%

43.3%

1.05

72.8%

1.7

6.2%

114.31

28.0%

73

1.05

27.2%

Portland, OR

1,021.3

1.2%

62.3%

25.6%

1.45

63.2%

6.1

7.6%

100.12

37.7%

67

1.45

36.8%

Providence

678.4

0.4%

62.0%

49.6%

1.33

88.3%

3.5

9.1%

149.82

38.0%

81

1.33

11.7%

Raleigh/Durham

840.9

1.9%

64.4%

56.1%

1.27

62.9%

2.8

6.3%

204.55

35.7%

85

1.27

37.1%

Richmond

549.1

1.1%

66.7%

63.2%

1.01

50.7%

2.4

5.2%

12.28

33.4%

86

1.01

49.3%
19.7%

New York–
Manhattan††
New York–otherboroughs††

Sacramento

887.8

1.0%

61.2%

23.8%

1.47

80.3%

4.0

8.5%

76.00

38.8%

66

1.47

Salt Lake City

460.1

1.7%

68.2%

40.6%

1.65

51.9%

6.6

4.0%

50.49

31.8%

84

1.65

48.1%

San Antonio

988.6

1.7%

62.8%

55.5%

1.03

56.3%

4.5

6.9%

127.62

37.2%

87

1.03

43.7%

San Diego

1,169.7

0.7%

53.9%

20.4%

1.69

44.3%

5.3

7.3%

137.83

46.1%

31

1.69

55.7%

San Francisco††††

643.2

0.0%

55.0%

10.0%

1.69

18.7%

6.8

17.7%

102.36

45.0%

17

1.69

81.3%

San Jose

677.4

0.4%

56.6%

9.9%

2.14

43.7%

6.4

10.9%

122.03

43.4%

14

2.14

56.3%

Seattle1,642.6

1.3%

60.2%

32.3%

1.47

38.6%

5.1

12.3%

99.31

39.8%

44

1.47

61.4%

Spokane, WA/Couerd'Alene, ID

328.7

1.4%

67.8%

30.1%

1.85

61.2%

2.5

4.4%

148.63

32.2%

95

1.85

38.8%

St. Louis

1,171.1

0.5%

69.3%

51.2%

0.93

65.0%

3.8

5.7%

134.49

30.7%

89

0.93

35.0%

Tacoma1,642.6

1.3%

60.2%

32.3%

1.47

38.6%

5.1

12.3%

99.31

39.8%

44

1.47

61.4%

Tallahassee

160.1

1.1%

58.2%

53.7%

0.80

48.9%

2.6

3.5%

161.46

41.8%

95

0.80

51.1%

Tampa/St. Petersburg

1,381.4

1.1%

65.8%

46.9%

0.97

71.9%

3.3

8.7%

105.65

34.2%

81

0.97

28.1%

Tucson

450.8

1.2%

64.0%

50.2%

1.23

77.5%

3.7

4.4%

98.56

36.0%

95

1.23

22.5%

Virginia Beach/Norfolk

707.9

0.9%

62.3%

31.4%

1.00

55.9%

3.2

5.9%

190.62

37.7%

84

1.00

44.1%

301.1

0.9%

63.9%

41.5%

1.16

45.3%

5.5

17.3%

126.27

36.1%

32

-

54.7%

499.3

1.0%

63.9%

41.5%

1.16

45.3%

5.5

17.3%

126.27

36.1%

32

-

54.7%

1,613.1

1.2%

63.9%

41.5%

1.16

45.3%

5.5

17.3%

126.27

36.1%

32

-

54.7%

Washington DC–
District†††††
Washington DC–MD
suburbs†††††
Washington DC–
Northern VA†††††
West Palm Beach†

637.0

1.4%

59.8%

50.4%

0.94

53.0%

5.2

10.6%

121.10

40.2%

56

0.94

47.0%

Westchester, NY/
Fairfield, CT

963.3

0.4%

66.7%

41.6%

1.50

36.0%

4.5

16.4%

150.95

33.3%

45

1.50

64.0%

†Other than household figures, data are for Miami/Fort Lauderdale/West Palm Beach, FL.
††Other than household figures, data are for New York City/Newark/Jersey City, NY/NJ/PA.
†††Other than household figures, data are for Los Angeles/Long Beach/Anaheim, CA.

††††Other than household figures, data are for San Francisco/Oakland/Hayward, CA.
†††††Other than household figures, data are for Washington/Arlington/Alexandria, DC/VA/MD/WV.

Emerging Trends in Real Estate® 2023

91

Exhibit 3-20 Local Market Perspectives by Select Market Categories, as indicated by ULI Focus Groups
Top Two Market Advantages
Group

Subgroup

For-Sale*Rental**Top Potential Disruptor

Super Sun Belt

Growth—demographic

Business-friendly
environment

Political extremism

18-Hour Cities

Growth—demographic

Quality of life

Housing—affordability andavailability, and inflation—
persistent higher rate (tie)Supernovas

Growth—economic

Quality of life

Housing—affordability
and availability

All Magnets

Growth—demographic

Growth—economic

Housing—affordability
and availability

Multitalented Producers

Economic diversity

Desirable suburbs

Housing—affordability
and availability

Knowledge and Innovation Centers

Educational and/or
training opportunities

Urban amenities

Housing—affordability
and availability

Major Market Adjacent

Desirable suburbs

Economic diversity

Housing—affordability
and availability

All Establishment

Urban amenities

Desirable suburbs

Housing—affordability
and availability

Visitor and Convention Centers

Opportunities—
investment

Opportunities—
development

Inflation—persistenthigher rate

Growth—economic

Opportunities—
development

Housing—affordability
and availability

Determined Competitors

Cost of living

Opportunities—
development

Inflation—persistenthigher rate

All Backbone

Cost of living

Desirable suburbs

Inflation—persistenthigher rate

Magnets

The Establishment

Niche
All Niche

Backbone

Note: Responses are provided for subgroups with eight or more focus group participants who completed the online intake form.

92

Emerging Trends in Real Estate® 2023

Chapter 4: Emerging Trends in Canadian Real Estate

Emerging Trends in Canadian Real Estate“Patience during this time of uncertainty will bea real virtue for 2023.”

Canada’s real estate industry has had a long and good run.
Capital was plentiful; rents, valuations, and returns continued torise across the industry; and Canada’s stability and immigration
trends have made the country an attractive place in which toinvest. Then came 2022, with its mix of interest rate increases,
high levels of inflation, and a geopolitical environment that hascreated uncertainty throughout the global economy. The result
has been a significant disruption to the Canadian real estatemarket. But while the changing environment in 2022 has beena shock for some, the long-term outlook is positive, since thefundamental underpinnings of the Canadian property market
remain strong. This is why now is the time to invest in solutions
to create value beyond the short-term uncertainty.

concern previously was about too much capital creating evenmore competition for deals and pushing up prices for assets,
the opposite is true now due in large part to a succession ofinterest rate increases by the Bank of Canada.

In this year’s report, we focus on three trends that are particularly salient for 2023 as financial, environmental, and socialpressures converge:

We can see the impacts in our survey results, in which respondents identified interest rates and costs of capital as the top
economic issue for real estate in 2023. We also saw a significant
rise in the number of respondents saying that both equity capitaland debt capital are undersupplied.

●●

●●

●●

Navigating a period of price discovery amid risingchallenges around costs and capital availability;
Addressing urgent imperatives around environmental,social, and governance (ESG) matters; andFinding meaningful solutions to escalating concerns
about housing affordability.

1. Costs and Capital: Navigating a Periodof Price Discovery amid Major Market
Shifts for Canadian Real Estate“Things are changing so quickly. . . . Developers are notpanicking, just pausing.”
While overabundance of capital was a significant concern lastyear, the sentiment has changed in 2022, with some interviewees expecting continuing challenges in 2023. Whereas theLenders, according to interviewees, have been tightening borrowing requirements that, coming on top of higher financing
costs, are making it harder for real estate companies to raise
capital and move projects forward. This, in turn, is leading to
reduced competition for deals during a period of price discovery as sellers and buyers find themselves at odds over pricing
expectations and valuations as some real estate assets comeunder pressure.

Pressure on Institutional Capital Increasing Uncertainty
While some interviewees suggested that capital is still available
for top-quality borrowers or projects, other factors remain that
may hinder the market for the time being. Consider, for example,
institutional investors’ allocations to real estate. While these havebeen rising in recent years, events in 2022 could reverse thattrend. With the value of their equity portfolio holdings having
declined, some may now have real estate allocations beyond
their target portfolio ranges. And as it becomes harder to generate returns from real estate investments, investors may prefer
the relative safety of fixed-income assets that rising interest rates
have made more attractive.

Emerging Trends in Real Estate® 2023

93

Exhibit 4-1 Importance of Issues for Real Estate in 2023
1No
importance3
Moderate
importance

Economic/financial issues
Interest rates and cost of capital 4.47
Qualified labor availability 4.26
Job and income growth 4.15

5Great
importance

To be sure, the current environment offers relief from the intense
bidding competition of recent years, which was also creating
challenges for real estate companies. But for now, the heightened uncertainty is leading many players to stay on the sidelines
as they wait to see where the market, particularly when it comesto pricing and valuations, settles. One interviewee noted theircautious approach when they said that they were “sticking to the
fairway, not trying to clear the trees and skip the dogleg,” when it
comes to deployment decisions.

Inflation 4.13
Capital availability 4.00
Global economic growth 3.61
Tariffs/trade conflicts 3.11
Provincial and local taxes 3.02
Federal taxes 2.94
Currency exchange rates 2.93
Social/political issues
Housing costs and availability 4.18
Geopolitical conflicts 3.64
Epidemics/pandemics 3.56
Climate change 3.55
Immigration policy 3.53
Political extremism 3.47
Income inequality 3.17
Provincial/local governments budgets 3.17
Federal budget deficit 3.12
Diversity and inclusion 3.05
Higher education costs 2.90
Threat of terrorism 2.86
Real estate/development issues
Construction labor availability 4.45
Construction labor costs 4.44
Construction material costs 4.43
Land costs 3.95
Operating costs 3.75
Tenant leasing and retention costs 3.59
Provincial and local regulations 3.56
Environmental/sustainability requirements 3.55
Infrastructure/transportation 3.55
NIMBYism 3.51
Property taxes 3.33
Risks from extreme weather 3.23
Health and wellness features 3.11
Municipal service cuts 2.93
Health- and safety-related policies 2.91
Source: Emerging Trends in Real Estate 2023 survey.
Note: Based on Canadian respondents only.

94

Emerging Trends in Real Estate® 2023

Cost Escalations amid Supply Chain Challenges andLabor Shortages
On top of concerns about the capital markets are supply chain
shortages and delays as well as significant increases in costs
for labor and materials. Labor issues have been a challenge
for some time, but rising costs and shortages of inputs—
including for key materials like steel—have added to thepressures. According to Statistics Canada, residential building
costs were up 22.6 percent on a year-over-year basis in the firstquarter of 2022. For nonresidential construction, cost increases
were lower but still significant at 12.8 percent. Construction
cost increases continued into the second quarter of 2022 amid
inflationary pressures throughout the economy.
Rising labor shortages are exacerbating the challenges.
According to Statistics Canada, construction job vacancies
reached a record high in the first quarter of 2022 and weredouble the number of open positions during the same period in
2020. And then there is the impact of construction wages, whichwere up 6.6 percent in the first quarter of this year comparedwith the same period in 2021.
All of this has made completing projects on time and on budget
even harder than in the past, and the situation is unlikely to
improve in the foreseeable future. The shortage of trades labor
is not expected to get better any time soon and construction
technologies have yet to evolve to make up the difference incost or productivity.
Adaptation Key as the Landscape Shifts for CanadianReal Estate
What does this mean for real estate companies? For some, it
adds further to the need to take a pause on activity. There havebeen rising projections, for example, of developers delaying or
potentially canceling condo projects as it becomes harder tomake the numbers work in these challenging conditions. Others
are trying to manage this by spacing out advanced sales of new
housing units to ensure that prices reflect rising costs as a project
moves forward. In some cases, companies are proactively shor-Chapter 4: Emerging Trends in Canadian Real Estate

Exhibit 4-2 Real Estate Capital Market Balance Forecast,
2023 versus 2022
Equity capital for investing
2023

27%

39%

34%

3%

35%

62%

Undersupplied

In balance

Oversupplied

2022

Source: Emerging Trends in Real Estate surveys.
Note: Based on Canadian respondents only.

ing up liquidity—even at higher financing costs—as they look to
reduce risk amid uncertainty about the availability of capital.
While challenging, an environment like this also presents opportunities. Companies with less leverage may be able to secure assets
at more reasonable prices. And while some sources of financing
may be less available than in the past, many interviewees predictthat the private debt market will help fill some of the gap. The
pause in the market is also a chance to explore solutions to someof the challenges that builders are facing. Some interviewees,
for example, touted mass timber as a potential opportunity to get
projects built faster, which is key in an environment of rising costs.

2. ESG Performance: A Critical Issue for
Canadian Real Estaterise in key areas, including when it comes to having robust commitments to address climate change. As we have seen in otherareas of the world, investors are increasingly looking beyond
whether a company has an ESG strategy to ask about plans toreach net-zero greenhouse gas emissions. And if a company
does not have a net-zero strategy, they won’t invest. But while
Canadian real estate players can expect to start seeing similar
requirements from their own investors, our interviewees showedthat some companies have yet to fully embrace the net-zeroimperative. According to PwC’s 2022 global CEO Survey, just 19
percent of real estate executives said that their organization had
made a commitment to net-zero greenhouse gas emissions.
For some real estate companies, the temptation remains to
be fast followers rather than leaders on matters like achieving
net-zero emissions. One interviewee, for example, told us thatthey were waiting for other companies to do the heavy lifting on
exploring and investing in the right technology investments toaddress ESG matters in real estate before following suit themselves. Others noted a tendency by some in the industry to
downplay the importance of ESG matters in favor of a continued
emphasis on quarterly financial performance. “Most private
investors want to feel good about ESG but care more about
profit,” one interviewee told us.
But amid rising investor expectations and growing evidence
that companies with strong ESG track records are expected
to be more profitable in the medium to long term, we also saw
plenty of evidence of a willingness by interviewees to addressthese issues more proactively than in the past. From exploring
solutions to reduce embodied emissions related to building
materials such as concrete to increasing the proportion ofelectric vehicle charging locations in residential developments,
companies are taking action on climate change.

“You can do ESG, and you can get a return.”

Navigating a Rising Imperative around Climate Disclosures

Alternative materials like mass timber also offer importantsustainability benefits, which brings us to another critical issue
for Canada’s real estate industry: ESG performance. There
are many factors underpinning the ESG imperative, but a few
issues in particular are driving the increased focus for realestate companies now. Key among them is the ability to attract
capital. At a time when financing is both less available and more
expensive, companies with a strong ESG track record will havean advantage in attracting investment from institutional players
and sourcing new forms of capital—such as green bonds andsustainability-linked loans—that continue to grow in Canada.

While some real estate companies are still figuring out their
ESG and net-zero strategies, the imperative to act quickly goes
well beyond investor expectations. This includes the evolving
area of climate disclosures, which will increasingly affect bothpublicly owned and private real estate companies in Canada.
In the United States, for example, the Securities and Exchange
Commission (SEC) has proposed a new rule requiring issuers
to disclose climate-related information, including details about
greenhouse gas emissions and climate risks. This means that
SEC issuers that are real estate tenants, investors, or lenders
would have to report this information, including disclosuresabout assets in Canada. This would affect private Canadian realestate companies in a number of ways. For example, they canWhile many Canadian real estate players have responded byincreasing their focus on ESG strategies, expectations continue to

Emerging Trends in Real Estate® 2023

95

Exhibit 4-3 Real Estate Capital Market Balance Forecast, 2023 versus 2022
Debt capital for acquisitions

Debt capital for refinancing

Debt capital for development/redevelopment

2023

2023

2023

41%

50%

9%

2022

48%

43%

10%

2022

56%

34%

10%

2022

8%

46%

46%

9%

47%

44%

21%

42%

36%

Undersupplied

In balance

Oversupplied

Undersupplied

In balance

Oversupplied

Undersupplied

In balance

Oversupplied

Source: Emerging Trends in Real Estate surveys.
Note: Based on Canadian respondents only.

expect requests from building tenants for information to help
them meet their own SEC climate disclosure obligations.

interviewees is the need to measure performance on key social
issues like inclusion and diversity.

The landscape for climate disclosures and reporting is also evolving quickly in Canada and internationally. The IFRS Foundation’sInternational Sustainability Standards Board, for example, has beenworking on draft sustainability disclosure standards that set out
detailed requirements in areas such as climate-related informationand make reference to industry-based requirements for sectors likereal estate. The Canadian Securities Administrators also is examining these issues, making ESG and sustainability reporting aneven more urgent matter for real estate companies to address.

How, for example, do companies compare to their peers on matters like workforce representation, diversity at senior ranks, andpay equity? As employees, community members, and, in somecases, regulators increasingly look for data in these and otherareas, real estate companies will need to have good processes inplace to produce it. But as PwC Canada found in its 2022 analysis of ESG reporting practices of large public companies, many
Canadian organizations have gaps in this area. The report foundthat while many companies disclosed policies and measurable
targets around gender matters, they tended to be lacking when it
came to transparency about other aspects of diversity.

While reporting and disclosure obligations will be a critical driver ofactivity, many other factors are driving the ESG imperative, including
its role in preserving and creating real estate value. It is important
to consider, for example, key risks like climate-related property
damage as well as tenant demands for low-carbon space. As one
interviewee told us, avoiding obsolescence as a result of a building’s carbon profile will be increasingly important for real estate
owners, as will the upsides of having green properties that are more
attractive to lenders, tenants, and buyers. A willingness to lookat retrofitting buildings will also be key since avoiding emissions
associated with new construction will be a critical part of theindustry’s contribution to achieving climate change goals.
Measuring the S Factor an Emerging ESG Focus for
Canadian Real Estate Companies
While climate change issues remain a major focus of the ESG
agenda, concern about social issues was an emerging issue
for interviewees this year. An important consideration for many96

Emerging Trends in Real Estate® 2023

The challenge for many real estate companies is the complexityof reporting on social matters like inclusion and diversity. Data
may not be readily available or of sufficient quality, or it may lie
in multiple systems across the organization. In some cases, key
workforce inclusion and diversity data comes from areas of thebusiness that have yet to develop best practices around metrics
and reporting that functions like finance and accounting havelong been leaders in.
Opportunities to Make Headway on Inclusion and Diversity
Metrics and Reporting
The good news is that increasingly sophisticated tools are available to help organizations improve reporting on inclusion anddiversity matters. These cloud-based solutions pull in data fromdisparate sources and connect teams across the organization tocreate a single source of truth about ESG matters like perfor-

Chapter 4: Emerging Trends in Canadian Real Estatemance on inclusion and diversity. They can also help automate
many labor-intensive processes and increase the accuracy ofthe data presented, which is critical at a time of rising expectations around the quality of ESG reporting.
Digital tools, of course, are very helpful, but they are only one
part of the journey to better reporting on social matters likeinclusion and diversity. A critical first step is to link your efforts
to your company’s purpose and values, which is key to aligning
the organization around what you are doing and making surethat everyone understands the reasons for it. Other foundational
steps include defining your reporting strategy, such as what
to report and to whom, as well as assessing which data you
already have and what the gaps are that you need to address.
It is also important to think about compensation and incentives,
which an increasing number of organizations are doing by tying
executive pay to progress on inclusion and diversity metrics.
For the real estate sector, this will likely be an area where there
will be a need for industry associations to take a leading role inattracting and developing a more diverse workforce for companies to recruit from.

and getting even tighter in the rental market, rising rents areadding to the growing affordability crisis.
While the RBC’s report noted that worsening affordability conditions would be particularly marked in relatively high-priced
markets like Toronto and Vancouver, the challenges have been
spreading across Canada as Canadians increasingly move toother communities—like suburbs and evolving 18-hour cities
as well as small towns and rural areas—in search of cheaper
places to live. Migration away from Canada’s largest cities—
which still tend to see population increases as a result of highrates of international immigration—has been a trend for sometime, but the growth of remote working during the pandemic has
exacerbated the move outwards and helped make affordability
pressures more widespread. We can see the impacts in annual
population estimates published earlier in 2022 from Statistics
Canada. The findings, which cover annual population changes
as of July 1, 2021, include the following:●●●●

3. Housing Affordability: A Challenging
Issue for Canada and a Significant
Concern for Real Estate Companies“In no jurisdiction in the world has affordable housing beensolved with no incentives.”
A key social issue for real estate, of course, is housing affordability. Housing costs and availability ranked as the top social/political issue among survey respondents this year, and itcomes as no surprise as affordability matters continued to rise
and reached crisis levels in some areas of Canada in 2022. We
can see the evidence in RBC Economics’ housing affordability
index report, which showed that ownership costs as a percentage of median household income reached 59.3 percent for
single-family homes at the start of 2022.
Moves by the Bank of Canada to raise interest rates as part ofits bid to tackle inflation are having an impact on home prices.
But higher interest rates will counteract the affordability impactsof any easing of home prices, at least for the time being. And
overall affordability pressures are affecting other classes ofresidential real estate as rising interest rates and the resulting
challenges faced by homebuyers in qualifying for financing
under the mortgage stress test push many potential purchasers
to try to rent a home instead. But with supply also constrained●●

Toronto and Montreal saw the largest net migration losses toother regions of Ontario and Quebec, respectively, since atleast 2001–2002.
Net intraprovincial migration to rural areas increased acrossCanada.
As further evidence of the growth of secondary cities andsuburbs, the fastest-growing census metropolitan areas
were Kelowna, British Columbia (2.6 percent), Oshawa,
Ontario (2.3 percent), and Halifax (2 percent). These growth
rates were well above the average of 0.5 percent across all
census metropolitan areas.

We can also see evidence of these trends in international
immigration statistics published by Statistics Canada. Whileinternational immigration is critical to the continuing growth of
Canada’s largest cities, it is also true that the share of permanent
residents settling in regions like Toronto has been declining overtime. Looking at Halifax, which is among the cities we have been
watching in recent years for the impacts of changing migration
trends, the opposite has happened. Its share of immigrants
to Canada’s census metropolitan areas rose to 1.4 percent in2020–2021 from 0.5 percent in 2001–2002.
We can see the impacts of all these trends on housing affordability in places like Halifax. According to the RBC’s latest
report, the affordability measure for Halifax reached 38.6 percent for a single-family detached home, which was well above
the long-term average of 31.6 percent for Halifax.

Emerging Trends in Real Estate® 2023

97

Exhibit 4-4 Housing Affordability (Single-family detached)

VancouverTorontoCanadaOttawaMontreal

Calgary

Halifax

1Q 2022(single-family detached)
1Q 2021(single-family detached)

Winnipeg

1Q 2020(single-family detached)
1Q 2019(single-family detached)

Saskatoon

1Q 2018(single-family detached)
1Q 2017(single-family detached)

Edmonton

Quebec City

0%

20%

40%

60%

80%

100%

120%

Source: RBC Economics, Housing Trends and Affordability reports, accessed July 21, 2022.
Note: The RBC Housing Affordability Measures show the proportion of median pre-tax
household income that would be required to cover mortgage payments (principal and interest),
property taxes, and utilities based on the benchmark market price for single-family detachedhomes and condo apartments, as well as for an overall aggregate of all housing types in agiven market.

98

Emerging Trends in Real Estate® 2023

Supply Insufficient to Meet Housing Demand
The question, of course, becomes what to do about an affordability crisis as it spreads across Canada. Even if affordability
eventually improves with falling housing prices, the reality isthat the key issue underpinning the crisis is insufficient supply to meet high demand for all types of homes. Demand willcontinue to rise, especially as the Canadian government commits to higher immigration targets in the coming years and thecountry welcomes large numbers of temporary residents, likeinternational students, who also need places to live. This meansthat even as homebuilding activity has been rising, tight market
conditions have put pressures on affordability that are unlikely toease significantly. As we noted, some interviewees are looking
at pausing housing developments—often condo projects—asthey deal with cost and financing challenges as well as softening demand due to rising interest rates. As that happens, andespecially if projections of cancellations continue to materialize,
the supply and affordability challenge will not go away even if
the housing market cools for the time being.
And, as the Canada Mortgage and Housing Corp. (CMHC)
noted earlier in 2022, the number of new units required to restore
reasonable affordability levels is high. Taking into account a
number of factors, including income and demographic trends,
CMHC estimated that Canada would need to build an additional
3.5 million units to restore housing affordability by 2030. This
number is above and beyond the 2.3 million units projected to
be built between 2021 and 2030. The findings suggest that thecountry needs to build a total of 5.8 million homes over that time
period, which is a high number considering that, according to
CMHC’s spring 2022 housing market outlook, there were only
about 271,000 housing starts in Canada in 2021. These reports
only reinforce the fact that what is truly driving the affordability
crisis is a lack of supply and is a signal that Canada does nothave the capacity to meet housing demand.
Addressing the Supply Issue from All Angles
More recent policy discussions and actions have acknowledged
what needs to be done to address affordability. There has been
increased recognition that supply is the crux of the challenge,
and governments at all levels have announced efforts to addressthat. We have seen initiatives from higher levels of government toencourage faster development approvals by municipalities, newmoney to incentivize construction of affordable homes, and policychanges aimed at facilitating the building of modestly denser
forms of housing, like duplexes, triplexes, and mid-rise buildings,
in urban areas currently reserved for single-family units.
While the increased acknowledgment of the supply gap is positive and the initiatives in response are welcome, the actions fall

Chapter 4: Emerging Trends in Canadian Real Estate

far short of what is necessary. For one, new funding to incentivize affordable housing is good, but it is not enough to make aserious dent in the problem. And without more consistent criteria
around what we mean when we talk about affordability andaffordable housing and how to tailor initiatives for groups withdifferent needs—such as homeless Canadians, the working
poor, and middle-income households—policies and programs
will fail to address them effectively.
Governments also need to acknowledge the ways that theiractions hinder affordability by adding significant costs onto
the construction of new housing. In many communities, fees,
charges, and taxes levied by different orders of government
make up a very substantial portion of the cost of a new home.
In December 2021, for instance, the Building Industry and Land
Development Association released a study of the Greater Toronto
Area housing market that noted that government-imposed taxes
and fees account for as much as 24 percent of the price of a
new home. And in some municipalities, plans are in the works
to raise this significantly. This includes Toronto, where the city
council recently passed a plan to raise residential development
charges by 46 percent by 2024. Such actions, along with lengthy
development approvals and other municipal policies, only add
to homebuilding costs, which, in turn, worsens affordability.
Governments also need to prioritize setting aside new land fordevelopment as well as more proactive efforts to facilitate thedensification of some existing neighborhoods. These are justsome of the changes required, but the central theme is a focus
on having consistent alignment around increasing supply. And inmany cases, that will require provincial policies to ensure consistency that has been lacking at the municipal level.
How Can the Industry Help?
To be sure, the development and broader real estate sectors
have a role to play in helping address the crisis. Beyond concerns
about societal trust and impacts on the industry’s reputation, theissue also increases regulatory risk, especially when it comes topotential policy changes like rent controls and measures targetinginvestment in the housing market. The industry may have goodarguments against such policies, but that does not mean thatgovernments won’t introduce them anyway.

have been taking on their own, with one describing efforts tomake a small number of units more accessible by modifying
deposit structures. One interviewee discussed their efforts
to increase efficiencies by shifting certain engineering andconstruction activities to happen earlier in the design process. Another interviewee emphasized the need for morecollaborative partnerships among industry players, nonprofit
organizations, and governments to deliver affordable housing. There are many examples of creative partnerships andapproaches to building affordable homes in Canada that, withthe right funding and incentives from governments, can make adifference if applied more broadly.
Labor Shortages Amplifying the Affordability Challenge
The other key issue is that even with better, more consistent, andmore collaborative programs and policies focused on supply,
labor shortages will impede significant progress on building
more housing. As we noted, one of the big factors increasing
development costs relates to the tight labor market, and demographic trends mean that that issue is not going away. While
much has been made of the so-called great resignation andthe notion that many Canadians are reevaluating their relationship with the workplace in the wake of the pandemic, Statistics
Canada has shown that the labor force participation rate bythose in the core-age cohort (people aged 25 to 54 years)
remains in line with pre-pandemic trends. (In July 2022, in fact, it
was above the rate for the same month in 2019.) One factor contributing to the tight labor market is retirements by those older
than the core-age cohort, and with Canada’s population aging,
we can expect these demographic trends to add to the challenges experienced by sectors like the construction industry.
So, what can we do about this? A key action is to heed calls
in reports like the one from Ontario’s housing affordability task
force to change immigration criteria to prioritize skilled-trades
workers. Promoting the trades and attracting people from underrepresented and marginalized groups to work in this area also
will help relieve these challenges over time.

Many interviewees say that they are ready and eager to help
address affordability. As one interviewee told us: “We are not theenemy; we are part of the solution.” So, what can the industry do?
For a few interviewees, there was a recognition of the goodyears they have been having, with one going as far as suggesting that the industry should prepare for a reset of profit
expectations. Some interviewees noted modest actions theyEmerging Trends in Real Estate® 2023

99

100

Emerging Trends in Real Estate® 2023

Interviewees
3650 REIT
Malay Bansal
Adi Development Group
Tariq Adi

Arnon Development
Corporation Limited
Gillie VeredAsana Partners
Sam Judd
AEW Capital Management LP
Stefan Neudorff
Michael Acton
Brian Purcell
Michael Byrne
Aspen Properties Ltd.
Sara Cassidy
Rob Blackwell
Josh Heller
Greg Guatto
AGF Investments
Scott Hutcheson
Ash Lawrence
Associated Bank
Alate Partners
Shawn Bullock
Courtney Cooper
AvalonBay Communities
Alberta Investment
David Gillespie
Management Corporation
Avenue 31 Capital Inc.
Paul Mouchakkaa
Jennifer Murray
Ian WoychukMichel Pilon
Alignvest Management
Avenue Living Asset
Corporation
Management
Sanjil ShahDavid Smith
Aline Capital
Bain Capital
Scott Williams
Benjamin Brady
Alliance Global Advisors
Joe Marconi
Jennifer Stevens
Balch & Bingham LLP
Alliance Prével
Patrick W. Krechowski
Laurence Vincent
Bank of America
Alliance Residential
Ada ChanCompany
The Bank of Nova Scotia
Bob Weston
Stephen Morson
Allied Properties Real Estate
Barclays Capital
Investment Trust
P. Sheridan Schechner
Michael Emory

Boardwalk REIT
Sam Kolias
Bosa Development
Corporation
Clark Lee
Boston Properties
Mike LaBelle
Owen Thomas
BridgeInvest
Alex Horn
Brivia Management Inc.
Vincent Kou
Brookfield Properties
Ben Brown
Matthew McCafferty
Vicki Mullins
Travis Overall
Jan Sucharda
Malee Tobias
Brookfield Residential
Properties Inc.
Thomas Lui
Brookline Bank
Joan Matera
BSB Design
Dan Swift
BTB Real Estate Investment
Trust
Mathieu Bolté
Michel Leonard
BuyProperly Limited
Khushboo Jha
C.W. Urban
Darlene Carter

Almadev
Rafael Lazer

Bard Consulting
Roy Schneiderman

Almanac Realty Investors
Matthew Kaplan

Barron Collier Companies
Brian Goguen

Alston & Bird LLPJason Goode

Barton Malow Builders
James Morrison

Altree Developments
Zev Mandelbaum

Basis Investment Group LLC
Mark K. Bhasin

American Constructors
Belinda Santolucito

Bateh Real Estate Advisors
Tarik Bateh

American Realty Advisors
Stanley L. Iezman

Beedie GroupDavid Pearson

Cadillac Fairview
Sal Iacono
Duncan Osborne

Amica Senior Lifestyles
Christine Albinson

BentallGreenOak
Jonathan Epstein
Andrew Yoon

Caliber Companies
Chris Loeffler

Angelo, Gordon & Co.
Mark Jackson
Reid Liffman
Mark Maduras
Adam Schwartz
Gordon Whiting
antonyslumbers.com
Antony Slumbers
Armco Capital Inc.
George Armoyan
The Armour Group Limited
Scott McCrea

BentallGreenOak (Canada)
Limited Partnership
Christina Iacoucci
Phil Stone
Berkshire Residential
Investments
Gleb Nechayev
Eric Schrumpf
Billingsley Interests
Alan BillingsleyBlackstone
A.J. Agarwal
Janice Lin

CA Health & Science Trust
Jesse Ostrow
Cabot Properties
Franz Colloredo-Mansfeld
Carey Herrlinger
Bradford Otis
Cadence Bank
Tim Williamson

CalSTRS
Michael McGowan
Camden Property Trust
James Flick
Cameron Development
Corporation
Tina Naqvi-Rota
Canada Ici Capital
Corporation
Brandon Kot
Canadian Apartment
Properties REIT
Mark Kenney

Canderel Management Inc.
Shawn Hamilton
Brett Miller

Colliers International
Annie Labbé
Warren Wilkinson

Canyon Partners Real
Estate LLC
Robin Potts

Colliers NashvilleJanet Miller

Capital Associates
Thomas Huff
Capital City Development
Corporation
Alexandra Monjar
Capital One BankJohn Hope

Colonnade Bridgeport
Hugh Gorman
Columbia Business School
Leanne Lachman
Combined Properties
Incorporated
Drew Faha
Steven GothelfCominarAdam Medeiros

Carmel Partners
Dennis Markus
Ron Zeff
Castle Hill Partners
John McKinnerney
CBRE
Lloyd E. Allen
Meade Boutwell
Brandon Forde
Justin Hirsch
Brandon Isner
Brandon McMenomy
Julie Whelan
CBRE Investment
Management
Pam Boneham
Chuck LeitnerCenterSquare Investment
Management LLC
Rob Holuba
Centric Architecture
Gina EmmanuelCharter Properties
Eric M. Williams
Childress Klein
Landon Wyatt III
Choice Properties REIT
Mario Barrafato
Rael Diamond
Cirrus Asset Management
Inc.
Steve Heimler
Citigroup
Thomas Flexner
City and County of San
FranciscoDaniel Adams
City of Raleigh, North
Carolina
Patrick O. Young
Clarion Partners
Jeb Belford
Hugh Macdonnell
Tim WangCompassRock International
David Woodward
Compspring
Lisa Dilts
Concert Properties
Brian McCauley
Andrew Tong
Concord Group
Richard M. Gollis
Condor Properties Ltd.
Sam Balsamo
Nancy De Gasperis
The Conservatory GroupMark Libfeld
Continental Properties
James H. Schloemer
Conundrum Capital
Corporation
Daniel Argiros
Corporate Office Property
Trust
Stephen Budorick
Todd Hartman
Anthony Mifsud
Cortland
Jason Kern
CoStar GroupJan D. Freitag
CPM Texas
Dave Stauch
CRE Tax Planning LLC
Dawn Polin
Cremona Consulting
Sera CremonaCresleigh Homes
Robert Walter
Crombie REIT
Donald Clow
CrossMarc Services
John Crossman

Codds Creek Capital
Ken Crockett

Crow Holdings Capital
Cyndy Silverthorn

Colicchio Consulting
Phil Colicchio

Crux CapitalPeter Aghar

Emerging Trends in Real Estate® 2023

101

CT REIT
Kevin Salsberg

Empire Title LLC
Tayler Tibbitts

Giarratana LLC
Tony Giarratana

CubeSmart
Christopher P. MarrEOA Architects
Sheila Dial Barton

Cushing Terrell
Sheri Blattel

EquitonJason RoqueCushman & Wakefield
Barrie Scardina
Rebecca Wells

Equus Capital Partners
Arthur P. Pasquarella

GID
Gregory Bates
W. Jeffrey Beckham
Hisham Kade
Suzanne E. Mulvee
Thad D. Palmer

Deka Immobilien Investment
GmbH
Alexander Heijnk
Simona Vigneron
Dermody Properties
Kathleen S. Briscoe
Desjardins Gestion
internationale d’actifs
Michel Bédard

Fengate CapitalManagement Ltd.
Jaime McKenna
Fiera Real Estate
Kathy BlackThe Glenview Corporation
Jake Shabinsky
Goldman Sachs
Alex Cheek
Nick O’Neill
Neil Wolitzer

Fifield Companies
Joe Pitsor

Government of New
BrunswickTodd Selby

FINFROCK
William A. Finfrock

Green Cities
Molly Bordonaro

First Horizon Bank
Christina Blackwell

Green Mesa Capital LLC
Randy C. Norton

First Merchants Bank
Rick Baer

Green Street
Cedrik LachanceDistriktPaul Simcox

First Southern Mortgage
Corp.
Stephen Brink
Graham Gilreath

Greenberg Traurig
Chuck Abrams

DivcoWest
Gregg Walker

First Washington Realty
Daniel Radek

Doucet & Associates
Tracy A. Bratton

Fitzrovia Real Estate
Adrian Rocca

Downtown Austin AllianceMichele Van Hyfte

Focus Strategies
Investment Banking
Terese Everson

Developing Solutions LLC
George J. Carfagno
Devmont
Sam Scalia
DIALOG
Mona Lovgreen
DilwegKelsey Reside

Dream Unlimited
Jason Lester
Dunaway
Roberta Salas
Durum Properties Inc.
Jay Simmons
Eastdil Secured LLC
Miles Theodore
Michael Van Konynenburg
Eastern Bank
Matthew Osborne
Economical Mutual
Insurance Company
Jayme Gualtieri
EDENS
Jodie McLean
ElmTree Funds
James G. Koman
EMBLEM Developments
Kash Pashootan
Emergent Research
Steve King
Empire Communities
Andrew Guizzetti

102

Federal Realty
Jeff Berkes
Jeff Kreshek

Gilbane Co.
Morgan Beam

Greystar
Michael Joyce
Groupe Commercial AMT
Jérôme Jolicoeur
Grubb Properties
Clay Grubb

Hilco Redevelopment
Partners
Jason Gill
Hines
Mark Cover
Josh ScovilleDavid Steinbach
H.J. Russell & Company
Delilah Wynn-Brown
HKS Architects
Emir Tursic
Holladay Properties
Allen Arender
Homes by WestBay
Willy Nunn
HopewellMurray Degirolamo
Jason Kraatz
David Loo

Hullmark Development Ltd.
Jeff HulliA Financial Group
Claude Sirois
ICM Realty GroupJohn Courtliff
IDI Logistics
Chris Kazanowski
Shawn Warren

Independence Title
Colin Parker

Hawkeye Partners
Bret Wilkerson

Industrious
Craig Robinson

Forest Gate Financial Corp.
Daniel Marinovic

Hawkins Partners Inc.
Landscape Architects
Kim Hawkins

Intercontinental Real
Estate Corporation
Jessica Levin

Hazelview Investments
Michael Tsourounis

Invesco Fixed Income
Kevin Collins
David Lyle

Herity Limited
Brad Foster
Hugh Heron

GarzaEMC
Rudy Garza
GEM Health Care Group Ltd.
Mahmood Hussain
Syed Hussain
John Yuan
Gemdale USA Corporation
Michael Krupa
Gensler
Diane Hoskins

Emerging Trends in Real Estate® 2023

Hersha Hospitality Trust
Ashish Parikh
Jay Shah
HH Fund
Tony Shen
High Street Logistics
Properties
Robert Chagares
Andy Zgutowicz

Kayne Anderson
John Wain
Kearny Real Estate Company
Hoonie Kang
KennMarAllie Rosenbarger

Killam Apartment REIT
Philip Fraser
Dale Noseworthy
Robert Richardson

H.J. Russell & Company
Delilah Wynn-Brown

Freddie Mac
Steve Guggenmos

Katz, Sapper & Miller
Josh Malarsky

Hughes Investments Inc.
Phil Hughes

FORE Institute, University ofDenver, Burns School of Real
EstateGlenn Mueller

Heitman
Aki Dellaportas

Kairos Asset Strategies
Rachel Lee

KHP Capital Partners
Ben Rowe

Immeuble populaire deQuébec inc.
Michel Côté

Franklin Street
Laura Gonzales

John Burns Real EstateConsulting
John Burns

Houlihan Lokey
Nick WayGWL Realty Advisors
Paul Finkbeiner

Forgestone CapitalManagement LP
Trevor Blakely

JLL
Jeff Coddington
James Cook
Mehtab Randhawa
Vineet Sahgal
Ryan Severino

InvestPlus REIT
Domenic Mandato
Ivanhoé Cambridge Inc.
Michèle HubertJamestown LP
Catherine Pfeiffenberger
Jayman Built
Aasit Amin
Jesta Group
Anthony O’BrienJBG Smith Properties
Moina Banerjee
Steve Museles
Dave Paul
Angie Valdes

Kimco REIT
Glenn Cohen
Ross Cooper
Conor Flynn
Kin Capital Partners
Galia Feiler
KingSett Capital Inc.
Jon Love
Kiser Vogrin Design
Katie Rudowsky
KKR
Chris Lee
Kothari Group
Anupam Kothari
KTCivil
Jonathan Fleming
Lafayette Square
Onay Payne
Landsea Homes
Logan Kimble
LaSalle Investment
Management
Alok Gaur
Jacques Gordon
Brad Gries
LCK
Dale Stigamier
Le Groupe Maurice Inc.
Francis Gagnon
Lee & Associates Charleston
Cameron Yost
Les immeubles Laberge Enr.
Charles Laberge
Les Immeubles Roussin Ltée.
Nathalie Roussin

Levcor Inc.
Justin Levine

Metrolinx
Michael Norton

Liberty Development
Corporation
Marco Filice

Metrontario Group
Lawrie Lubin

Linneman Associates
Peter Linneman
Lionstone Investments
Andrew Bruce
Andrew Lusk
Lockehouse Retail Group
Steve Cutter
Low Tide Properties
David Ferguson
LOWE
Martin Caverly
Mack Real Estate Group
Madison Homes Limited
Miguel Singer
Mainstreet Equity Corp.
Trina Cui
Manulife
Maria AielloManulife Investment
Management Limited
Gregory Sweeney
Jeffrey C. Wolfe

Michelle Malanca Frey
Consulting
Michelle Malanca Frey
Midtown Equities
Mehul J. Patel
Minto Communities USA
Mike Belmont
The Minto Group
Michael Waters
Moody’s Analytics
Victor Calanog
Morgan Group
Andrew Grimm
Morgan Properties
Jason Morgan
Jonathan Morgan
Morguard Corporation
Paul Miatello
Mortgage Bankers
Association
Jamie Woodwell
MSCI/Real Capital Analytics
Jim Costello

Northern Trust
Brian Bianchi
David Dagley

Peerage Capital Canada
LimitedGavin Swartzman

NorthWest Healthcare
Properties REIT
Shailen Chande

PEG Companies
Robert Schmidt

Northwood Ravin
Jeff Furman
Nuveen Global Cities REIT
Steve Hash
Nuveen Real Estate
Donna Brandin
Brian EbyJack Gay
Jason Hernandez
Chris McGibbon
Carly Tripp

Porte Realty Ltd.
David Porte

Opus Development Company
Ryan Carlie
Orchestra Partners
John Boone

Marcus Partners
Paul Marcus

MURAL Real Estate Partners
Robin Zeigler

Oxford Properties
Michael TurnerMarkee Developments
Jason Marks

MW Builders Inc.
Su Jones

MarketStreet Enterprises
Dirk Melton

National Development
Brian Kavoogian

Pacific Elm Properties
Billy Prewitt
John Rutledge

The Mathews Company
Bert Mathews
Jody Moody

National Multifamily
Housing Council
Douglas Bibby

Mattamy Homes
Brad Carr

Nelson\Nygaard
Transportation Consultants
Lauren Mattern

Melcor Developments
Naomi Stefura
Meridian Capital Group
Helen Hwang
Merlone Geier Partners
Heather Beal
Metlife Investment
Management
Sara Queen
Metro Nashville Housing
Division
Hannah Davis

New City Development
Isaac Bamgbose
New York Life Real Estate
Investors
Brian Seaman
Ross BerryNew York University
Arpit Gupta
NewQuest Properties
Jay K. Sears
Nordblom Company
Kris Galetti
Norris Design
Matthew Taylor
Northcrest Developments
Derek Goring

Plymouth Industrial REIT Inc.
Anthony Saladino
Pen White
Jeff Witherell

Ontario Infrastructure andLands Corporation
Michael Fedchyshyn
Ontario Real Estate
Association
Tim Hudak

Ownly
Jason Hardy

Pacific Urban Investors
Art Cole
Page
Sara Ibarra
Ryan Losch
Panattoni
Whitfield Hamilton
Pan-Canadian Mortgage
Group Inc.
Joel McLean
Pangman Development
Corporation
Kevin McKee
Parkwood Business
Properties
Chris Meyer
Parmenter Realty Partners
John Davidson
Patterson Real Estate
Advisory GroupKen Grimes
Pebblebrook Hotel TrustThomas Fisher

RCLCO
Charles A. Hewlett
RCLCO Fund Advisors
Taylor Mammon
Real Property Associationof Canada
Michael Brooks

Port of San Francisco
Diane Oshima

Multiplex Construction
Canada Ltd.
Terry Olynyk

McMillan Pazdan Smith
Architecture
K.J. Jacobs

PGIM Real Estate
Stephen Bailey
Alyce Dejong
Joanna Mulford
Soultana Reigle
Jaime Zadra

OnPlace
Monica Onstad

Marcus & Millichap
Geoffrey Bedrosian
John Sebree

MCAN Mortgage Corporation
Floriana Cipollone

Pensford Financial Group
J.P. Conklin

RBC Capital Markets
Dan Giaquinto
David Switzer
David Tweedie
William Wong

RealPage
Jay Parsons
Realstar Management
PartnershipColin Martin
Regency Centers
Christopher Widmayer
The Regional Group
Sender Gordon
Kelly Rhodenizer

PREA
Greg Mackinnon
Preferred Apartment
Communities
John Isakson
Pretium Partners LLC
Zain ButtCharles Himmelberg
Nishu Sood
Martin Young
Price Edwards & Company
Jim Parrack
Prima Capital Advisors
Nilesh Patel
Greg White
Prism Capital Partners LLC
Eugene Robert Diaz
Prologis
Chris Caton
Liz Dunn
Ricardo Gradillas
Todd Lewis
Hamid Moghadam
Kim Snyder

Regional Municipality ofDurhamLorraine Huinink
RentMonster
Brian Tunnell
Reuben, Junius & Rose LLP
Corie A. Edwards
Revera Inc.
Glen Chow
Kulbir Nijjer
Rice Management Company
Ryan M. LeVasseur
RioCan REIT
Andrew Duncan
Rivergate
Jay Massirman
R-LABS Canada Inc.
George Carras
RLJ Lodging Trust
Nikhil Bhalla
Leslie D. Hale

Public Sector Pension
Investment Board
Carole Guerin
Luc McSween

The RMR Group
Adam Portnoy
Rockpoint
Spencer Raymond

Public Square
Clay Haynes

Rohit Group of Companies
Rohit Gupta

QuadReal Property Group
Limited Partnership
Anthony Lanni

Rosen Consulting
Kenneth Rosen

Quinn Residences
Richard Ross

The Roxborough Group
Marc Perin
Munezeh WaldRATIO.CITY Inc.
Monika Jaroszonek

Roy-L Capital Corporation
Matthew Fishman
RVi Planning + LandscapeArchitecture
Jared Pyka

Emerging Trends in Real Estate® 2023

103

RXR
Mike Maturo
Mike O’Leary
Scott Rechler

Stiles Corporation
Scott MacLaren

Tricon Residential Inc.
Gary Berman

Watson Land Company
Jeff Jennison

Schneider Electric
Stuart Whiting

Stillwater Capital
Clay Roby

Westbank Corp.
Judy Leung

Stockbridge
Terry Fancher
Seth Kemper
Stephen Pilch
Kristin Renaudin
Nicole Stagnaro

Tridel Corporation
Bruno Giancola
Len Gigliotti

Seamon Whiteside &Associates
Chip Buchanan
Sienna Senior Living Inc.
Nitin Jain
Signature Development
Group
Paul Nieto

Strathallen
Cathal O’Connor

Signorelli Company
John Montaquila

Structure Development
Sarah Andre

SilverCap Partners
John Scott Trotter

Structures
Dante Angelini
Heidi Cisneros

Silverstein Properties
Brian Collins
Skyline Investments
Adam Cohen
Robert Waxman
Slate Asset Management
Brandon Donnelly
Steve Hodgson
Lindsay Stiles
Sleiman Enterprises
Michael McNaughton
SmartCentres REIT
Rudy Gobin
Mitchell Goldhar
Snapbox Self Storage
Scott Hastings
The Sorbara Group ofCompanies
Edward Sorbara
Société de gestion COGIR
S.E.N.C.
Mathieu Duguay
Sonesta International Hotels
Corporation
John MurraySouthwest Properties Ltd.
Gordon Laing
Paul Murphy
Jim Spatz
Spirit Realty
Ken Heimlich
Stafford Developments
Jonathan Goldman

104

Stock Development
Keith Gelder

Suburban Land Reserve
David Cannon
The Sud Group
Adrian Rasekh
Elliott Sud
Summit Industrial Income
REIT
Ross Drake
Dayna Gibbs
Summit Investors LLC
Greg Winchester

Triovest Realty Advisors Inc.
Prakash David
Ted Willcocks
Triple Group of Companies
Steve Apostolopoulos
Tristan Capital Partners
Douglas Poutasse
TruistAndy Holland
UDR
Thomas W. Toomey
United Property Resource
Corporation
Tim Blair
University Federal Credit
Union
Jason Qunell
University of San Diego
Norm Miller
Urby
Dennis Giuliano
U.S. Bancorp Community
Development Corporation
Kacey Cordes

USAA Real Estate
Sunstone Hotel Investors Inc.
Will McIntosh
Robert Springer
Vantage Point Development
The Swig Company
Brannon Butler
Stephanie Ting
Vential Investments
TA Realty
Dino P. Christoforakis
Randell Harwood
VeritasJames Raisides
Yat-Pang Au
Sean Ruhmann
Tanzola Corp.
Greg Tanzola

The Viera Company
Todd J. Pokrywa

Taylor Derrick Capital
Nick Etherington

Village Green
Diane Batayeh

Townline Homes Inc.
Rick Ilich
Dan Jekubik

Virtu Investments
Ritesh Patel

Trammell Crow Company
Jim Casey
Matt Khourie
Trammell Crow Residential
Ken Valach

Starwood Capital Group
Ethan Bing
Anthony Murphy

Transwestern Development
Company
Ashley Grigsby
Doug Prickett

Starwood Land Advisors
Mike Moser

Trepp
Lonnie Hendry

STG Design
Jim Susman

Trez Capital
Vikram Rajagopalan

Emerging Trends in Real Estate® 2023

The Vision Foundry
David Stoller
W.P. Carey
Jason Fox
Brooks Gordon
John Park
Toni Sanzone
Walton Street Capital
Raphael Dawson
Washington Capital
Sean Whitfield
Waterstone Properties
Group Inc.
Herb Evers

Weston Urban
Reeves Craig
Mark Jensen
WeWorkNicholas ShyaWhite Oak Partners
Michael Menzer
Windmill Development Group
Ross Farris
Jeremy Reeds
Jeff Westeinde
Jonathan Westiende
Yardi Matrix
Peter Kolaczynski
Zelman & Associates
Dennis McGill
ZOM Living
Matthew Adler
Zonda
Nikolas Scoolis
Kristine SmaleSponsoring Organizations

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The Urban Land Institute is a global, member-driven organization
comprising more than 45,000 real estate and urban development professionals dedicated to advancing the Institute’s mission of shaping thefuture of the built environment for transformative impact in communities
worldwide.
ULI’s interdisciplinary membership represents all aspects of the industry, including developers, property owners, investors, architects, urban
planners, public officials, real estate brokers, appraisers, attorneys,
engineers, financiers, and academics. Established in 1936, the Institutehas a presence in the Americas, Europe, and Asia Pacific regions, withmembers in 80 countries.

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U.S. Real Estate Leader
Dallas, Texas, U.S.A.

The extraordinary impact that ULI makes on land use decision-making
is based on its members sharing expertise on a variety of factors affecting the built environment, including urbanization, demographic andpopulation changes, new economic drivers, technology advancements,and environmental concerns.

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Canadian Real Estate Leader
Toronto, Ontario, Canada

Peer-to-peer learning is achieved through the knowledge shared bymembers at thousands of convenings each year that reinforce ULI’s
position as a global authority on land use and real estate. In 2021 alone,
2,148 events were held in cities around the world.

Thomas Veith
Global Real Estate Leader
Frankfurt, Germany

Drawing on the work of its members, the Institute recognizes andshares best practices in urban design and development for the benefitof communities around the globe.

Global Real Estate Leadership Team

K.K. So
Asia Pacific Real Estate Leader
Hong Kong, China
Angus Johnston
European, Middle East & Africa Real Estate Leader
London, U.K.
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LinkedIn, and Instagram.

W. Edward Walter
Global Chief Executive Officer, Urban Land InstituteULI Center for Real Estate Economics and Capital Markets
Anita Kramer
Senior Vice President
www.uli.org/capitalmarketscenter
Urban Land Institute2001 L Street, NW
Suite 200
Washington, DC 20036-4948
202-624-7000
www.uli.org

Emerging Trends in Real Estate® 2023

105

Atlanta’s Midtown skyline from the vantage
point of Piedmont Park.

Emerging Trends in Real Estate® 2023

Highlights

What are the best bets for investment and devel­op­ment in
2023? Based on insights from a select group of the mostinfluential and experienced ULI members, this forecast will
give you a heads-up on overarching trends that will affectreal estate, where to invest, and which sectors and markets
offer the best prospects. A joint under­taking of PwC and ULI,
this 44th edition of Emerging Trends is the forecast that you
can count on for no-nonsense, expert insight.

• T ells you what to expect and what the expected
best opportunities are.

ULI is the largest network of cross-disciplinary realestate and land use experts who lead the future of urban
development and create thriving communities across theglobe. As a ULI member, you can connect with members
around the world in Member Directory (members.uli.org),find ULI opportunities to lead and volunteer on Navigator(navigator.uli.org), and explore ULI’s latest research and bestpractices on Knowledge Finder (knowledge.uli.org), including
all the Emerging Trends in Real Estate ® reports publishedsince 2003. Visit uli.org/join to learn more about ULI’s
exclusive member benefits.

• E laborates on trends in the capital markets, including
sources and flows of equity and debt capital.
• Indicates
which property sectors are most promising
and what the risk factors are.
• Provides
rankings and assessments of a variety of
specialty property types.
•D escribes the impact of social and geopolitical trends onreal estate.
• E xplains how locational preferences are changing.
• E lucidates the increasingly important intersectionof real estate and technology.

U.S. $49.95
I S B N 978-0-87420-481-0

54995

9

780874 204810

www.uli.org

www.pwc.com