By Jennifer French, CPA
TOP 10 ISSUES IN THIS ARTICLE:
How is the real estate industry shaping up for 2023? The outlook is mixed, with a balanced approach of cautious optimism, flexibility, and long-term adjustments.
Although there are recurring themes from one year to the next, like infrastructure, technology, demographic shifts, sustainability and more, certain trends are expected to have a moderate to substantial impact on real estate as a whole in 2023. In many ways, the pandemic is still influencing commercial and residential real estate. Other national and global macroeconomic issues, like inflation and interest rates, will persist throughout the year as well.
While 2023 is expected to look more normalized in terms of pricing and availability, the real estate industry is still grappling with many overarching issues.
These trends are expected to dominate real estate headlines in 2023 and beyond. Here are the top 10 real estate trends we are seeing in 2023, not ranked in any particular order.
1. Interest Rates and Inflationary Pressure
Inflation can either have a positive or negative effect on real estate, depending on the investment type. Rental real estate and real estate sellers tend to benefit while investors, builders, and potential buyers will experience higher costs associated with financing, supplies, and materials.
Inflation looks to be slowing, with the Fed’s most recent interest rate hike also its smallest in months.
Many industry experts predict that mortgage rates have already hit their highest point. This is good news, but rates are already doubled from a year ago. There are mixed signals on whether a recession is coming in the short-term, though the markets were already headed for a correction before COVID.
2. Residential Housing
Most of the country will experience no or little gains in home prices this year. The inventory of new homes remains low. And as interest rates remain high, demand for rental units is expected to stay strong throughout 2023 and in the years to come.
3. Macroeconomic Impacts
World economies are in flux and the implications for real estate are unclear. Increased and persistent volatility around the world adds more risk to real estate. The impacts of the Ukraine war, supply chain interruptions, and individual economies may be hard to measure on their own, but collectively these and other global events cause ripple effects in multiple industries like real estate.
Generally, the longer the global economic issues take to resolve, the greater the negative impact on real estate – and other industries.
Some experts point to a growing trend of de-globalization: a protectionist mindset is growing where countries are expected to insource more and rely less on outside suppliers. In the U.S., a low tax environment is unlikely to continue, especially after provisions in the Tax Cuts and Jobs Act (TCJA) expire at the end of 2025.
4. Hybrid and Remote Workplaces
A changing workplace environment is one of the permanent side effects of COVID. The pandemic simply accelerated a shift that was already starting, though.
Some estimates indicate that as much as ten or 20 percent of office space will need to be repurposed or removed. Office space valuations are expected to decline an average of almost 30 percent in the long-term. In the meantime, landlords will need to update existing office buildings to reflect changing worker preferences.
It’s not just office space that’s facing pressure. Sectors like education, health care, hospitality, and entertainment are facing pressure to redefine their workplaces, too.
Another offshoot of the shift in worker locations is where people are choosing to live. De-centralization, or the exodus of workers from urban areas to less populated geographies has tested local infrastructure and changed regional footprints. Workers are looking for more cost effective living situations when they can work from anywhere.
For real estate, this trend has two main effects: on employers with physical locations to offer the best and most relevant amenities for a better on-site worker experience, and on local investors, owners, and builders to offer more of what people need in more suburban and rural areas.
5. Supply Chain Disruptions
Since the earliest days of the pandemic, consumers and businesses have been dealing with supply chain constraints. Challenges will persist into 2023 even as companies across the continuum adjust their sourcing strategies.
In 2022, almost 2,000 manufacturing companies re-shored production facilities to the U.S., part of a growing initiative to regionalize manufacturing. In addition to easing the supply chain burden, there will be increased demand for industrial real estate as this sector grows nationwide.
Real estate stakeholders must continue to utilize a diverse supply chain network and adjust project timing accordingly.
6. Energy and Climate Resiliency
There’s also now a proven business case for sustainability alongside the need to reduce real estate’s carbon footprint. Energy and sustainability trends that will continue in 2023 include strategies to improve occupant health and well-being, reduce energy usage, and upgrade older buildings. New and expanded tax credits should help to ease the financial burden of these investments.
In considering the impact of climate change, real estate landowners and investors – especially those in coastal regions or in areas with severe weather – also need to be prepared for higher property and casualty insurance costs. In some regions, insurance in high-risk regions is hard to get at any price point. A lower-risk building will tend to see lower insurance rates.
If conversations around sustainability and climate resiliency haven’t been happening yet, now is the time.
7. Investor and Regulatory Demand for ESG
No longer a nice-to-have, environmental, social, and governance (ESG) disclosures are a requirement in many cases. From the SEC’s disclosure regulations that take effect for 2023 operations to pressure from investor groups, ESG is now top-of-mind and a driving force behind innovation and diversity. Real estate owners and operators may want to start benchmarking their progress and performance in these areas, even if they’re not required by an external reporting body.
8. Labor Shortages Continue
Builder confidence is still lagging due to ongoing labor shortages and higher costs – some of which are directly attributed to the labor crunch. Employers’ labor costs have increased exponentially as they fight to retain quality workers.
While most of the lost jobs during the pandemic have been refilled, there remains a shortage of skilled or specialty workers. This can also complicate new construction or certain upgrades since the best tax incentives for energy and sustainability also require prevailing wage and registered apprentices.
9. Changes in Regulatory Compliance
Regulatory burdens remain a moving target in 2023. From changes to building regulations resulting from COVID to global commitments to sustainability, real estate owners and operators are dealing with multiple compliance requirements at all levels of government. And these regulations are often vague with room for interpretation.
Moving forward, it will be important to spend extra time scrutinizing regulatory requirements and how they may change over the course of a project.
10. Heightened Cybersecurity Risks
Cyberattacks are on the rise; most real estate professionals have reported some kind of cyber incident in the last 18 months. Online hackers target anything from health systems’ networks to interstate pipelines, servers, employer networks, financial data, and more. These risks are only going to increase.
Especially as more buildings are equipped with smart technology, criminals can have more opportunities to gain illegal access to real estate assets. Stakeholders need to ensure they have a comprehensive cybersecurity plan in place, including an incident response plan.