普华永道：2023房地产新兴趋势报告

2023-03-31

EMERGING TRENDS

IN REAL ESTATE

United States l Canada

2023

Emerging Trends in Real Estate

2023

A publication from:

iEmerging 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 through

Infrastructure 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 Crop

47 The Future of Single-Family Housing

50 Industrial/Logistics: Strong Fundamentals Persist

while Capital Markets Adjust

53 Office: Desperately Seeking Clarity about

Its Future

65 Retail

68 Hotels

73 Chapter 3 Markets to Watch

79 Grouping the Markets

93 Chapter 4 Emerging Trends in Canadian

Real Estate

94 Costs and Capital: A Period of Price Discovery

amid Major Shifts for Real Estate

96 ESG Performance: A Critical Issue for Canadian

Real Estate

98 Housing Affordability: A Growing Challenge for

Real Estate Companies

104 Property Type Outlook

109 Markets to Watch

114 Expected Best Bets for 2023

115 Interviewees

119 Sponsoring Organizations

Emerging

Trends

in Real Estate

2023

ii Emerging Trends in Real Estate

2023

Editorial Leadership Team

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 Staffieri

Billy 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 Hughes

David Swerling

David 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.

PwC Advisers and Contributing ResearchersEmerging Trends Chairs

R. Byron Carlock Jr., PwC

W. Edward Walter, Urban Land

Institute

Editors-in-Chief

Andrew Warren, PwC

Anita Kramer, Urban Land Institute

Author, 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, Office

John McManus, Multifamily

Residential

Avikar Shah, Hotels

Authors, Chapter 4

Glenn Kauth

Peter Kovessy

Contributors

Paul Angelone

Lindsay Brugger

John Chang

Mike Hargrave

Roberto Hernandez

David 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, Canada

Frank Magliocco, PwC, Canada

Christopher J. Potter, PwC,

Canada

Steven Weisenburger, PwC, U.S.

Project Staff, ULI Center for

Real Estate Economics and

Capital 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 regis-

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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

1Emerging Trends in Real Estate

2023

Notice to Readers

Emerging Trends in Real Estate

is a trends and forecast publication now in its 44th

edition, and is one of the most highly regarded and widely read forecast reports in the

real 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 devel-

opment 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 of

either PwC or ULI. Interviewees and survey participants represent a wide range of

industry experts, including investors, fund managers, developers, property compa-

nies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally

interviewed 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/multifamily

real 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-specific

attribution 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 interview-

ees 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.

2 Emerging Trends in Real Estate

2023

3Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

Interest rates are rising, economic clouds are darkening, and

real estate deal flows are sinking because buyers and sellers

cannot agree on pricing. But for all that, most commercial real

estate 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 the

consensus mood seems to be one of cautious optimism that

we will ride out any near-term slump and be well positioned for

another 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 typically

takes more time (and effort) than buying just about any other

type of financial asset, and they are usually held for longer dura-

tions. Still, the willingness of so many people in the industry to

look beyond some of the cyclical headwinds is striking. Says the

head 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 any-

thing else. We’ll look back in 10 years, and the prices that seem

astronomical 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 a

recession in the first half of 2022, having sustained two straight

quarters of (modestly) declining gross domestic product (GDP).

But if we were in a recession at the time of writing, it would be a

most peculiar one. For one thing, gross national income—the

income 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:

 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 still

rising; and

 Consumer spending—which accounts for two-thirds of the

economy—has been at least mildly positive every month this

year (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 the

business outlook indices compiled by the Institute for Supply

Management have been trending downward since mid-2021,

Taking the Long View

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

But if you have the long view,

I don’t think it’s time to panic

.”

Exhibit 1-1 Firm Protability Prospects for 2023

20%

40%

60%

80%

100%

202320222021202020192018201720162015201420132012

Good–excellent

Abysmal–poor

Percentage of respondents

Fair

Source: Emerging Trends in Real Estate surveys.

4 Emerging Trends in Real Estate

2023

Higher for Longer

With interest rates headed “higher for longer,” the risk of a

deeper, full-fledged recession is rising, according to a grow-

ing consensus of economists. In an August 2022 survey by the

National Association of Business Economics, only a quarter

of economists were even “somewhat” confident that the Fed

could bring down inflation to its target range without causing a

recession. Worrying signs out of Europe in early autumn and

expectations of soaring heating bills this coming winter add to

the 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 reduce

values. Indeed, rising interest rates and uncertainty over future

market conditions are already killing deals since sellers have not

been ready to capitulate to buyers’ growing demands for price

concessions, as we discuss in our capital markets trend.

New Horizons

Still, not all recessions are alike, and most economists, as well

as Emerging Trends interviewees, expect any recession to be

relatively short and shallow. Reflecting the view of several CRE

leaders we interviewed, a senior executive with a global devel-

opment and investment firm said, “My gut says we’re going to

have a recession, but it’s going to be relatively mild compared

to 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 a

cleansing, 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 and

beyond follow:

1. Normalizing

 Property market fundamentals are “normalizing” as some

markets weaken due to diminishing pandemic tailwinds and

the potential for a cyclical economic downturn.

Exhibit 1-2 U.S. Real Estate Returns and Economic Growth

–6%

–5%

–4%

–3%

–2%

–1%

GDP change

–50%

–40%

–30%

–20%

–10%

10%

20%

30%

40%

50%

Index change

NAREIT Equity REIT Index

NCREIF

GDP

2023*

20212019201720152013201120092007200520032001

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 even

sharper. All of these positive and negative factors together paint

a 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 exis-

tential 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 that

the worst was over and that the Fed could soon ease up its con-

tractionary monetary policy. Indeed, the consensus of experts we

interviewed 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 be

a 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 in

late August when Fed Chairman Jerome Powell gave his annual

speech to fellow central bankers affirming the Fed view that infla-

tion is not nearly under control, jolting markets. Any remaining

doubt about that was quashed by the official Fed commentary

accompanying their September rate announcement projecting

that 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 beginning

of the end, but, possibly, the end of the beginning.”

5Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

 Some property sectors may cool, including residential and

industrial, while others may heat up to historical average

levels, 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 terrify-

ing and uncertain days of the COVID-19 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.

Not every property type, however: hotels endured their worst

and most sustained downturn in memory, while offices suffered

an unprecedented and significant cut in usage of space. And

not every market: some of the nation’s strongest gateway mar-

kets, 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 and

managers 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 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 more sustainable levels.

Perhaps the biggest surprise is that these reversals of fortune

are hitting favored property sectors like multifamily and indus-

trial. 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 that

the (really) good times may be over, at least for a while.

Housing Set to Cool

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 typi-

cally see. So, the markets are more normalizing.” Indeed, home

Exhibit 1-3 Importance of Issues for Real Estate in 2023

Currency exchange rates

Federal taxes

State and local taxes

Tariffs/trade conﬂicts

Global economic growth

Capital availability

Inﬂation

Job and income growth

Availability of qualiﬁed labor

Interest rates and cost of capital

Health- and safety-related policies

Municipal service cuts

Health and wellness features

Risks from extreme weather

Environmental/sustainability requirements

Property taxes

Infrastructure/transportation

NIMBYism

Tenant leasing and retention costs

State and local regulations

Operating costs

Land costs

Construction labor availability

Construction material costs

Construction labor costs

Economic/ﬁnancial issues

Real estate/development issues

Social/political issues

4.51

4.48

4.46

3.97

3.72

3.54

3.49

3.47

3.42

3.19

3.02

2.99

2.89

2.76

4.38

4.26

4.24

4.15

3.88

3.42

3.03

3.02

2.97

2.69

importance

Moderate

importance

Great

Threat of terrorism

Diversity and inclusion

Higher education costs

Federal budget deﬁcit

Income inequality

State/local government budgets

Climate change

Epidemics/pandemics

Immigration policy

Political extremism

Geopolitical conﬂicts

Housing costs and availability

4.21

3.51

3.47

3.45

3.28

3.19

3.17

3.12

2.94

2.88

2.87

Source: Emerging Trends in Real Estate 2023 survey.

6 Emerging Trends in Real Estate

2023

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 aspects

of 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 pace

has 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 August

2022 to its lowest level since May 2020.

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, and

home prices remain near record levels. And while multifamily

vacancies 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. “They

should come back to more of a long-term historical average of

3 percent to 4 percent, and maybe offset some of the unafford-

ability in the country.”

Indeed, housing markets may be partly victims of their own

success as record prices and rents mean fewer households can

afford to buy homes or rent apartments, particularly with mort-

gage interest rates and housing-related expenses like utilities

rising sharply—a topic we explore in “Too Much for Too Many,”

our trend on housing affordability.

The Warehouse Pause

The white-hot industrial market also seems set to cool after

several years of unprecedented demand growth and rent

gains that have 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.

The largest warehouse user in the United States has delayed

occupying numerous completed projects, trying to sublet many,

as it slows its physical growth. Other major retailers also have

been cutting back their distribution expansion plans.

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 last

year, and these high-riding sectors do not look quite as invulner-

able as they had in recent years.

But even recognizing that industrial demand could ease at all

from 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 the

long term, there’s still cycles within the business and therefore

you could potentially see some oversupply in the industrial mar-

ket over a short period of time.”

Reversion UP to the Mean, Too

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 sec-

tor, 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 future

probably 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 COVID-

19 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

Exhibit 1-4 Emerging Trends Barometer 2023

abysmal

poor

202320212019201720152013201120092007

Buy

Hold

Sell

good

fair

excellent

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

7Emerging Trends in Real Estate

2023

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 ana-

lysts 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 believe

that capitalization rates are heading up next year and returns

are coming down, primarily due to rising “interest rates and cost

of capital,” which was the top economic concern voiced in our

survey. After more than a decade of “lower for longer,” the Fed is

finally normalizing interest rates closer to historical levels. Those

rising 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. Unlike

in 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 an

investment management firm. Thus, the government is turning

off both the monetary and fiscal spigots that had been support-

ing commercial real estate and the economy overall.

The head of a development company summarized it like this: “I

feel like we’ve been on a little bit of a sugar high with this stimu-

lus 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’s

going 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 destinated

to endure.

 Online spending is receding from its pandemic peaks but is

not likely to revert to pre-pandemic levels. Business travel is

unlikely to recover to pre-COVID-19 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 a

significant share of the existing stock may need to be reposi-

tioned to remain competitive.

Even as property markets begin to “normalize” in many ways after

some of the disruptions of the past few years, we won’t be resum-

ing our former lives in some key respects. The pandemic forced

structural shifts in how and where we live, work, and recreate in

ways that seem destinated to endure at least at some level, even if

less extreme than our behaviors during the peak of COVID-19.

Many activities have already returned to pre-pandemic levels,

of course, especially those involving socializing. Americans are

back to attending concerts and sporting events, and leisure

travelers, at least, have returned to the nation’s roads and

airways. Meanwhile, we are obviously tired of exercising and

cooking alone at home, so gym memberships have returned to

historical levels while restaurant sales are back above groceries,

as they had been since 2015 until COVID-19 shut down dining

establishments.

Yet many other activities—and how we use space—seem

unlikely to return to the old ways. The pandemic changed us.

Says a director of an investment management firm, “People are

looking to achieve their lifestyle choices more quickly. They’re

less focused on their employer and more focused on their per-

sonal 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 from

physical 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 initially

resorted 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 other

benefits, including greater convenience, selection, and price

advantages. Thus, the share we spend online remains highly

elevated at just under 18 percent, nearly five percentage points

above the rate before COVID-19.

8 Emerging Trends in Real Estate

2023

Where will it go from here? The fate of shopping centers and

physical 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.

Those gains could moderate or even reverse if the online

shopping share endures, however, as consumers shift some

spending back from goods to nonretail services they avoided

during the pandemic, like travel and entertainment. As one real

estate investment trust (REIT) analyst notes, “There’s still very

healthy growth in e-commerce, but it’s no longer the lofty expec-

tations we used to have at the height of the pandemic.”

With growth in online spending slowing, physical retailers will

have an opportunity to regain some lost market share, espe-

cially those that can “bridge the gap between e-commerce and

bricks and sticks. They survived very well in the pandemic and

will probably continue to do well,” says one investment con-

sultant. Other winners will be the resourceful retailers that can

provide consumers with compelling shopping experiences. But

the permanent shift to greater online spending ultimately means

that 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 fell

even 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 back

to only 73 percent of 2019 levels and will not return to pre-pan-

demic levels through at least 2026. Firms are restricting travel to

save on costs, and employees are reluctant to travel anyway. Of

greater importance, they have less need to travel since clients

are 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 so

long, we have learned to conduct business remotely, facilitated

by improved meeting technology.

Business travel will continue to recover over time, but few

expect levels to attain prior levels soon. The USTA study shows

business travel flattening in 2023 short of pre-COVID-19 levels.

The greatest real estate impacts will be on business hotels, fine

dining, and conference facilities. But office demand also could

suffer as firms have less need to lease space to accommodate

client visits.

Work from Home versus Return to the Office

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-19, most of us are still not back in the office

nearly as often as in the “before times.” Various sources suggest

that less than half of office workers actually come into an office

on a given day, at least in major markets.

That level may finally increase meaningfully this fall, as some

leading tech firms and investment banks issued ultimatums for

their 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 than

similar 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 col-

laboration, and workers’ “fear of missing out” will translate into

more in-office work over time. But those factors will be weighed

against the potential to save on occupancy costs and especially

worker 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 the

upper hand in these negotiations and will resist employer

desires to have workers return to the office. But that could

change if unemployment rises in a downturn. Says the head of

real estate at one investment bank, “I don’t think we’ll know the

outcome of office until we’re through a recession and the power

dynamics between employee and employer change. But we do

know there’s definitely going to be less office demand.”

One guess, which seems to reflect the collective wisdom of

experts we interviewed, is that “probably somewhere between

10 and 20 percent of the stock needs to be removed or repur-

posed, leaving the 80 percent that really does a better job of

delivering what tenants want,” according to the head of research

9Emerging Trends in Real Estate

2023

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 be

rendered 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 the

kinds of collaborative work expected to dominate office work in

the future, which likely will vary across firms and industries and

take years to define. Another critical challenge is accommodat-

ing worker preferences for individual workspaces if most people

come into the office on the same three days to be with their col-

leagues. 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 space

in the future or because they could not break their lease. Thus,

the level of physical office occupancy (i.e., the share of work-

ers actually coming into the office) is considerably less than

standard economic occupancy metrics (the percentage of office

space 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 compla-

cency by the relatively benign vacancy levels. More firms are

downsizing 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 by

trying to sublet the space until their leases expire. Brokers report

that a record level of office space is available for sublease, and

more is hitting the market every quarter. Much of this space will

eventually turn into outright vacancies as leases turn, unless

firms eventually reverse course.

But no one we interviewed expects a mass departure from office

buildings. Even under the most pessimistic scenarios, most

knowledge work will occur in company offices, which, after all,

were designed to facilitate this high-value work. But it will take

more 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 and

biblical references, it’s probably really more of an Odyssey as

opposed to an Exodus.” The search for a post-pandemic “new

normal” will continue.

3. Capital Moving to the Sidelines—or

to Other Assets

 After a robust first half of 2022, real estate property transac-

tions began declining, primarily because buyers and sellers

cannot agree on pricing due to heightened market uncer-

tainty.

 Rising debt costs and restrictive underwriting standards are

also limiting transaction volumes.

Exhibit 1-5

Anticipated Changes in Commercial Mortgage Rates, Ination, Cap Rates, and Expected Returns, Next Five Years

20%

40%

60%

80%

100%

Investor return expectationsReal estate cap ratesCommercial mortgage ratesInﬂation

Next 5 years2023Next 5 years2023Next 5 years2023Next 5 years2023

Increase

Increase substantially

Decrease

Remain stable

at current levels

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

10 Emerging Trends in Real Estate

2023

Says the regional leader of one global firm, “Cap rates have

gapped 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 so

everything has to be repriced, everything has to be reset.”

Also limiting investor demand: debt is getting more difficult to

obtain, and the Emerging Trends survey expects underwriting

standards to get even more rigorous. As the partner in one lead-

ing advisory firm explains, “This is one of those ‘cash is king’

situations where borrowing costs are higher, and if you’re an all-

cash buyer, those probably represent a disproportionate share

of the people in the market today.”

 The denominator effect may force some institutional inves-

tors to reduce their CRE exposure, but any negative impact

could be limited by the growing market share held by

nontraded REITs, high-net-worth investors, and other non-

institutional 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 and

nearly one-third more than the prior $600 billion record reached

in 2019. The surge continued into 2022, with sales volumes in

the first half of the year up 38 percent over the same period last

year, as even the sharp rise in interest rates did little to dampen

transaction volumes.

But these recent volumes do not tell the whole story—and

the 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 of

assets 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.

Fewer Investors

Fewer investors and lenders will be providing capital for assets,

according to this year’s Emerging Trends survey: expectations

of 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 compel-

ling risk-adjusted returns.

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 with

the lower expected returns discussed in our “Normalizing”

trend. Rising interest rates are making acquisition and construc-

tion 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 or

pull out altogether.

Exhibit 1-6 Availability of Capital for Real Estate,

2023 versus 2022

Public-equity REITs

Institutional investors/

pension funds

Private local investors

Private REITs

Foreign investors

Private-equity/opportunity/

hedge funds

Securitized lenders/CMBS

Commercial banks

Mortgage REITs

Insurance companies

Government-sponsored

enterprises

Debt funds

Nonbank ﬁnancial

institutions

Lending source

3.18

3.09

3.00

2.98

2.89

2.73

3.74

3.54

3.59

3.66

3.67

3.40

3.05

2.99

2.97

2.83

2.72

2.58

2.56

3.44

3.26

3.39

3.44

3.42

3.63

3.61

2022

2023

2022

2023

Large

decline

2 43

Stay

the same

Large

increase

Equity source

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

11Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

Meanwhile, the same interest rate increases that reduce lever-

aged returns and thus demand for real estate also make bonds

and other interest-bearing investments more compelling. As the

head of real estate banking at one investment bank explains,

“Rising bond yields are going to mean that real estate and other

alternatives are all going to be facing less availability of capital

and some outflows.”

And while interest rates are increasing, equity and bond prices

have been falling, triggering the “denominator effect” for some

institutional investors with asset allocations that must remain in

balance. 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 this

time. 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 gov-

erned by fixed asset allocations, including public REITs, private

investment firms, and high-net-worth individuals, and especially

nontraded 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.

Uncertainty = Hesitancy

Perhaps the biggest headwind to getting deals done now is

uncertainty over where prices will settle. Reflecting the views of

many experts we interviewed, one senior investment banker says,

“Transactions are being done at cap rates that are anywhere from

25 to 75 basis points wider than they were—but there is not any

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 to

go 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 the

financial distress that forces them to. It all translates into fewer

deals. One senior adviser to institutional investors said, “It’s pen-

cils 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’s

comments at the end of August led more observers to believe that

relief will not come until at least 2024 and seemed to precipitate

a 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.”

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 have

capitulated enough to recognize the new environment.”

Exhibit 1-7 Debt Underwriting Standards Forecast

for the United States

More rigorousRemain the sameLess rigorous

4.1% 24.8% 71.1%

20.3 61.1 18.6

3.9 22.3 73.8

13.1 52.4 34.5

24.9 45 .0 30.1

16.8 47.0 36.2

8.4 44.2 47.4

35.4 51.7 12.9

2016

2017

2018

2019

2020

2021

2022

2023

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

Exhibit 1-8 Equity Underwriting Standards Forecast

for the United States

2016

2017

2018

2019

2020

2021

2022

2023

More rigorousRemain the sameLess rigorous

4.4% 28.8% 66.8%

28.0 53.7 18.3

5.0 27.9 67.1

12.9 55.5 31.6

21.1 48.7 30.2

17.1 51.4 31.5

11.5 54.2 34.3

34.0 52.4 13.6

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

12 Emerging Trends in Real Estate

2023

At the beginning of COVID-19, several firms set up opportunistic

funds anticipating all the distress that ultimately never came.

Most of those funds eventually just went away or changed their

focus. 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 lot

of the nontraded REITs have plenty of money. There’s still high

net 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 back

on some things. We’re more selective, and things have to be

more compelling. You have to take a closer look, resharpen your

pencils.” But deals will get done. Concludes one adviser, “If

deals underwrite and make sense, there is capital that is both

eager and available.”

4. Too Much for Too Many

 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 homeownership

bar further out of reach for a growing share of households.

 The chronic undersupply of housing is the result of govern-

ment 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 afford-

able—but prices and rents have soared even further out of

reach over the course of the past year. And even if we experi-

ence 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 existing-

home price jumped by over 18 percent in 2021 alone—the

largest 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 afford-

ability has fallen to its lowest level in over 30 years relative to

incomes, according to the National Association of Realtors.

Exhibit 1-9 Real Estate Capital Market Balance Forecast,

2023 versus 2022

Debt capital for acquisitions

Debt capital for reﬁnancing

Debt capital for development/redevelopment

2023

OversuppliedIn balanceUndersupplied

36% 53%

11%

2022

28%

67%

33%

57%

10%

2022

54%

40%

49%

43% 9%

2022

19%

54% 27%

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 a

crash or liquidity crunch in property markets. Notably, there are

few signs of distress. Balance sheets are generally strong, lever-

age is low, and values have not fallen very far, so few assets are

underwater with their debt. Moreover, replacement financing is

generally still available for those who need it, if at a higher price

and 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 open-

ing overview. Thus, there are few examples of motivated sellers

in the market.

13Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

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 of

U.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 build-

ing 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 single-

family rentals (SFRs) also contributes to declining affordability

of for-sale housing. Proponents argue that SFRs extend the

opportunity 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 homebuy-

ers 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 the

unit. 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 a

third compared with before the pandemic.

Another supply constraint is homebuilders’ cautious construc-

tion pacing, a vestige of the last recession. Explains the director

of 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 that

again. 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. “The

construction sector as a whole hasn’t returned to the peak we

saw 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 house-

hold formations was the lowest since the government began

tracking these trends and half as much or less than in preced-

ing decades, despite the consistent increase in deliveries since

bottoming in 2010. And now both permits and housing starts

have been trending down again in 2022. Plunging homebuilder

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

Real price

Nominal price

2022201820142 01020062002199819941990198619821978197419701966196219581954

–15%

–10%

–5%

10%

15%

20%

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

14 Emerging Trends in Real Estate

2023

confidence suggests that that decline will likely continue until the

interest rate environment turns more favorable.

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’re

moderating, but they’re still at very high levels.” Finally, high

permitting fees and utility charges and large minimum lot sizes

push developers to build more expensive homes.

Renters Priced Out of the Homebuying Market

With a growing share of households priced out of the for-sale

market, 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-19. Further boosting demand is the increasing

number of younger adults choosing to live alone, according

to a report from economists at the Fed, perhaps a reaction to

lockdown claustrophobia.

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 since

1980,” 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 than

home prices. And though not a formal part of the affordability

calculations, other housing-related costs like utilities and main-

tenance are also rising faster than incomes, further constraining

the ability of households to afford basic shelter.

Moving to More Affordable

Recent slowdowns in rent growth and home price appreciation,

noted in our “Normalizing” trend, have done little to increase

affordability. So how to address this? Millions of people have

taken matters into their own hands. As an executive with one

developer notes, “A lot of people are moving to markets where

Exhibit 1-11 Average Cost of Regulation as a Percentage of Total Multifamily Development Cost

Pure cost of delay (if regulation imposed no other cost)

Cost of land dedicated to the government or left unbuilt

Complying with OSHA/other labor regulations

Affordability mandates (e.g., inclusive zoning)

Cost of applying for zoning approval

Fees charged when building construction is authorized

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

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

Changes to building codes over the past 10 years

10%

15%

20%

25%

30%

35%

40%

45%

11.1%

8.5%

5.4%

4.4%

3.2%

2.7%

2.6%

2.4%

0.5%

Total:

40.6%

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

15Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

they can go buy a house and it’s a little more affordable.” That

solved 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, migra-

tion from the highest-priced markets has not been enough to

actually 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 a

recession. “The good news is that it is an opportunity for home-

builders and land developers to do a little catch-up. They’ve

been 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 to

solve the affordability quandary. What else would help? As we

outlined in previous editions of Emerging Trends—when hous-

ing 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 homes

by helping bring innovation and cost efficiencies to a sector that

has been notoriously slow to change. Most notable are different

approaches to prefabricated and modular housing in which much

or all of the house is built in a factory and then assembled on

the homesite. These methods can dramatically reduce the need

for labor and shrink production times at more affordable costs.

Promising innovations are also arising from the nascent single-fam-

ily build-to-rent sector, which is learning how to scale construction

and design to reduce costs and development time, as explained

in our single-family sector overview found in chapter 2.

Government could also expand affordable housing produc-

tion. Unfortunately, Congress dropped the affordable housing

components of the proposed Build Back Better Act from what

became 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 obvi-

ous: 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 and

get it built more affordably.”

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

Multifamily average = 4.5

Single-family average = 12

Multifamily starts (5+ units)

Single-family starts

2021

2022

2019

2017

2015

2013

2011

2009

2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

19 79

19 77

19 75

19 73

19 71

1969

1967

1965

1963

1961

Sources: U.S. Census Bureau and U.S. Department of Housing and Urban Development; compiled by Nelson Economics.

Note: 2022 gures are through July.

16 Emerging Trends in Real Estate

2023

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 the

Sidelines—or to Other Assets.” But real estate capital markets

are also becoming more bifurcated between

the favored and the

scorned 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:

 The security of major product types with the strongest

demand fundamentals, notably industrial and multifamily

housing, which essentially tie for top investment ratings in

this year’s Emerging Trends survey;

 Best-quality assets in sectors undergoing significant

demand disruption, especially retail and office; and

 Narrowly targeted subsectors (like student housing) and

newer “niche” asset types (like single-family rentals).

There is much less appetite now for riskier opportunistic invest-

ments. 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 divergence

of demand among different property types and then within

property types, particularly office. As investors get more

selective, they increasingly choose safer sectors with the most

compelling 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 the

greatest interest from capital markets. Retail and office, by

contrast, 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 for

apartments and warehouses is deep at all price points and

almost every market, but the story is more nuanced for office

and retail. Demand for well-located, top-quality office and retail

space is as strong as ever, but tenants, and thus investors, are

losing interest in lower-quality buildings and shopping centers.

Bifurcation and the Flight to Quality

The bifurcated demand that started a decade ago in the retail

sector and expanded over time has now spread to the hotel

and office sectors. However, the dynamics are different for

each sector. The retail bifurcation was driven primarily by years

of overbuilding combined with the sector’s failure to update or

demolish obsolete centers and then compounded by the grow-

ing 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 and

everything 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-19 recov-

ery 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 and

business hotels languish.

And then there is office, where tenants are increasingly choos-

ing newer, more modern buildings and abandoning everything

else, 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 old

class B office, I’d be worried because that’s the kind of space

that 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 office

stock—is distinguished by several key modern design features.

These include the following:

Exhibit 1-13 Share of All CRE Transactions, by Major

Property Sector, 1H 22 and Change from 1H 21

Sector

Share of

1H 22 sales

Change from

1H 21

Apartments 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.

17Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

 High ceilings and floor-to-ceiling window lines that allow for

abundant natural light;

 Sustainable design that minimizes or even zeros out the

building’s carbon footprint; and

 Premium 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 invest-

ment 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 their

brand. And so if they want to attract talent, they want to be at a

modern, sustainable building.”

“Those rents continue to hold up really well,” says the head of a

real estate investment bank. “And everything else continues to

be really, really tough. So it’s going to be ‘trophy and trauma’ in

the business.” It is almost hard to overstate how much that older

office product has fallen out of favor. A global portfolio man-

ager 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 opportu-

nistic 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 and

modern design standards offered by the top-tier properties.

Mainstreaming of Niche Property Types

In last year’s Emerging Trends, we documented the growing

interest by institutional investors in nontraditional CRE product

types. This year’s survey and interviews reveal an even stronger

interest in niche products. Niche property types occupy five of

the top-rated six slots for “investment prospects,” as shown in

chapter 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 and

returns relative to the traditional product types. Why? Exits are

less certain because these assets tend to be more thinly traded.

Moreover, there is less reliable operating data, and these prod-

ucts often require more specialized management, raising the

risks for investors lacking experience in these sectors.

The significance of these factors is likely to recede as more

investors 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 institu-

tional players often construct their portfolios to match the NPI

mix, 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. In

a 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-19 Onset (April 2020–June 2022) by Building Age

–100 –80 –60 –40 –20 0 20 40 60 80 100

Net absorption (millions of square feet)

Pre-1960

1960s

1970s

1980s

1990s

2000s

2010–2014

2015–pres ent

–75,616

–28,007,668

–23,240,353

–7 7,4 54,0 06

–24,469,540

–12,505,693

–80,788,619

86,794,297

18 Emerging Trends in Real Estate

2023

change will effectively give investors more latitude to pursue less

traditional asset types.

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 the

more established subtypes like medical office, self-storage, and

student and senior housing with strong demographic tailwinds

supporting rising demand. There also are newer subtypes with

growing interest, like cold storage warehouse, life-sciences

office, and single-family rentals, generally benefiting from favor-

able 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.

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 a

little 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 to

ride out expected headwinds due to strong demographic sup-

port or other favorable demand fundamentals.

6. Finding a Higher Purpose

 Long-term demographic trends and more recent structural

demand shifts have rendered countless existing buildings

and properties either redundant or obsolete. Many of these

buildings may ultimately need to be repurposed or upgraded

to 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 better-

located 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 and

substantial investment to execute. The value loss that owners

may need to recognize in order to justify the transformative

investment could be the greatest barrier to project feasibility.

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 preced-

ing 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.

The Importance of Older Buildings

In her classic 1961 urban planning treatise, The Death and Life

of Great American Cities, Jane Jacobs elucidates the critical

ingredients for a diverse, vibrant city. Among them is one rule

that may seem puzzling at first: “The district must mingle build-

ings that vary in age and condition, including a good proportion

of old ones.” Why the need for old buildings? Why not all new?

“If a city area has only new buildings, the enterprises that can

exist there are automatically limited to those that can support the

high costs of new construction.” How boring and monotonous

that 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: so

many of them find new life with uses different from their original

function. Walk around the bustling old port districts of Montreal

or Boston or Portland, Maine, and you will find hundreds of for-

mer 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 and

vintages that have been converted into new uses. Often the

conversions go “upstream,” as lower-value land uses like ware-

houses convert into higher-value uses like office or retail. But the

direction 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 the

location) or obsolete (unable to lease in its current condition and/

or configuration). But many—though not all—of these can be

either repurposed or upgraded to meet new market standards.

The many opportunities include the following:

19Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

 Converting older offices to residential uses, or upgrading

them 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); and

 Scraping buildings to create development land where con-

version 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 by

both people inside and outside the real estate industry. But the

case for these conversions can be easy to exaggerate. Nearby

residents don’t relish sharing local roads with big-rig trucks serv-

ing 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, often

command the highest values per square foot of any property

type and warehouses among the lowest: converting a mall into a

warehouse may require an enormous value writedown.

It is possible to convert malls to uses with higher values than

warehouses. For example, the Austin Community College

converted Highland Mall into a mixed-use campus, while an

e-commerce giant purchased the former Lord & Taylor flagship

store in Manhattan, aiming to convert the building into offices,

though those plans have since been frozen as it reevaluates

its space needs. An even more likely step for failing malls is to

convert just the most problematic portions. For example, at York

Galleria in York, Pennsylvania, a former Sears was converted into

a casino and then a vacant Bon-Ton department store into a self-

storage facility.

What’s Next for Office?

Perhaps the biggest challenge confronting urban landlords and

city 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 right

now is we’ve got a bunch of pre-1980 buildings that are function-

ally 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 con-

crete 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 improve-

ments to compete for tenants, of course, but even funding

tenant improvements may be too risky in this highly competi-

tive 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 hard

pressed 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 or

there’s some debt extension test that comes up. Some of those

buildings will come back to the lenders, but others may be can-

didates for conversion to other uses.”

One affordable housing developer is optimistic about the poten-

tial for more housing. “Anybody who’s sitting in city hall with a

homelessness 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 some

homeless 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 over-

priced. But at some point, owners may have no alternative to a

serious 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 the

understanding that there is no cookie-cutter building to convert,

particularly when converting commercial real estate to multifam-

ily use. Not only is each experience different, but developers of

successful 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

20 Emerging Trends in Real Estate

2023

adjust in real time. As one developer summed it up: “You go with

the flow of what the building is telling you it wants to do or can

do 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 not

fully vacant—may not be the universal impediments once thought.

They have been successfully addressed enough times to suggest

that 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—and

the full conversion process itself—depends on the strength of the

multifamily market in the particular location.

A growing number of developers are honing the skills required

to understand which buildings are most amenable to trans-

formation at a feasible price point and to undertake the

complexities of conversions. Conversions to residential units

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.

Retrotting for the Future

The obstacles to converting from one property type to another

are varied and daunting. Many owners will rise to the challenge,

but such undertakings are often not practical—either too expen-

sive or just too difficult. But the need to “retrofit for the future,”

as one real estate adviser points out, provides another set of

opportunities that may be more limited in scope but ultimately

broader in scale. Owners and managers of real estate will need

to enhance the resilience of their assets against potential climate

change impacts or otherwise decarbonize their assets as

increasingly demanded by tenants, investors, and regulators,

as we discuss in greater detail below.

But whether a full-scale conversion to another land use or a

more limited retrofit to higher building standards, there is a

compelling sustainability reason for these projects beyond their

potential financial feasibility. It has been said that “the greenest

building is one that is already built.” Simply, it is far more sustain-

able 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 make

way for new construction.

7. Rewards—and Growing Pains—in the

Sun Belt

 Despite their continued popularity among residents, employ-

ers, tenants, and investors, some Sun Belt markets are

experiencing 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 capac-

ity to accommodate continued massive population inflows.

 These markets will remain popular for both business and

residential in-migration but could see the pace of both occur

at more moderate levels.

Everyone still likes the hot Sun Belt markets. Almost all the

Emerging Trends “magnet” markets that shone most brightly

in our last report—the large Super Sun Belt metro areas and

the fastest-growing Supernovas—still shine luminously in the

Exhibit 1-15 Importance of Disrupters for Real Estate

in 2023

Drones

Blockchain

Augmented/virtual reality

3-D printing

Autonomous vehicles

Sharing/gig economy

Coworking

5G implementation

Internet of things

Artiﬁcial intelligence/machine learning

Automation

Big data

Cybersecurity

Construction technology

Real estate industry disrupters

3.74

3.49

3.23

3.15

3.09

3.02

2.98

2.97

2.77

2.62

2.56

2.41

2.36

importance

Moderate

importance

Great

Source: Emerging Trends in Real Estate 2023 survey.

21Emerging Trends in Real Estate

2023

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 has

slightly dimmed the outlook for some star markets, as indicated

by this year’s survey.

All this growth is bringing big-city problems to some smaller,

vibrant markets that Emerging Trends once described all-inclu-

sively as 18-hour cities. Such problems include those that affect the

quality of life (like congestion) and standard of living (like declining

housing affordability). These side effects to unfettered growth bring

to mind the old joke about the hot restaurant that is so popular that

no one wants to go there anymore. The Sun Belt markets are

still 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, some

high-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 the

Supernovas and some other Sun Belt markets were likelier than

members from metro areas with more sluggish economies to

cite issues like living costs, housing affordability, and infrastruc-

ture quality as being a regional disadvantage. These issues

were most frequently mentioned as problems in some of the

booming markets, like Austin and Nashville.

Describing the growing pains in her market, a focus group par-

ticipant commented, “Nashville is like a teenager. We have grown

too quickly and haven’t decided what we want to be when we

grow up.” Like some other Sun Belt markets, this former “18-Hour

City” has graduated to a full-fledged 24-hour metropolis, but the

regional 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 intrare-

gional migrations from CBDs to suburbs. Some of this migration

was destined to reverse eventually. Some households left their

inner-city apartments for safer environs until the pandemic was

better understood and brought under control. Some young

adults moved back in with their parents until their jobs reopened

or their old neighborhood revived. Many of these migrants have

moved back to their old places.

But beyond these temporary moves, the pandemic acceler-

ated more permanent migration. Some workers were freed to

move wherever they wanted by flexible work arrangements

that 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 favor-

able amenities or superior economic opportunities. A ULI focus

group participant from Salt Lake City said, “Quality of life and

affordability have been great draws to the market. Sustained

high growth will test these factors long-term.”

These migrations certainly caught the attention of investors and

developers. Many of these lifestyle markets jumped to the top

of 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 for

work/life balance, and then the jobs have come in a big way.

They were already doing right, and then the COVID-19 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 gain-

ing momentum—risking oversupplied markets. While job growth

and income growth in these markets far outdistance national

trends, home prices and rents are growing even faster, compro-

mising the affordability that helped made them draw migrants

in the first place. Inflation rates in Phoenix, Atlanta, Tampa, and

other popular Sun Belt metro areas are among the highest in the

country, partly due to surging housing costs, which make up a

significant portion of the inflation calculation.

What happened? For some markets, it was just too much, too

soon. 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 the

nation, 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 Life

At the same time, one appeal of these destination markets is their

lower tax rates and perceived lighter regulatory burden. But more

relaxed 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 into

a major metropolis inevitably experiences growing pains along

the way. A key issue confronting the current generation of hyper-

growth markets is whether they will invest in the infrastructure

and regional planning needed to facilitate growth while maintain-

ing the qualities that led to their appeal.

22 Emerging Trends in Real Estate

2023

One ULI focus group participant in Austin said, “The disadvan-

tages 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 representa-

tive offered that “the rapid increases in cost of living that we’ve

seen in the region have hindered some of the advantages the

area 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-19 hit, and brokers already report

housing 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 both

residential and commercial real estate. The head of an insti-

tutional investment advisory firm says they are “paying much

closer attention to supply in traditionally unconstrained markets,”

especially Dallas, Atlanta, Austin, and Phoenix. “We are prob-

ably relatively less attracted to the growth markets despite their

fundamentals, 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 these

markets will continue, if at a slower pace going forward, and will

continue to attract a disproportionate share of the investment

capital. And any “oversupply” of homes could help ease hous-

ing 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 are

keys to success. And they can also cover up a lot of mistakes.

So those markets are still a major focus.”

8. Smarter, Fairer Cities through

Infrastructure Spending

 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 opportu-

nity to replace and expand critical urban infrastructure to

rebuild cities and spur new development—and address

historical inequities.

 After years of uncoordinated local efforts, the new national

programs may provide the leadership needed to transform

the built environment.

The title of the final trend in the 2020 edition of Emerging Trends

captured the sorry record of federal leadership in funding criti-

cally needed infrastructure: “Washington Fumbles; States and

Cities 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 the

meantime, state and local governments took the initiative with

efforts destined to be more piecemeal and less coordinated

than 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 spend-

ing over five years and eclipses the $305 billion infrastructure

bill 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 broad-

band internet, power, environmental remediation, and resilience,

among other programs. The Inflation Reduction Act adds spending

for combating climate change and building energy security.

While every program promises to touch some part of the built envi-

ronment, 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 to

opportunity 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 thou-

sands, and destroying generational wealth. The Reconnecting

Communities Pilot program will provide “dedicated funding for

23Emerging Trends in Real Estate

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Chapter 1: Taking the Long View

planning, design, demolition, and reconstruction of street grids,

parks, or other infrastructure” to reconnect these bifurcated

communities. 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 neighborhood

of 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 the

neighborhood. According to a leader of the reconnect effort, the

community then lost 61 percent of its population and almost half

of its homeownership between 1950 and 1980. As he con-

cludes: “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 other

cultural amenities, in addition to affordable housing and a new busi-

ness corridor. St. Paul already has received a $1.4 million grant to

“develop a comprehensive transportation plan for the Rondo neigh-

borhood to address safety, equity, and quality of life concerns.”

The Reconnecting Communities Pilot program may help this

project and other similar ones move forward:

 The Texas Department of Transportation is building a deck

above a sunken portion of I-10 separating downtown and

uptown El Paso to create, as described in the federal grant

application, “amenities such as green space, public gather-

ing space, and entertainment venues.”

 A community group called Loving the Bronx supports

capping the Cross-Bronx Expressway, which runs through

dense neighborhoods in the South Bronx, with the goals of

improving local air quality and providing new land for devel-

opment projects.

 In Seattle, Lid-5 activists are advocating for the city govern-

ment 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 land

as 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 sig-

nificant 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 United

States, the program also seeks to “lower prices for internet ser-

vice 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 the

Opportunity: “Availability of widespread, high-speed broadband

networks already has a wide variety of benefits to the real estate

industry, communities, and individuals. . . . Increasing mobility

opportunities can present potential value that real estate owners

and managers can harness for their buildings. Such opportuni-

ties include repurposed or reduced parking facilities, denser

projects, and higher rates of return.”

Expanding broadband access to underserved communities is

also critical to increasing opportunities for employees in more

communities 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 have

been unable to keep up with building critical infrastructure,

particularly that which is related to transportation. The infrastruc-

ture 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 the

need to invest in public transportation: “Increasing access to

jobs, economic opportunities, social interactions, and mobility

is essential. Public transportation provides the regional frame-

work for compact, people-centric urban development, enables

significant real estate and value creation opportunities, and

mitigates climate change.” The new infrastructure funds more

than $90 billion to modernize transit, improve accessibility, and

continue 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.

24 Emerging Trends in Real Estate

2023

9. Climate Change’s Growing Impact on

Real Estate

 The CRE sector has an important role to play in mitigat-

ing climate change. But with climate risks growing, the real

estate industry must proactively address the impacts of

climate change on assets.

 Climate change may alter the dynamics of where people

want to live and invest. In addition to the discomfort and

health risks of living in ever-hotter climates, energy costs rise

with temperatures, as do the risks of power outages as more

strain is placed on power grids. Extended drought condi-

tions may limit new development because authorities may

limit new hookups.

 Many investors rely on insurance rather than capital improve-

ments to protect their investments, but changing investor

sentiment toward climate risks may force more affirmative

changes.

The earth is getting hotter. The latest global climate report from

the National Oceanic and Atmospheric Administration (NOAA)

found that July 2022 “marked the 451st-consecutive month with

temperatures above the 20th-century average. And the five

warmest 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 for

Environmental Information calculates that the annual number

of billion-dollar events (inflation-adjusted) in the United States

has been increasing rapidly in recent decades, rising from

about three per year in the 1980s to over 20 in the 2020s. More

disturbing is the increase in severe summer storms, excluding

climate events like drought, flooding, and wildfires. The number

of billion-dollar severe storms has jumped from less than one

per year in the 1980s to 12 in this decade—a 15-fold increase in

less than 40 years and trending further upward.

Just in the recent summer of 2022, we experienced five “once-in-

a-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 build-

ings and infrastructure are poorly equipped to withstand the

changing climate—much less what might be coming.

There is still a political divide in the country about what is to

blame 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 Center

in 2021 believe that extreme weather events across the United

States 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—climate

change, 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 do

even 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 our

industry 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 to

migrate 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, bring-

ing 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 tempera-

tures, which can be hazardous to humans if they cannot cool

down at night. Sun Belt cities like Phoenix and Dallas are work-

ing with CRE owners to reduce heat islands by expanding the

tree canopy, adding reflective coatings or vegetation to roofs,

and using cool pavements to reduce the heat absorption of

asphalt streets and concrete sidewalks. These approaches are

important and necessary but may ultimately prove inadequate

to the challenge if climate change keeps ratcheting up tempera-

tures as expected.

Beyond the discomfort and health risks of living in ever-hotter

climates, energy costs rise with temperatures, as do the risks

of 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

25Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

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 for

Drought-Resilient Development.

Water and Power

The combination of rising temperatures and drought—often

related—may soon limit where we can build. Drought through-

out much of the Southwest is prompting water authorities to

cut allocations to several states as water levels in rivers and

lakes fall to multidecade lows. Declining water availability could

require reductions in new hookups and compromise hydroelec-

tric power sources. States may be forced to choose between

growing cities and agricultural areas. Some of the fastest-

growing 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 of

cities pausing all new development because of drought in some

western 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 improve-

ment will come slowly, and forecasts expect temperatures to

keep rising and weather to become more extreme for the fore-

seeable future. So how are we to adapt?

The Bipartisan Infrastructure Law highlighted in the preceding

“Smarter, Fairer Cities through Infrastructure Spending” trend

contains major programs specifically designed to improve

the resilience of physical and natural systems. These include

funding for water efficiency and drought resilience projects in

eight western states and programs to increase the resilience

of transportation systems. The infrastructure law also provides

funding to homeowners for energy efficiency upgrades through

the Department of Energy’s weatherization assistance program.

Though none of these programs offers direct assistance to own-

ers 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 undertake

even 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, “the

odds 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 better

but likely would be more expensive in the short term.

That calculus could change if insurance costs are allowed to

rise to reflect the full risks of climate change. In many high-risk

areas, insurance is subsidized, or insurers are limited in what

Exhibit 1-16 Percentage of U.S. Adults Who Say Their Community Has Experienced Weather- and Climate-Related

Events in the Past 12 Months

10%

20%

30%

40%

50%

Experienced rising sea levels

that erode beaches

Experienced major

wildﬁres

Experienced droughts

or water shortages

Experienced long periods

of unusually hot weather

Experienced severe weather,

like ﬂoods or intense storms

43%

42%

31%

21%

16%

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.

26 Emerging Trends in Real Estate

2023

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 price

of that amenity and location fully, and they don’t,” says one

academic. “But I think we’re moving in that direction. When the

insurance 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 substitute

for building resilience: “Now investors understand the need to

model climate risk over a longer period of time. Insurance can

protect us against damage loss but not demographic or investor

sentiment changes.”

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 indus-

try groups like NCREIF and PREA and from government

regulation by the SEC.

 As shelter costs increasingly strain household budgets, state

and local governments are resorting to regulation to address

affordability, including various types of rent control and

vacancy 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 the

property 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 the

growing 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 and

investors are intensifying. In October 2021, the two primary

industry groups for institutional investors—the National Council

of Real Estate Investment Fiduciaries (NCREIF) and the Pension

Real Estate Association (PREA)—jointly released their ESG

Principles of Reporting for Private Real Estate handbook for

reporting 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 Reporting

Standards” (of how member firms report their performance and

portfolios to their clients and the industry). Nonetheless, these

principles likely will be widely adopted by institutional inves-

tors, given NCREIF’s and PREA’s influence in their respective

communities. The NCREIF/PREA guidance joins a growing list

of standards and tools being developed to help investors and

regulators in their quest to accelerate decarbonization in the

built environment and promote broader ESG adoption by the

private sector.

Moreover, the impact of this greater disclosure could be felt

more widely throughout the real estate industry due to the mar-

ket size of pension funds and other institutional investors. “Some

of 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 more

energy-efficient buildings, particularly offices—as noted in our

“Give Me Quality, Give Me Niche” trend—older “brown” build-

ings will see their values discounted, and their owners have

trouble selling them. As the head of U.S. real estate for a global

private-equity firm explains, “You can’t sell the building to a

major 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 more

sustainable 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 imple-

menting their climate action plans. Buildings in several leading

markets will need to achieve energy efficiency targets and

greenhouse gas emission limits as early as 2024 or face sig-

nificant fines. The climate impact of buildings will likely become

more transparent across the United States if the Securities and

Exchange Commission (SEC) has its way. The SEC proposed

27Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

new ESG disclosure regulations in May 2022. The amendments

to rules and reporting forms aim “to promote consistent, com-

parable, 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 self-

regulation calls for. This would include reporting on greenhouse

gas emissions and the portfolio’s carbon footprint, as well as the

climate 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 specifically

covered. The proposed changes would apply to “registered

investment advisers, advisers exempt from registration, reg-

istered investment companies, and business development

companies.” These would include REITs, with additional report-

ing requirements for funds specializing in ESG investing, such

as green building funds. Indeed, the SEC and European Union

regulators are already launching investigations into companies

accused of misrepresenting their environmental impacts in

funds claimed to be “green.”

Still, these are only draft regulations. Indeed, some ques-

tion whether the SEC has the authority to implement these

rules, especially given the recent U.S. Supreme Court deci-

sion 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 and

greenhouse gas emissions limits by 2024.”

To be fair, building owners and developers may also leverage

a host of new incentives from federal, state, and local govern-

ments, 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 in

place to integrate ESG considerations into the investment pro-

cess. But adoption varies widely by type of firm, with generally

much higher levels from public companies (61 percent) and

institutional investors (55 percent) than private companies

(23 percent).

ESG disclosure will be costly, requiring not only capital improve-

ments in buildings to reduce carbon impacts but also the

systems to measure them and the staff to comply with the

proliferation of reporting requirements. Those costs could favor

larger, better-capitalized investors, leading to more industry con-

solidation. 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 ben-

efit 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 of

mind 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 to

individual property owners.” That warning comes from the head

of advisory services for a real estate data analytics firm.

As shelter costs increasingly strain household budgets, some

state and local governments are resorting to regulation to

address affordability. This takes two primary forms: limits on

how much landlords can increase rents and imposing costs on

owners who keep units empty. At present, only California and

Oregon, plus the District of Columbia, have statewide rent con-

trol, although about 25 municipalities in California impose their

own laws. Four other states—Maine, Maryland, New Jersey, and

New York—allow some or all local governments to enact local

own regulations but have no statewide law. Most other states

either expressly preempt rent control or limit home rules that

would 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. Several

of these initiatives already failed to pass before the legislatures

adjourned for the session. But the volume and range of these pro-

posals show just how widespread the concerns are, and some of

these 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

28 Emerging Trends in Real Estate

2023

Inclusive and Equitable Growth: The Emergence of Impact Investing within

Institutional Real Estate

In recent years, institutional investors and corporations have

announced billions of dollars’ worth of capital commitments

targeted at addressing socioeconomic inequity, particularly

with respect to bridging the racial wealth gap. At the same

time, there are very few announcements detailing if and how

those commitments have been met.

It appears that many of these corporations and investors

are struggling with how, where, and with whom to deploy

that capital; industry leaders have not yet coalesced around

solutions to address inequity that are innovative, replicable,

and scalable.

The 1977 Community Reinvestment Act initiated a wave of

investment targeted at meeting some of the basic needs of

low- and moderate-income communities. The passage of the

act was an important step aimed at reversing years of inten-

tional disinvestment caused by practices such as redlining

and blockbusting.

In my view, it was a recognition that capital should be

deliberately directed to address the needs of low-income

individuals: all members of society deserve to be afford-

ably housed, have enough food to eat, and have access to

employment that allows them to address at least their most

basic needs. It is critical that society continue to support its

most vulnerable.

It is now equally critical, however, that new capital deploy-

ment strategies be developed to support much more than

simple sufficiency; they need to be tailored toward more

equitable societal outcomes and the economic mobility that

is required to achieve them. Scalable solutions must be cre-

ated that allow more people to thrive, not just survive.

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 measure

that represents the income inequality or the wealth inequal-

ity within a nation or group) reached 0.485 in 2018—the

most inequitable level of income distribution recorded in the

United States since the Census Bureau began tracking the

metric in 1947, and the highest level of income inequality

among Group of Seven countries. In terms of wealth inequal-

ity, 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.

Research from Opportunity Insights comparing children’s

household incomes at age 30 to those of their parents at the

same age shows that absolute mobility has declined precipi-

tously. Ninety percent of people born in the 1940s out-earned

for inflation, no exemption for new properties, no allowances for

capital 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 declara-

tions. However, both states prohibit local rent control, and both

governors opposed relaxing state control, reducing the likeli-

hood of ever being enacted.

Vacancy taxes. Vacancy taxes can take various forms, but the

goal is to increase the effective supply of housing by impos-

ing costs on landlords who keep housing units vacant. Another

goal, which can also be applied to commercial property, is to

address blight by encouraging property owners to put their

buildings to productive use. For example, Washington, D.C.,

imposes a tax on vacant buildings of $5 per $100 of assessed

value, while “blighted” properties are taxed at $10 per $100

of value.

Vancouver, British Columbia, is believed to be the first city in

North America to impose a vacancy tax, enacted in 2017 to

combat 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 con-

dominium 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

29Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

Continued next page.

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 on

vacant retail stores in 2020 but suspended implementation for

almost two years due to the COVID-19 pandemic. The measure

finally took effect in 2022 for commercial space vacant for more

than 182 days in a calendar year. The tax equates to an average

annual 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 that

the 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.

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 regula-

tions 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, especially

climate change and housing affordability.

their parents by age 30, while only 50 percent of people born

in the 1980s did the same. The decrease in absolute mobility

has affected people in all socioeconomic classes, with lower-

income 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 inequal-

ity. According to research from the St. Louis Federal Reserve

Bank. in 2016, older Americans had more than 12 times

as much wealth as younger families, up from 7.5 times the

wealth of younger families in 1989. The top 10 percent of

families ranked by household wealth owned 77 percent

of America’s wealth in 2016, while the bottom 50 percent

owned only 1 percent. White families owned 89 percent of

America’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 ascendance

as talent and, increasingly, leadership within the workforce

will likely lead to a heightened focus on finding solutions to

these 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 and

income disparity; growth potential may be disrupted by social

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 will

vary by investor, this deliberately inclusive form of capitalism

focuses on unlocking the potential of people and places that

have been historically overlooked and underserved. Looking

through a dual lens of purpose and profit, measurable impact

and equitable outcomes are central to this investment strat-

egy. This stands in stark contrast to how investors have often

viewed social responsibility in the past—as a tangential and

philanthropic “nice to have,” but not a “must-have.”

Increased transparency has contributed to the evolution of

impact investing. The increases in both regulatorily man-

dated and stakeholder-driven environmental, social, and

governance (ESG) disclosures for public companies and

pension 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 along-

side their returns can now disabuse people of the notion

that purpose-driven investing must equate with conces-

sionary returns. Research now suggests that a company’s

improvement on material industry-specific ESG measures is

predictive of significant future financial outperformance rela-

tive to its competitive set.

30 Emerging Trends in Real Estate

2023

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 a better

understanding of the characteristics of places that are cor-

related with higher rates of upward mobility. Among the most

notable, Harvard Think Tank Opportunity Insights has used

anonymized census data, tax records, and most recently

social media data to analyze the characteristics of “high

opportunity neighborhoods.” They found a direct link between

economic connectedness (one form of social capital) and

higher levels of socioeconomic mobility for lower-income

individuals. It is important to highlight that the research found

that simple coexistence did not correlate with mobility; the

correlation 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 partic-

ipation from the private sector, in tandem with the cooperation

of 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 inves-

tors will likely need to be further incentivized to increase their

allocations outside the major metropolitan areas that have

traditionally been the primary beneficiaries of institutional

capital flows.

Public policy that deconcentrates poverty, reduces barriers to

the creation of affordable and attainable housing, and incentiv-

izes the development of mixed-income neighborhoods with

deliberate infusions of social capital warrants additional con-

sideration. The Economic Opportunity Coalition (EOC) recently

announced by Vice President Kamala Harris’s office is a posi-

tive 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

reported by Barron’s, some have even shifted from strictly

granting plus or minus 5 percent of annual spending to mod-

els 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 bridg-

ing 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 be

complemented by qualitative input from local, community-

based stakeholders who will be essential in co-creating

sustainable solutions to reducing inequity. The importance of

intentional co-creation cannot be emphasized enough given

that only 1 percent of real estate assets under management

are deployed by minority-led real estate firms and only 2 per-

cent of real estate development companies are led by African

Americans. Those investors who may be best positioned to

co-create sustainable solutions are still typically unable to

access the capital necessary to scale those solutions. It mat-

ters where capital is deployed, how it is deployed, and with

whom it is deployed.

A new generation of impact investors within the real estate

industry is innovating holistic approaches to addressing

inequity. Their impact frameworks and investment strategies

reinforce one another. Investments of financial capital in low-

and moderate-income neighborhoods complemented by

people-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 and

human 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 their

ability 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 virtu-

ous 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.

31Emerging Trends in Real Estate

2023

Chapter 1: Taking the Long View

The Opportunities and Challenges of Climate Risk Analytics

It is clear that real estate investors and developers can no

longer 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 United

States. Many of these types of events—and the material risk

they pose to the real estate industry—are unavoidable in the

near 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: physical

risks and transition risks. While both are critical to address,

acute (e.g., floods and hurricanes) and chronic (e.g., sea-

level rise) physical risks present a special concern for the real

estate industry given the geographically stationary nature of

most assets.

An array of climate analytics data, software, and consulting

services has emerged in response to the changing climate and

the attendant shifts in policy frameworks, regulatory environ-

ment, and growth in investor focus on environmental, social,

and governance (ESG) issues. These data providers offer a

wider range of commercialized science applications designed

to help institutional real estate managers identify, measure, and

describe physical risk at the asset and portfolio scales. While

these tools offer an opportunity to evaluate current and future

physical risk; the process by which investors integrate the infor-

mation 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 their

product offerings, these firms often create summary metrics

that aggregate the risk of multiple individual hazards. When

aggregated, the weighting factors and hazards included vary

by 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 of

physical 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 measure

tend to introduce further variation in outputs. This is due to

the differences in how providers source the “value” of VaR.

Considerations might include market value, the assumed

percentage change in value, capital repair estimates, replace-

ment 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 in

prediction 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 institu-

tional real estate managers to carefully articulate their use

case needs—specifically regarding valuation and value-at-

risk. The climate risk analytics provider community can, in

turn, benefit from sharing more about their approaches and

the strengths and limits of models and physical risk data. To

the extent that these conversations can be continuous and

earnest, 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

This figure from an institutional real estate manager depicts a set

of aggregate risk scores generated by three different climate risk

analytics providers (vendors A, B, and C) for assets (A to G), dem-

onstrating the challenge of translating complex climate science into

business decisions.

32 Emerging Trends in Real Estate

2023

Emerging Proptech Developments

The 2022 Mid-Year Global PropTech Confidence Index shows

that confidence in proptech, as an industry, is at an all-time

low for both investors and founders. This latest sentiment

level is an abrupt departure from record-high confidence

levels in 2021, following years of unprecedented growth in the

industry, and is in keeping with 2022’s broader sentiment shift

in the capital markets.

Investor confidence has declined considerably, measur-

ing 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 per-

cent 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 inves-

tors—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 for

enterprise software continues to grow quickly. As real estate

owners, operators, and developers struggle with increasingly

challenging environments of their own, many believe that

technology can provide an opportunity for revenue genera-

tion and cost savings.

The real estate recession during the Global Financial Crisis of

2007–2010 saw some of the fastest growth rates for revenue

of property management software systems as the recession

forced chief financial officers to embrace technology as a

means to drive efficiency. It is possible that this trend will only

accelerate during the current environment, as technological

efficiency compounds over time. In fact, many startups have

experienced 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 to

rebound; 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 senti-

ment included—presents the opportunity to adapt and share

best practices across asset types, sectors, and geogra-

phies. It encourages founders to move toward greater capital

efficiency and gives investors a new lens on how to make

meaningful investments.

As the real estate market continues to evolve, technology will

play an increasingly important role. In this section, we will

cover five emerging trends that are fueling new growth and

innovation 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 propos-

ing and passing key legislation to meet these targets. In

addition to environmental pressures, a number of prominent

social equity movements have catalyzed a shift towards the

public and private sectors including nonfinancial-related

disclosures, such as emissions and diversity data, into their

reporting. Firms are actively searching for an effective way to

collect and share data related to their pursuit. The real estate

industry 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 to

establish a baseline and measurement framework to map any

future improvements against. A selection of relevant bench-

marks include asset- and portfolio-level energy, water, and

waste 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 CO

emissions, based on a report from the IEA.

Energy and HVAC optimization, water and waste manage-

ment, 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 intertwined

pressures—a worsening shortage of skilled labor, volatile

material prices, evolving contracting structures—that are

33Emerging Trends in Real Estate

2023

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 to

turn to digital-first labor marketplaces to meet demand

for projects, and to robotics and automation solutions to

address 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 10

times within certain applications.

Similarly, the spike in prices of materials and ESG pressures

to reduce the carbon emissions impact of the built envi-

ronment are driving advancements in steel and concrete

production. The continued growth of modular and pre-

fabricated 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 out

of valuable production assets. And as the majority of large-

scale 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 under

budget.

3. Growing Demand for Data Interoperability,

Infrastructure, and Intelligence Tools

As the level of technology adoption within the real estate

industry and built environment has grown, the demand for

tools to coordinate and build upon the data and capabilities

produced by this increasingly robust yet fragmented solu-

tion 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) nor-

malize 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 to

integrate a new vendor technology into a building), and 3)

enable customers and/or third-party vendors to create and

build 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 one

of 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 play-

ers 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 emerg-

ing to power all stages of the asset management life cycle,

for all sizes of market participants. From acquisitions to

leasing to work order and facilities management solutions

targeting large and midsized owners and operators to full-

service 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 growth

of 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 regions

of the globe. However, in the last few years, technological

advancements including the internet of things (IoT), big

data, and the cloud have catalyzed supply-side capability

and ambition to expand into mature international proptech

hubs earlier than predecessors. The supply is coupled

with 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 to

foster growth of compelling foreign technologies or similar

local solutions. This confluence of demand and supply-side

appetite and technological advancements has led to a new

wave of proptech companies expanding to new interna-

tional markets easier, quicker, and more successfully than

ever before.

Continued next page.

34 Emerging Trends in Real Estate

2023

Metaverse Poised to Help Shape the Future of Real Estate

Business leaders are closely monitoring the potential impact

on the real estate industry of the metaverse, a digital platform

that may profoundly change how businesses and consumers

interact with products, services, and each other.

Real-world activities such as conferences, trade shows, exhibi-

tions, 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 the

workplace. The metaverse can enhance collaboration, com-

plement the physical office, and improve the overall workplace

experience at a time when more workers are demanding flex-

ible 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 other type of real estate, metaverse properties can

be bought, sold, and leased. This could open up real estate

investing to a new pool of investors, since virtual properties are

much cheaper than physical ones.

Interest in the metaverse is high, even though many of its con-

cepts are years away from being solidified. Your firm does not

need to be a metaverse leader today, but you should explore

the potential implications to your organization.

Like any new technology, the metaverse has potential risks

of which you 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 will need

to vet potential partners and work with someone they trust as

they outline a long-term plan.

—PwC

As proptech internationalizes, local solutions emerge, often

adapting models pioneered in more mature markets, and

established solutions expand more quickly into new geogra-

phies. As this happens with greater frequency, best practices

for cross-border expansion surface. The top four drivers

of 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 be

a champion customer, investors, and/or local brokers and

advisers; 3) tailoring the business model, including perform-

ing 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 secu-

rity, to name a few.

—Maureen Waters, founder of Metaprop

35Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

Real estate capital markets are still open for business. Investors

are still buying, lenders are still lending, and no one seems to

be 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 all

property types together in our Emerging Trends survey fell more

this year than in any year since the GFC. But that overall trend

masks 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, inves-

tors seek properties with the strongest operating performance

while shunning weaker sectors viewed as riskier. This flight

to safety is shown in the nearby graph, as “investment pros-

pect” ratings for the top two major property sectors have been

separating from those for the bottom two sectors, meaning

that investors are more selective. The trend for “development

prospects” shows a comparable widening spread. In fact, the

gap between the preferred sectors and shunned sectors is

wider now than it has been for at least 15 years, which suggests

that 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 multifam-

ily housing. These two property sectors have ranked at or near

the top of the Emerging Trends surveys almost every year going

back to before the global financial crisis of 2008–2009, but the

margin of preference for them over other property sectors has

been increasing steadily for six straight years.

On the other hand, office and retail remain out of favor with

survey respondents. Office actually displaced retail as the

lowest-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 office

sector is uncertain at best.

In between these two extremes are the hotel and single-family

housing sectors in a virtual tie, though their fortunes have

reversed in the last year. Interest in hotels rose more over the last

year than any other major property type as tourists—if not busi-

ness travelers—returned to the roads and airways. By contrast,

prospects fell for housing as rising mortgage rates have cooled

buyer interest in new homes.

Property Type Outlook

“We don’t see signicant sales of assets taking place, but we do see a lot

more choosiness,

pickiness, selectivity

when it comes to new opportunities.”

Exhibit 2-1 Rating Spread between Emerging Trends

Top Two and Bottom Two Property Types, 2007−2023

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Average 2007–2023: 0.53

Difference between top 2 and bottom 2 sectors

202320212019201720152013201120092007

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.

36 Emerging Trends in Real Estate

2023

Beyond the major property types, 2023 may be known as the

year that “niche” property types came into their own. Five of the

six highest-rated property subtypes would be considered niche,

led by workforce housing and data centers, as well as life-sci-

ences facilities, medical office, and single-family rental housing.

These sectors generally command greater returns than tradi-

tional 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

 Demographics: A four-generation surge of household

formation and housing preference will buoy fundamental

apartment demand through and beyond 2030.

 Technology impact: Exponential advances in technology,

data, and artificial intelligence capability and applications

will have impacts on building-cycle, property operations and

management, and resident experience cost-versus-value

models.

 Capital liquidity: A post-pandemic-era flight to safety will

continue 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-

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

Development prospectsInvestment prospects

2023

2019

2020

2021

2022

2023

2019

2020

2021

2022

Abysmal

Fair

Poor

Good

Excellent

Abysmal

Fair

Poor

Good

Excellent

3.69

3.67

3.33

3.32

2.86

2.72

3.67

3.52

3.34

3.05

2.51

2.34

3.79

3.73

3.31

3.82

2.84

3.07

3.83

3.61

3.85

2.74

2.49

2.69

3.76

3.39

2.86

3.39

2.69

2.93

3.73

3.33

3.48

2.59

2.54

2.67

3.65

3.55

3.22

3.37

2.77

3.24

3.66

3.36

3.39

2.94

2.45

3.00

3.57

3.52

3.19

3.52

2.85

3.24

3.62

3.29

3.48

3.21

2.44

2.92

Ofﬁce

Retail

Hotels

Single-family housing

Multifamily housing

Industrial/distribution

Ofﬁce

Retail

Single-family housing

Hotels

Multifamily housing

Industrial/distribution

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

37Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

ment rental housing. Today, with more than one out of three

of 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 one

out 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 are

coming online.

A present that is polarized grows more so over time. For market-

rate 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 and

social mobility, the future of apartment rentals holds more ques-

tions 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 exist-

ing 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, are

a trio of macro forces—work/life balance, an urgency to stall

the climate effects of global warming, and an array of technolo-

gies—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 manu-

facturing era, turn the tide on local political will, and win over the

hearts, 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—the

answer would be a cautious “yes.”

However, a gigantic hurdle stands in the way of telling fleet-

ing 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 or

a public-sector one like the U.S. Bureau of Labor Statistics—rent

Exhibit 2-3 Commercial Property Price Index, by Sector

100

120

140

160

180

200

220

240

260

280

2Q 20221Q 20211Q 20191Q 20171Q 20151Q 20131Q 20111Q 2009

1Q 2007

1Q 2005

Apartment

Office–suburban Retail

Office–CBD

Industrial

Source:RCA CPPI, MSCI Real Assets.

Note: 100 = December 2006.

38 Emerging Trends in Real Estate

2023

growth spiraled upward nationally in ranges from just under 10

percent to just shy of 25 percent.

The Pandemic: This Time Is Different

With the pandemic and the cascade of economic and social

policies it set off, five macro apartment industry tailwinds

reached gale-force levels:

 One, there was a preexisting multigenerational avalanche

of both rent-by-choice and rent-by-necessity demand for

multifamily rental units.

 Two, demand gathered speed and sweep as people sought

larger living spaces to balance remote work and household

life, and more outdoor living options.

 Three, constrained construction of new supply, and a price

run-up on the single-family for-sale front, spilled over into

expanded apartment demand.

 Four, construction capacity to add new supply stalled as

COVID-19 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. residen-

tial real estate).

Outsized demand, a sudden spike in remote work mobility,

constricted supply, and floods of money with nowhere better to

go—a grand slam of anomalies.

The U.S. apartment property sector—providing shelter to 37 mil-

lion 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, com-

pressed 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 at

least. According to a recent Bloomberg report, “After dipping in

2020, the number of new units authorized in multifamily build-

ings 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.

Exhibit 2-4 Apartment Investment Prospect Trends

good

excellent

poor

fair

High-income apartments

Single-family

rental

Student

housing

Lower-income

apartments

Moderate/workforce

apartments

Senior housing

202320212019201720152013201120092007

Source: Emerging Trends in Real Estate surveys.

Apartment Buy/Hold/Sell Recommendations

Student housing

Senior housing

High-income

apartments

Lower-income

apartments

Single-family rental

Moderate-income

apartments

0% 20% 40% 60% 80% 100%

Buy Hold Sell

52.7% 38.4% 8.8%

42.3 40.7 17.0

38.1 48.8 13.1

27.0 50.3 22.7

19.0 56.9 24.1

Opinion of Current Apartment Pricing

0% 20% 40% 60% 80% 100%

Over pricedUnder priced Fairly pricedOverpriced UnderpricedFairly priced

Student housing

High-income

apartments

Senior housing

Lower-income

apartments

Single-family rental

Moderate-income

apartments

52.7% 38.4% 8.8%

42.3 40.7 17.0

38.1 48.8 13.1

32.5 56.2 11.3

27.0 50.3 22.7

19.0 56.9 24.1

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

39Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

At the same time, COVID-19’s aftermath sharply defined con-

flicting forces—which together destine virtually all of America’s

newly developed and built apartment communities for a

financially privileged professional class. Rather than causing

an expansion of rental housing stock, however, higher-income

households’ come-lately demand for rental neighborhoods

instead served to crowd out moderate- and lower-income

households in supply-constrained areas.

“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.”

In mid-2022, yet another freshly drawn inflection point—coin-

ciding with the devastation wrought by the Russia-Ukraine war

and an aggressive U.S. monetary and fiscal tightening effort to

dial 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.

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—will

continue to make shelter decisions, especially as U.S. domes-

tic migration and mobility continues at over 27 million movers

(approximately 8 percent) each year. Financial factors—given that

runaway costs and high mortgage interest rates will price more

households out of homeownership as an option—will determine

many of their decisions, as has long been the case.

What is different over the past several years has been growth in

discretionary 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 the

pandemic, to 11.3 million. With this increase, the share of renter

households in this income group rose from 20 percent to

26 percent.

Younger, older, and more economically, racially, and culturally

diverse households together will bend the economic and cultural

arc of rentership upward. (American Community Survey data

Exhibit 2-5 Owners and Renters: Select Household Characteristics

Renters

Owners

Hispanic AsianBlackWhite

75.1% 8.2% 10.2% 4.7

51.8% 20.3% 19.7% 5.4%

Race/Ethnicity

Renters

Owners

85+75–8465 –7455–6445–5435–44Under age 35

9.9% 15.5% 19.0% 22.8% 19.1% 10.1% 3.5%

34.4% 19.9% 15.6% 13.7% 8.9%

4.8

2.8

Age

Source: Pew Research Center analysis of U.S. Census Bureau data.

Note: Data as of 2019. Race and ethnicity categories reect U.S. Census Bureau terminology. Black or African American adults and Asian Americans do not include Hispanics.

Hispanics/Latinos are of any race.

40 Emerging Trends in Real Estate

2023

notes that people of color represent 91 percent of total household

growth between 2009 and 2019, and fully 85 percent of renter

household growth in that period, according to the JCHS.)

Apartment industry leaders now recognize a blurring of behav-

ioral lines across generations. When it comes to housing type

need or preference, generational cohorts—generation Z, millen-

nials, generation X, and empty-nester baby boomers—act more

like each other than not.

“Our customer experience research shows it’s more appropri-

ate to classify people by [buying pattern] behaviors than by

generational cohorts,” says the CEO of one of the nation’s top

20 privately held multifamily developers. “You’re going to find

people in gen Z and millennials and even gen Xers that have

very similar behavioral components and some of that is stage

of life, but not all of it is.”

Consumer-driven trends—a desire for indoor/outdoor living,

health and well-being features and functionality, designs for

a 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-19, we were able to pivot to a technology footprint

for our business model that reduces reliance on people and

improves 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 the

rules of the road change, ‘How quick can you adapt?’”

Capital Calculus

As COVID-19 dynamics shifted multifamily property ownership

from 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 amounts

of 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 apart-

ments. “And so, all of a sudden, they became the market

themselves. When you’re buying apartment portfolios at $20

[billion] or $30 billion at a clip, you’re establishing what the mar-

ket floor is. It was, ‘We’re going to buy apartments everywhere

at a 3.5 or 4 capitalization rate.’ They didn’t differentiate one

property from another.”

Class A property investments align with rent-by-choice higher-

income 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 and

medical first responders. Furthermore, addressing this “missing

middle” household income level does not preclude the need

for additions to and preservation of properties for lower-income

households.

The Great Bottleneck: Local Ballot Boxes

Apartment stakeholders’ number-one nemesis, blocking private-

sector 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 develop-

ment. 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 to

enforce 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,” the

CEO of one of the nation’s largest property management

organizations says. “I think we’re still stuck in the past. Some

policymakers are not in tune. Voters who may not be well versed

in these issues elect government officials who then become a

huge wall to economic solutions. I don’t see solutions for all this

happening in my lifetime.”

41Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

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

Regional malls

Central-city ofﬁce

Outlet centers

Power centers

Suburban ofﬁce

Urban/high-street retail

Lifestyle/entertainment centers

Stand-alone retail*

Economy hotels

Student housing

Luxury hotels

Midscale hotels

Upscale hotels

Lower-income apartments

R&D

Flex

Neighborhood/community

shopping centers

High-income apartments

Senior housing

Manufacturing

Warehouse

Single-family rental housing

Medical ofﬁce

Life-sciences facilities*

Fulﬁllment

Data centers

Moderate-income/

workforce apartments

Regional malls

Power centers

Central-city ofﬁce

Outlet centers

Suburban ofﬁce

Urban/high-street retail

Lifestyle/entertainment centers

Economy hotels

Luxury hotels

Upscale hotels

Stand-alone retail*

Neighborhood/community

shopping centers

Midscale hotels

Student housing

Flex

Lower-income apartments

R&D

High-income apartments

Manufacturing

Senior housing

Medical ofﬁce

Warehouse

Single-family rental housing

Life-sciences facilities*

Moderate-income/

workforce apartments

Fulﬁllment

Data centers

Development prospects

Investment prospects

Abysmal Fair Excellent

2022

2023

2022

2023

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

*First year in survey.

42 Emerging Trends in Real Estate

2023

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 differenti-

ated by rate and service offerings as the sector continues

to mature and evolve.

2. The articulation of a new value proposition for senior hous-

ing 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 the

health care continuum.

4. The gradual recovery of occupancy from the nadir reached

during COVID-19, boosted by a recent slowdown in inven-

tory growth and strong post-pandemic demand patterns.

5. Outside exogenous factors including the national and

global 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 are

squeezing operator margins, investment returns, and debt

issuance.

7. And, of course, U.S. demographic patterns, which are

pushing 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, with

offerings from Motel 6 to the Ritz-Carlton, operators, devel-

opers, and capital providers are increasingly segmenting

the senior housing market by both price point and service

offerings. “Active adult” offers amenitized rental housing for

the “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 assessed

and quantified the need for more affordable housing and care

options for middle-income seniors, offers care and hous-

ing options for the value-minded older adult consumer. And

“ultra-luxury retirement communities” offer older adults high-

end concierge lifestyle living options with wellness centers,

five-star culinary options, entertainment, and A-list cultural

events. And, of course, the traditional senior housing product

remains, with a price point that falls between the two and

offers a value proposition of security, socialization, engage-

ment, room and board, care coordination, and lifestyle.

Wellness value proposition. Many operators increasingly

recognize that senior housing provides an environment that

can promote and support health and wellness, enticements to

the baby boomers as they age and seek the aforementioned

proverbial fountain of youth. Furthermore, the movement

of many operators to incorporate wellness programs into

their offerings has the ability to be a significant competitive

advantage as potential residents seek communities that hold

promise to improve the quality of their life through programs

focused on the intellectual, physical, social, spiritual, voca-

tional, 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 of

health 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 systemati-

cally monitor changes in conditions. Properly managed, this

can result in fewer resident hospitalizations, reduce federal and

state-level health care spending, and act as a catalyst for future

business opportunities and collaborations. Further, thoughtful

care intervention can provide support to the overall health care

ecosystem through the support and creation of conscientious

awareness and follow-through. And, once senior housing is fully

recognized as part of the health care continuum, senior housing

operators will be able to participate in the revenue streams asso-

ciated 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 under

construction in the second quarter of 2022 for the 31 NIC

MAP Primary Markets was the fewest since 2015. And that

pattern may remain in place—at least in the near term—

because senior housing starts continue to linger at moderate

levels and remain well below their peaks seen in the 2016–

2018 period. This is because rising prices for materials and

43Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

continued next page

inflation, labor shortages in the building trade industries, and

the change in Fed policy of higher interest rates are collec-

tively affecting plans for new development; many projects

increasingly do not pencil out for reasonable returns.

Second, demand is also a tailwind for an ongoing improve-

ment in occupancy. Indeed, demand, as measured by the

change in occupied inventory or net absorption, was robust

in the second quarter of 2022, increasing at its strongest

pace ever recorded by NIC MAP Vision except for the post-

pandemic boost in demand in the last half of 2021. Since the

recovery 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 combination

of the majority independent living and assisted living proper-

ties—rose 0.9 percentage point during the second quarter

of 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, occu-

pancy 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 level

of 87.2 percent in the first quarter of 2020.

Outside inuencing factors. Looking ahead, several exog-

enous factors will influence the strength of net move-ins and

demand. 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, result-

ing 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 from

higher mortgage interest rates),

 The stock market (considered in a bear market),

 Pent-up demand for senior living settings (strong through

the 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.

Senior Housing Fundamentals, Primary U.S. Markets, 1Q 2007–2Q 2022

Units

Occupancy rate

Occupancy

–18,000

–13,000

–8,000

–3,000

2,000

7,000

12,000

17,000

2022202120202019201820172016201520142013201220112010200920082 007

Inventory growth

Absorption

60%

65%

70%

75%

80%

85%

90%

95%

Continued next page.

44 Emerging Trends in Real Estate

2023

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

Rent increases

Employee pay increases

Pay increases, assisted living employees

–2%

10%

12%

Independent living rent growth

Assisted living rent growth

–2%

10%

12%

2022202120202019201820172016201520142013201220112010200920082007

Note: Rent growth is change in annual asking rent. For 2022, wage growth is as of rst 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 conducted

in 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. This

is presenting challenges for operators seeking to maintain

census, much less grow and expand.

Indeed, the U.S. jobless rate was low at 3.6 percent in

June 2022 and was only 0.1 percentage point above the

pre-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 nurs-

ing and assisted living properties.

While good for employees, low jobless rates present chal-

lenges 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 envi-

ronment and culture, recruitment programs comparable with

those used to market to new residents, and collaboration with

educational institutions.

Expenses, margins, and returns. Rising wage costs asso-

ciated with temporary agency workers, overtime hours, and

sick leave associated with COVID-19 have combined with

dollars expended on personal protective equipment and ris-

ing insurance costs to put significant pressure on expenses.

Rent growth, while rising, has not been sufficiently able to

offset 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.

COVID-19 was particularly hard on the senior housing sector.

Many investors had reduced their appreciation expectations

for senior housing as the impact of the coronavirus weighed

heavily 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 first

quarter 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 prop-

erties (10.96 percent). The senior housing income return in

the first quarter was 0.91 percent, its best showing since late

2020. This was stronger than industrial and nearly on par with

apartments, and slightly less than the NPI (0.99 percent).

Nevertheless, on a longer-term basis, the 10-year return for

senior housing was the strongest of the main property types

45Emerging Trends in Real Estate

2023

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, the

number of persons 82 and older—often the age at which a

person moves into senior housing—is growing at an accel-

erating pace. In 2022, there were 10.6 million Americans

aged 82 and older; by 2026, this figure is projected to grow

to 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 (those

over 80 years of age) will continue to shrink at a precipitous

pace 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 for

caregiving—divorce rates are high for older adults—con-

gregate settings will indeed get a further boost in demand.

In addition, the increasing segmentation and differentiation

of 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 pen-

etration rate of roughly 11 percent of U.S. households, the

penetration rate does not need to increase dramatically for

occupancy to rise to pre-pandemic levels.

Looking ahead, many reasons exist to be optimistic about the

outlook 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 pace

in the near term, which should act as a tailwind for occupancy

improvement. And, while demand may also be affected

by economic headwinds, the value proposition of senior

housing—security, socialization, engagement, room and

board, care coordination, and lifestyle—remains in place and

ultimately should win the day by attracting new residents to

senior 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 to

improve the quality and length of their lives.

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

Exhibit 2-7 Prospects for Residential Property Types,

2023 versus 2022

Vacation homes

Multifamily condominiums

Single family–moderate/workforce

Single-family lots*

Manufactured-home communities

Age-restricted housing

Master-planned communities

Single family–high income

Vacation homes

Multifamily condominiums

Single family–high income

Single-family lots*

Single family–moderate/workforce

Master-planned communities

Age-restricted housing

Manufactured-home communities

Investment prospects

Development prospects

Abys mal Fair Excellent

2022

2023

2022

2023

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

*First year in survey.

46 Emerging Trends in Real Estate

2023

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 been

something of a renaissance after two very challenging years

due to the COVID-19 pandemic.

Rent Growth and Occupancy Levels Not Seen in

at 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 than

the 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 kick

off with never-before-seen occupancy rates. With student

competitive housing (in other words, nearby conventional

multifamily housing properties that compete with purpose-

built assets) also seeing record rent growth and occupancy

rates as well, there is less pressure on purpose-built off-

campus housing space than in years past.

Investment from Institutional Players Solidies

Student Housing as a CRE Sector

Back in 2018, there was a big splash in the student housing

space when Greystar completed its acquisition of EDR. At

the time of acquisition, that left only one publicly traded real

estate investment trust (REIT) in the student housing space.

Yet another massive announcement followed in 2022 with

Blackstone’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 and

benchmarking—the more important takeaway is that institu-

tional capital continues to flow into the sector.

Will Fall 2022 Be a Flash-in-the-Pan Rebound, or

a Positive Shift in Long-Term Expectations?

While somewhat more difficult to measure, the return to a

more normal campus life for students, university employees,

and industry professionals alike has been widely welcomed.

After all, record leasing activity and record rent growth

indirectly 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 the

pipeline of prospective student renters, it is reasonable to

suggest that the coming few years could see sustained per-

formance readings.

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

New beds delivered

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Fall 2022Fall 2021Fall 2020Fall 2019Fall 2018Fall 2017Fall 2016Fall 2015Fall 2014

New beds delivered

Historical average since 2014:

50,306

Source: RealPage Market Analytics.

Note: Data reect purpose-built off-campus student housing, and year-over-year production from July to July.

47Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

U.S. Student Housing Effective Rent Change

by Distance from Campus, Fall 2019–Fall 2022

Less than 0.5 mile

Greater than 1 mile

0.5 to 1 mile

Fall 2022Fall 2021Fall 2020Fall 2019

75%

80%

85%

90%

95%

100%

Fall 2022Fall 2021Fall 2020Fall 2019

Less than 0.5 mile

0.5 to 1 mile

Greater than 1 mile

Source: RealPage Market Analytics.

Note: Data reect purpose-built off-campus student housing.

Rent change data is year-over-year from July to July.

Source: RealPage Market Analytics.

Note: Data reect purpose-built off-campus student housing.

Pre-lease occupancy data is as of July for each year.

U.S. Student Housing Pre-Lease Occupancy

by Distance from Campus, Fall 2019–Fall 2022

Construction Levels at Decade Lows

In recent years, one of the more remarkable trends in the

student housing space has been the sheer consistency of

national supply totals. Although campus-level construction

figures are often capricious—it is not uncommon to see a huge

wave 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 a

result, 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.

Despite Positive Signals, Be Aware of Headwinds

and Risks

Although fall 2022 performance is a welcome sight for

industry professionals, external risks and headwinds should

not be discounted. For one, inflation remains at its highest

level in 40 years. Although there does not appear to be a

correlation between rising inflation and increasing missed

payments (and eventually evictions) thus far, that does not

mean that the broader inflation story should be dismissed. In

addition, demographic trends such as fewer 18- to 24-year-

olds 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 their

smaller counterparts (e.g., small liberal arts schools and

some smaller private institutions).

—RealPage Inc.

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 to

reevaluate both where they live and how they live. The United

States experienced “the Great American Move” in which house-

holds and businesses relocated to more affordable places, often

to buy or rent a home with additional space and a yard, and

farther from employment centers. Builders across the country

could not keep up with the new demand—and supply chain

interruptions, labor shortages, and permitting delays during the

COVID-19 pandemic did not help matters. As a result, home

prices escalated at historic rates; the median new home price in

the United States increased 22 percent since the start of 2020

and existing home prices increased 58 percent.

48 Emerging Trends in Real Estate

2023

larger (65-foot-wide) lots. Buyers like the low maintenance and

compact design of these homes.

Technology also will affect the way people live, and faster

than most people believe, according to the CEO of a national

firm specializing in residential architecture. Homes have not

changed significantly over the past few decades, and he

believes there are “aspirationals”—people who value time more

than money and innovation over sameness—who are waiting

on the sidelines for innovation. He is focused on designing the

“thoughtful home,” infusing floor plans with performance capa-

bilities that will save homeowners time, make life easier, and

perhaps help homeowners live longer. Homebuilders are often

willing to embrace new technology depending on the cost, but

more often, buyers will choose their own technology after they

purchase the home.

Where People Live

The pandemic brought massive migration across the United

States 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 note

of apartment dwellers becoming homebuyers because they

wanted yards. A large private builder in the South experienced

the same and furthermore found that new in-migrants had suf-

ficient 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-19.

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 the

for-sale housing market. Every housing metric is indicating a

softening, and builders are starting to recalibrate their business

plans in the face of slowing demand. As the housing market

resets, we should start to witness the true impact of the pan-

demic on home design, location preferences, amenities, and

financial preferences.

How People Live

Home offices and flex spaces are nothing new, but the desire for

more functional spaces grew tremendously during the pan-

demic-related lockdowns. Builders have not had time to create

new designs, but they are modifying current ones. The CEO of a

large 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 office

spaces. 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 not

need 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 great

rooms are not going away. Instead, they are being paired

with more private spaces like prep kitchens, drop zones,

retreats, and nooks.

 Outdoor spaces taking a larger share of space and home-

owner 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. Over

62 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 suc-

cessful 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

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

or Rent

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.

+G

Single-family

renters who

would prefer

to own

65%

Single-family renters

who prefer to rent

35%

49Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

Buyers are also searching for the right community. With such

high levels of new residents, a CEO of an amenity planning

and lifestyle design company noted how amenities played a

more direct role in connections. New residents want to be con-

nected—especially via the outdoors—with their neighbors and

amenity 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 and

cooling elements to make residents comfortable.

Historically, affordability has played a key role in housing pur-

chase 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 cost

of 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 a

national firm specializing in residential architecture, is lowering

the cycle time for building homes. Just as Henry Ford slashed

the time needed to build a Model T from 12 hours to 96 min-

utes 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 implica-

tions for traditional builders. There are positive implications—a

hedge against slower demand from consumers of for-sale hous-

ing, as many builders report that they are receiving multiple calls

each day from single-family rental operators who want to con-

tract 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 nascent

stage 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 a

build-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 per

month prefer to rent for more flexibility, as well as for less

maintenance and fewer financial responsibilities, than they

would have as homeowners.

Exhibit 2-9 Reasons Renters Continue to Rent, Based

on Rental Households That Believe Homeownership

Is Important

0% 10% 20% 30% 40% 50% 60% 70%

Would rather spend money

on other things (e.g.,

hobbies, travel, etc.)

Cannot take on the

maintenance responsibilities

Require the ﬂexibility to

move if desired/needed

Lack of supply (e.g., no

homes that ﬁt my needs)

Cannot afford mortgage

payments

Life circumstances (e.g., waiting

for marriage, planning to relocate,

desire to downsize, etc.)

Need to save for

downpayment

67%

37%

34%

28%

19%

16%

13%

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 with

household income of over $50,000. Survey elded July 12–17, 2022.

Exhibit 2-10 Footprint Allocated to the Home’s Outdoor

Space, 2021 versus 2020

Much less

footprint

Slightly less

footprint

Same

footprint

Slightly more

footprint

Much more

footprint

11%

47%

35%

58%

Source: 2022 Annual Survey of Architecture. conducted by the New Home Trends Institute/

John Burns Real Estate Consulting LLC and Pro Builder

50 Emerging Trends in Real Estate

2023

 Renters of single-family homes can have private yards, no

one living above or below them, pets, and garages—the

primary 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 architec-

ture. As single-family rental operators design new floor plans

and build hundreds of houses at a time (with no option choices

from consumers to manage), the industry can modernize and

become 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 half

of 2022, requiring more space to move goods quickly and hold

higher inventories. The urgency to secure more space, paired

with delays in supply and rising replacement costs, pushed

rents to historic highs while vacancies fell to record lows. At the

same time, capital market dynamics began to shift, marked by

repricing and a pullback in volume.

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 conve-

nience and choice of shopping online. The number of people

who used same- or next-day delivery held steady in 2021 dur-

ing 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 accommo-

date faster delivery timetables, which attracts sales because

consumers appreciate the speed. More than 90 percent of con-

sumers 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 number

of retail options close to home.

The pandemic’s impact on the growth of e-commerce extends

across retailer and product categories. While an e-commerce

giant is now 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 logis-

tics demand for the foreseeable future with growing diversity.

Demand Still Outpaces Inventory

Given persistent stock-outs, rapidly rising prices, and unreli-

able 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 and

Services PMI ask about inventory levels: sentiment was below

50 until July 2022, when the services inventory sentiment tipped

slightly above. Meanwhile, the Manufacturing PMI customers’

Exhibit 2-11 Prospects for Niche and Multiuse Property

Types, 2023 versus 2022

Agricultural land

Suburban mixed-use properties

Urban mixed-use properties

Self-storage

Infrastructure

Abysmal Fair Excellent

Investment prospects

Development prospects

Abysmal Fair Excellent

2023

2022

2023

2022

Agricultural land

Urban mixed-use properties

Suburban mixed-use properties

Self-storage

Infrastructure

Source: Emerging Trends in Real Estate surveys.

Note: Based on U.S. respondents only.

51Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

inventories remained below 50, meaning that there is still a need

for 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 yet

back to pre-pandemic levels, and they are focused on carrying

more product to improve customer service. The end goal is to

plan 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 will

continue to be a challenge. Cyclical trends will only affect the

timing of this goal.

Oversupply Risk Is Low, Even as Supply Pipeline Builds

The pipeline of space under construction reached a record high

of more than 620 million square feet as of the second quarter

of 2022. At the same time, supply chain bottlenecks delayed

deliveries. Strong demand propped up the proportion of space

pre-leased on completion—at roughly 65 percent as of the sec-

ond 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 levels

of 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 sub-

markets 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 price

surges since the end of 2019 for these, and other major catego-

ries, caused finished construction costs to spike by 50 percent.

“Construction durations in the broader industry have increased

by two to three months, on average, since 2019, due to lon-

ger 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 lever-

aging direct partnerships with national material suppliers to

pre-secure and prioritize long-lead building materials and

mitigate material shortages where possible. Developers are

also introducing modularized construction systems to expedite

repeatable project elements, such as office tenant improve-

ments and in-warehouse restrooms, which reduce on-site

construction timelines. Finally, traditional means of construction

Exhibit 2-12 Industrial/Distribution Investment

Prospect Trends

202320212019201720152013201120092007

good

excellent

poor

fair

Flex

Manufacturing

Fulfillment

R&D

Warehouse

Source: Emerging Trends in Real Estate surveys.

Industrial/Distribution Buy/Hold/Sell Recommendations

Buy Hold Sell

R&D

Flex

Warehouse

Manufacturing

Fulﬁllment

0% 20% 40% 60% 80% 100%

37.8% 40.8% 21.4%

35.6 54.1 10.3

33.9 51.9 14.2

31.4 44.1 24.5

30.2 51.3 18.5

Opinion of Current Industrial Pricing

Manufacturing

Flex

R&D

Warehouse

Fulﬁllment

0% 20% 40% 60% 80% 100%

56.9% 37.9% 5.2%

43.4 53.2 3.4

42.1 53.5 4.4

36.0 56.0 8.0

27.4 65.7 7.0

Over pricedUnder priced Fairly pricedOverpriced UnderpricedFairly priced

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

execution are being improved by optimizing schedules directly

with general contractors and trade partners in real time, before

delays are felt.

Labor Challenges Persist

Industrial labor shortages continue to consternate users of logis-

tics facilities. “Labor is always up amongst the top two things

companies look at when they move into an area,” according

52 Emerging Trends in Real Estate

2023

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

Index change

Neutral

Manufacturing PMI

Services PMI

Jan 22 June 22Jul 21Jan 21Jul 20Jan 20Jul 19Jan 19

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, nancial 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 in

smaller markets, where some companies are diversifying pro-

duction locations by moving to secondary markets in the United

States to offset risks with supply chain disruptions.

As labor continues to stress industrial real estate users, auto-

mation 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, and

companies with robotic in-warehouse transportation are using

it to solve labor shortages.

“This [technology] can save three times the walking time that

a human being would need to cross through a warehouse,”

explains an industrial investment expert.

Automation Is Increasing Supply Chain Visibility and

Efficiency

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 indus-

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 are

focused on implementing autonomous trucks for middle-mile

operations. Middle-mile routes—the transport between ports

and warehouses—consist of stretches of open roads with lim-

ited human obstacles and pose the lowest barriers to

autonomous adoption.

Industrial developers are also monitoring advancements in

autonomous or remote-operated machinery with the potential

to mitigate labor shortages and increase safety in some of the

most injury-prone construction processes, which include heavy

equipment operation, working from elevated lifts, or repetitive

motions. Additional safety-related advancements that are in the

startup phase and show promise include biometric and posi-

tioning 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 grow

cautious and interest rates rise. Although a marked deceleration

from the prior year’s growth, the transaction volume for indus-

trial warehouses increased by 11 percent year-over-year as of

the 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 and

ask prices could add hurdles to investment, thereby reducing

53Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

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 rate

environment. 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 stron-

ger fundamentals compared with prior cycles, which should

help shield against severe correction.

Even as capital market dynamics begin to shift, the return out-

look 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 four

of the last five years. A pullback in development means that rent

growth could remain stronger for longer, given the strength of

structural demand trends buoying future returns. According to

research from MSCI Real Assets of surveyed industrial manag-

ers, in-place rents were 22 percent below spot market rents.

This spread offers embedded net operating income growth for

the foreseeable future.

Office: Desperately Seeking Clarity about

Its Future

Into the third year of the COVID-19 pandemic, we should have

clarity 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 to

determine what works best for them in relation to what employ-

ees 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 firm

says, “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 arrange-

ment—some willingly because it is working for them and others

begrudgingly to avoid a mass exodus of workers—and are

experimenting 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 the

extended experimental phase. Some executives hesitate to elim-

inate space they once acquired with pride, figuring that office

space represents a small share of expenses. Others are dealing

with bigger fires. “Businesses have a lot of problems now with

the supply chain mess, demand shifts, geopolitical risk—office

space is low on the list of issues to deal with,” said one executive

who advises companies on space. “We still have no idea how to

manage a company where people work two to three days in the

office. In many ways, it is easier to manage a workforce that is

fully remote.”

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

Net absorption

Absorption (millions of square feet)

100,000

200,000

300,000

400,000

500,000

600,000

2022*202120202019201820172016201520142013201220112010

Vacancy rate

10%

12%

Sources: CBRE, JLL, Cushman & Wakeeld, Colliers, CoStar, CBRE-EA, Prologis Research.

* As of second quarter.

Continued on page 58.

54 Emerging Trends in Real Estate

2023

Top North American Data Center Markets by Capacity

Northern Virginia

New York City

Northern New Jersey

Boston

Atlanta

Columbus

Chicago

Minneapolis

Dallas/Fort Worth

San Antonio

Houston

Denver

Salt Lake City

Phoenix

Las Vegas

Portland

Seattle

Quincy

Los Angeles

Northern

California

Vancouver

Montreal

Toronto

Source: datacenterHawk, datacenterhawk.com.

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

Data Centers: A Resilient Real Estate Asset Class in High Demand

Data centers are essential infrastructure that keeps modern soci-

ety functioning. Particularly post-pandemic, countless day-to-day

functions in people’s business and personal lives are processed

in 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, and

transactions 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 electronic

transactions, 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, and

robust cooling systems.

Companies typically prefer to outsource their data center

needs rather than owning and operating their infrastruc-

ture, 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 infra-

structure, leading cloud providers are building some of the

largest facilities or executing substantial leases from data

center providers. Unlike traditional real estate assets, it is

more accurate to measure data centers by power (kilowatts

and megawatts) and not by square footage. While the physi-

cal space that a company occupies is part of its rental rate,

the rate is generally structured according to the amount 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 their

internal operations and bolster their existing digital infrastruc-

ture or shift legacy operations to digital platforms, further

55Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

North American Data Center Capacity Growth and Vacancy Rates

Capacity (megawatts)

2,000

4,000

6,000

8,000

10,000

12,000

Hyperscale companiesVacancy rate

Co-location data centers

1H 20222H20211H 20212H 20201H 20202H 20191H 20192H 20181H 2018

10%

12%

Vacancy rate

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.

increasing their reliance on data centers. As a result, the

industry witnessed a large spike in demand and develop-

ment in 2020 and onward.

Demand for data center capacity occurs across North

America but is most heavily concentrated in 10 primary

markets: 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 commis-

sioned or preleased, and over 9,250 megawatts planned for

future development. This does not include the large amount

of capacity owned and operated by hyperscale companies in

those markets.

Trends in Data Center Supply

Inux of capital into the industry.Data centers are now seen

as a distinct and valuable asset class, resulting in ample capital

flowing 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 also

interested in individual assets, often acquiring stabilized enter-

prise data centers in sale-leaseback transactions.

Limited options for users with smaller requirements.Due

to demand from hyperscale data center users (i.e., users with

requirements exceeding 5 megawatts), North America’s data

center vacancy level is at its lowest point ever. With the size

of transactions that occur nowadays, data center assets are

quickly occupied by single tenants, leaving little capacity for

users with smaller requirements. Some providers will even

opt 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 indus-

try has witnessed a substantial increase in lease sizes, with

leases often exceeding 10 megawatts and some exceeding

100 megawatts. While these leases were becoming more

common, 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 hyperscale

leasing 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 maintain

their 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

56 Emerging Trends in Real Estate

2023

Self-Storage Outlook Remains Optimistic Despite Ination 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 addi-

tional self-storage demand as living spaces become more

crowded. However, property performance could be hindered

by new supply, since the pace of development is likely to

accelerate. 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 ination. Driven in part by a surge

of cross-country relocations, self-storage vacancy in most

major metropolitan areas fell to all-time lows in 2021. Lifestyle

changes 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 fastest-

growing major metro areas, nine are located in the U.S.

Southeast or Southwest. The creation of self-storage demand

associated 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 in

many larger Sun Belt metro areas could push some would-be

residents to shift to nearby markets with similar climates and

a 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 popular

with 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 house-

hold formation observed in 2021, the pace is set to slow this

year as climbing living expenses shift some residential deci-

sion-making. Rising vacancies across all apartment classes in

the 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 situ-

ations 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

Spending (billions)

Jan 22Jul 21Jan 21Jul 20Jan 20Jul 19Jan 19Jul 18Jan 18Jul 17Jan 17Jul 16Jan 16Jul 15Jan 15

Sources: Marcus & Millichap Research Services; U.S. Census Bureau.

Note: Spending is seasonally adjusted annual rate.

57Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

32 to 34 percent during the pandemic and has yet to revert to

the 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. While

fewer new households ultimately mean fewer potential new

self-storage renters, this consolidation process can create

new storage needs that may offset the slowdown in forma-

tion. 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 sup-

ply additions in 2023. Self-storage completions have been

steadily trending downward following a 2019 peak, when the

nationwide two-year completion total exceeded 145 million

square feet. However, the pace of stock expansion remains

markedly elevated when compared with the earlier part of

the 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 consistent

monthly increases thus far in 2022. While remaining well

below the levels seen in 2017 and 2018, which precipitated

the pre-pandemic development wave, this current uptick in

spending 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 the

more rapid stock expansions are geared toward chronically

undersupplied metro areas. In addition, the aforementioned

demand factors should mitigate the long-term upward

impact to availability in even the more generously supplied

markets, supporting a favorable revenue growth outlook.

Ination draws buyers to self-storage, but Fed response

creates capital market headwinds. Vacancy rates remain-

ing consistently below historical averages, in tandem with

recent rapid rent growth, are drawing buyers to self-storage

properties. The sector also boasts advantages as infla-

tion 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 calculated

month to month, providing facility owners the opportunity to

respond to market conditions more rapidly than proprietors

of other asset classes. Though this advantage has attracted

investment capital, keeping transaction velocity historically

elevated through the first half of 2022, ongoing monetary

shifts 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 gaug-

ing 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 infla-

tion 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

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

Household formation (millions)

0.0

0.5

1.0

1.5

2.0

2022*20212020201920182017201620152014201320122011201020092008200720062005200420032002

Household formation

Percentage living with parents

25%

30%

35%

Sources: Marcus & Millichap Research Services; U.S. Census Bureau.

*Household formation forecast.

58 Emerging Trends in Real Estate

2023

In a topic with little consensus, there is agreement that gen-

eralizing 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 by

industry, not by location. It all depends on the function within

companies,” 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

culture and ease onboarding, and to increase collaboration and

productivity. Pro-office voices are growing and companies—

particularly in the financial sector—are increasingly demanding

a full-time return to the office.

Employees, however, are happy to avoid time-consuming, expen-

sive, and stressful commutes and to have flexibility to make daily

schedules that permit a work/life balance. Flexible work sched-

ules 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 that have tried to implement stricter

in-office policies are getting pushback. “The longer people are

away from the office, the harder it is to get them back,” said one

executive. “The biggest surprise for management teams is under-

estimating 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 employ-

ees 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 as

technology, gives them leverage.

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 pres-

sure to optimize expenses as it pertains to office space.”

In the meantime, office usage has stabilized in the low–40 per-

cent range nationally, though it varies significantly by location,

according to card security firm Kastle Systems. “The question is

what is going to unstick that,” said an industry researcher.

Office as Destination

Office owners are dealing with the post-COVID-19 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 light-

ing, enough space per person, fitness centers, food service,

meeting rooms, outdoor shared areas, and quiet space to make

Exhibit 2-15 Office Investment Prospect Trends

good

excellent

poor

Medical office

Suburban office

Central-city office

fair

202320212019201720152013201120092007

Source: Emerging Trends in Real Estate surveys.

Office Buy/Hold/Sell Recommendations

Central-city ofﬁce

Suburban ofﬁce

Medical ofﬁce

Buy Hold Sell

0% 20% 40% 60% 80% 100%

43.6% 46.3% 10.1%

21.1 52.9 26.0

16.5 64.2 19.3

Opinion of Current Office Pricing

0% 20% 40% 60% 80% 100%

49.4% 35.9% 14.8%

41.7 45.5 12.8

27.8 69.9 2.3

Medical ofﬁce

Suburban ofﬁce

Central-city ofﬁce

Over pricedUnder priced Fairly pricedOverpriced UnderpricedFairly priced

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

Continued from page 53.

59Emerging Trends in Real Estate

2023

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 phys-

ical requirements such as food, car service, or seat reservations

while others provide concierge services.

“Companies should make the workplace a destination instead of an

obligation,” said a consultant at an architecture firm. This phenom-

enon 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.

Occupiers are voting with their feet and their wallets. JLL

Research found that between the onset of COVID-19 and the

second quarter of 2022, buildings delivered in 2015 or later

had 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 square

feet) 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 such

as lease length and amount of space—you can take a smaller

footprint than you could elsewhere—and companies can pick

up the amenities coworking has to offer,” said a data firm execu-

tive. A bank executive said, “It allows us to provide amenity-rich

space when we don’t have critical mass in an area.” The new

emphasis 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 concen-

tration of workers in any area away from a headquarters to justify an

entire office. “No one’s figured that out yet,” said a senior researcher.

Impact on Capital

The overarching issue remains: how much will work-from-home

(WFH) change demand for offices? Some industry players main-

tain 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 their

office footprint. “Everybody is coming back to the office, it’s just

a matter of when,” said one senior finance executive. “To me, the

question is less about the lasting impact of COVID-19 demand,

and more the impact of the macro environment.”

Pro-office proponents note that the total number of office-using

jobs in the United States was 5 percent higher than pre-pan-

demic 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 demand

caused by WFH will be offset by the growth in the number of

office-using employees and the increased space taken up by

design changes, i.e., more collaborative and open space. Not to

mention that companies will be hard pressed to cut desks when

on some days the entire workforce will be in the office. The idea

that WFH will be a drag on office demand “is overrated. Looking

at the data, the story is oversold,” said one researcher.

Since 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 the

forecasts of massive space cutbacks. Nationally, net absorption

returned to positive levels in 2022. Much of the vacancy growth

has 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 that

companies are moving offices from urban areas to the suburbs,

but that fewer companies are downsizing in suburbs than in

urban areas. “There [isn’t] a flight to the suburbs; it is more that

companies are making space adjustments in urban areas,” said

one industry researcher. Some of the suburban growth comes

from 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 space

is underused and potentially on the chopping block. Every

corporate pronouncement about a return to the office has a

corresponding announcement about permanent remote and/

or hybrid options for employees. With daily office usage down

from pre-pandemic levels, some researchers predict a drop

in demand of anywhere from 10 to 25 percent. For example, a

report by a New York University team forecasts that demand

for Manhattan office space will plummet, prompting values to

drop by 32 percent over the short term and by 28 percent over

the long term. “Remote work really is a big and important deal,

Continued on page 64.

60 Emerging Trends in Real Estate

2023

The Future Looks Bright for Medical Office

The U.S. health care system supports an insured population

of more than 300 million people and represents over 18 per-

cent of U.S. gross domestic product. The medical real estate

that supports this industry generally falls into two categories:

inpatient, or hospitals, and outpatient, or medical office

buildings (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 areas

for patients to drive to. They might be occupied by practi-

tioners 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 genera-

tor for emergency power.

Due to the increasing number of insured people who followed

the introduction of the Affordable Care Act of 2010, as well as

an aging population, the already significant demand for medi-

cal services has continued to grow. In addition, advances

in medical technologies have enabled the transfer of many

inpatient procedures to lower-cost, more-efficient outpatient

settings. The sector has also been shifting to a retail mind-

set, 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 commer-

cial real estate—sometimes up to 15 or 20 years—and are

much more likely to renew since moving too far away would

jeopardize their local patient market share. This patient/pro-

vider dynamic and the increasing demand for space have

resulted 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, typically

ranging between 2 and 3 percent per year. These dynamics

also translate into a long-term stable occupancy trend. Even

in the wake of the financial crisis of 2008–2009, occupancy

never fell below 90 percent. After the pandemic-related shut-

downs, physician employment recovered remarkably fast

and, despite the sudden halt of many services for a period,

renewal rates increased.

Investors have also been shifting their view of the sec-

tor. Whereas previously it was considered so niche an

investment that only specialists would invest in it, it is now

recognized for how insulated it is and how resilient it is during

market cycles.

With awareness of the fundamentals of MOBs increas-

ing, sales volume has been growing dramatically over the

last five years. Previously, most of the acquisition activity

was attributable to health care–focused real estate invest-

ment trusts (REITs) and smaller, private investors. In recent

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

Transaction volume (billions)

Cap rate

20222021202020192018201720162015

$10

$15

$20

$25

Cap rate average

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

Annual volume

Source: ©Revista, revistamed.com.

Note: Transaction volume is for trades valued at $2.5 million or more; gures 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.

61Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

years, many more institutional and diversified investors have

entered 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 most

of 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 of

space. 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 physi-

cian groups). The remainder is owned by REITs and private

investors. This represents a substantial amount of opportu-

nity 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 per-

cent of inventory. Most of the medical offices that are built

are largely preleased before breaking ground; speculative

construction is limited and geographically specific. Although

hospitals 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 self-

developed by the hospital system or provider group; that has

been shifting, however, with third-party developers account-

ing for more activity. Many of these projects developed by

third parties are owned by the developer or partner investor.

In 2021, 45 percent of outpatient square feet started was

developed 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 and

hospitals to locate services in more convenient, community-

based areas; and advancements in health care technology

and care delivery that require the space to support it. With

reliable performance and very little speculative construc-

tion, combined with the availability of industry-specific data,

medical office has been maturing into an attractive and

stable commercial real estate asset class. This has captured

the interest of the broader investment community, and their

appetite for exposure has continued to grow. These dynam-

ics 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)

Occupancy rate (weighted average)

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

1Q 20221Q 20211Q 20201Q 20191Q 20181Q 20171Q 20161Q 20151Q 20141Q 20131Q 20121Q 20111Q 2010

Occupancy rate

90%

91%

92%

93%

94%

95%

Physician office employment

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.

62 Emerging Trends in Real Estate

2023

Life Sciences

The life-sciences industry is flourishing amid record levels of

venture capital funding, continued investments in research

and development (R&D), and burgeoning investment in local

ecosystems that will bolster long-term industry expansion in

core clusters and emerging markets alike.

Commercial laboratory real estate has been in high demand

as life-sciences companies expanded and scaled opera-

tions over the last two years, driven by record venture capital

funding and strong revenue gains among select public

companies. Real estate investors followed in similar fashion,

targeting opportunities within the sector as the appetite for

alternative real estate investment opportunities accelerated

while the office sector outlook remained uncertain due to lag-

ging return-to-office momentum.

More recently, venture capital flows are being closely

watched as macroeconomic choppiness continues to weigh

on investors. Uncertain public market performance is driv-

ing conservative investment in 2022 compared with more

aggressive activity in 2021 when venture capital flows to

biotech and pharmaceutical startups hit all-time highs. Cash

preservation and cautious expansion activity have colored

the backdrop of real estate demand for lab space at midyear

2022. Nonetheless, the industry continues to thrive amid an

environment 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; a

capital event typically leads to a commercial lab lease

transaction within six to nine months. In 2021, U.S.-based

pharmaceutical and biotech startups received record levels

of funding, totaling $45 billion, far exceeding the average of

$15.3 billion annually from 2011 through 2020 and driving a

significant 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, the

industry had been gaining momentum prior to 2020. The

convergence of science and technology has been the

ultimate growth driver in this industry for the last decade,

leading to quicker development of breakthrough drugs and

innovative 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 appe-

tite for early-stage and preclinical startups, creating frothy

Top Life-Sciences Submarkets versus Top U.S. Life-Sciences Markets Overall, 2015–2022

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

Top U.S. life-sciences markets overall

Mid-Peninsula (San Francisco)

University Towne Center (San Diego)

Torrey Pines (San Diego)

Seaport District (Boston)

East Cambridge (Boston)

20222021202020192018201720162015

Direct asking rent per square foot

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; and

Philadelphia, which represent 80 percent of the total U.S. life-sciences market.

63Emerging 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 com-

panies, or companies that have moved through phase-one or

phase-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 com-

pany 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 in

some pockets. While 2021 was an unprecedented year in

terms of real estate demand, it was more of an outlier driven

by the sense of urgency that tenants felt that space was run-

ning 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 the

space. Due to rapid tenant growth, investors and develop-

ers had to move quickly to capture demand, especially given

speed-to-market needs of growing companies. A majority of

leasing activity was driven by expansions and new leases,

accounting for 62 percent of leasing volume since the onset of

the 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, sub-

lease availability climbed to 2.1 percent of inventory, totaling

3.2 million square feet, and up 60 basis points from the most

recent 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 scarcity

of 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 of

time, with plans to reabsorb following future expansion activity.

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

12%

Vacancy rate

Completions

Absorption and completions

(millions of square feet)

–0.75

–0.25

0.25

0.75

1.25

1.75

2.25

2.75

3.25

1Q 2022

1Q 2021

1Q 2020

1Q 2019

1Q 2018

1Q 2017

1Q 2016

1Q 2015

Vacancy

Absorption

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.

Continued next page.

64 Emerging Trends in Real Estate

2023

20 percent as of midyear 2022 and capitalization rates are

likely to keep rising as interest rates, the cost of debt, and risk

premiums all move higher. Office values will fall more than

other property sectors such as multifamily in which rising rents

counterbalance higher cap rates. Plus, debt is becoming more

constrained as lenders and bond investors are wary of the

potential 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 partici-

pants are conflicted about pricing, favoring niche sectors such

as 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

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 location

and 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 are

dated 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 all

property types, investor concerns about the future of office

count as a double whammy. Property values dropped 10 to

Lab real estate fundamentals remain relatively tight because

of steady company formation and expansion over the last

two years, easily keeping pace with robust development

activity. The top life-sciences clusters in aggregate recorded

lab vacancy of 5.6 percent at midyear 2022, reflective of

tight market conditions. Market equilibrium is generally when

vacancy is between 8 and 10 percent; some of the sublease

space 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 ten-

ant demand trends drove rents to all-time highs across the

commercial lab market. Asking rents increased 45.4 percent

on an absolute basis from the first quarter of 2020 through

midyear 2022, reaching an average of $79.08 per square foot

on 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 foot

at midyear 2022, an increase of 23 percent since 2019; San

Diego’s UTC corridor recorded the highest rate of accelera-

tion, with rents increasing 69.7 percent since 2019 to an

average NNN asking rate of $88.13 per square foot. The pace

of rent growth is anticipated to slow amid a potential slow-

down but remain strong overall.

Life Sciences Is a Resilient Long-Term Opportunity

Innovation is happening at a more rapid pace than ever

before, opening up limitless possibilities for the advance-

ment of medical and life sciences. Novel therapies within

the realms of personalized and regenerative medicine will

continue to scale, revolutionizing the industry. The seeds of

growth begin with the research and development activities

happening in innovative life-sciences market clusters, where

science, technology, institutional support, and funding all

meet to drive progress.

The most mature market clusters are generating the great-

est 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 the

development of innovation communities, talent pipelines,

and incubator space for growing startups, more markets will

capture the growth of the life-sciences industry.

Top clusters have evolved over several decades, but emerg-

ing 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 com-

munities 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 posi-

tive. The advances in science, the continued flow of capital,

and the development of ecosystems in markets outside the

core clusters will bolster the industry’s steady expansion over

the long term.

—JLL

Continued from page 59.

65Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

office buildings around the country are being converted to

multifamily, industrial, medical offices, life sciences, and other

uses. 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 buildings

in 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 is

under construction nationally, per Yardi Matrix—due to logistics.

Conversions are costly and the stars need to be aligned with the

right building configuration, floor plates, neighborhood ameni-

ties, 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 high

vacancy and the right floor plates to convert into an apartment

building 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 exac-

erbated trends as much as started them. Dissatisfaction with

offices did not start in 2020. Worker satisfaction was at an all-

time 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 science

of how to create the best outcomes.”

The key for office owners is to focus on facilitating the productiv-

ity of tenants’ workforces by improving the health, safety, and

functionality of buildings. “I think we who are now in the real

estate industry must realize we are no longer selling a product

but selling a service,” said one analyst. “Those are different

beasts. Any real estate investor that is not taking seriously the

possibility that the market is being fundamentally upended is

going to get a real shock. Office owners must understand the

customer like never before; if not, they will have a problem.”

Retail

It might be easy to assume that the consensus outlook for the

retail sector in 2023 would be glum, given the outsized chal-

lenges that retail has faced in recent years and with economic

uncertainty on the horizon. But instead, there is a general sense

of 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 the

greatest 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 hyper-

focused 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 worst

of the disruptions.”

This shift in mind-set may be difficult to understand for those

accustomed to the popular pre-pandemic narrative of “retail

apocalypse.” It reflects not just the depth of the challenges the

sector has faced, but the strength of the rebound—albeit an

uneven 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 the

consumer space is always evolving, and it is doing so at a faster

pace than ever. But as much as those of us in the sector have

spoken about retail resiliency in recent years, I am not sure

many of us realized the true depth of that resiliency until the

pandemic.”

That resiliency is best demonstrated by the wild swing in retail

demand that has occurred since 2020. The sector set records in

terms of bankruptcies and closures in the wake of the pan-

demic. COVID-19 accelerated the demise of dozens of chains

that 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 great-

est challenges. Though quick service restaurants (QSRs) with

drive-throughs fared far better than their dine-in counterparts,

more than 110,000 restaurants failed in the first six months of

the 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 franchi-

sees) and already operating on narrow margins, COVID-19 was

an unprecedented disaster.

66 Emerging Trends in Real Estate

2023

Exhibit 2-16 Retail Investment Prospect Trends

good

excellent

poor

fair

Urban/high-street

retail

Outlet centers

Lifestyle/entertainment centers

Neighborhood/community

shopping centers

Power centersRegional malls

good

excellent

poor

fair

202320212019201720152013201120092007

Source: Emerging Trends in Real Estate surveys.

Retail Buy/Hold/Sell Recommendations

Regional malls

Outlet centers

Power centers

Urban/high-street retail

Lifestyle/entertainment

centers

Neighborhood/community

shopping centers

0% 20% 40% 60% 80% 100%

Buy Hold Sell

54.7% 36.8% 8.5%

23.3 51.4 25.3

19.0 59.1 21.8

11.1 42.1 46.8

8.5 50.4 41.1

3.2 24.4 72.4

Opinion of Current Retail Pricing

Neighborhood/community

shopping centers

Lifestyle/entertainment

centers

Outlet centers

Power centers

Urban/high-street retail

Regional malls

0% 20% 40% 60% 80% 100%

52.9% 34.6% 12.5%

50.2 41.6 8.2

39.0 51.9 9.1

34.0 60.1 5.9

33.5 58.2 8.4

29.6 60.0 10.4

Over pricedUnder priced Fairly pricedOverpriced UnderpricedFairly priced

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

Though a combination of government aid (PPP loans), opera-

tor grit, and landlord largesse kept the damage from being far

worse, it is critical to remember that the pandemic dispropor-

tionately 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.

This was only further fueled by outsized spending. Monthly retail

sales 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 reallocated

dollars that would have gone toward services, travel, and enter-

tainment elsewhere (those sectors would not see a rebound in

spending until the arrival of vaccines).

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 to

falter in May 2022 as the impact of inflation started to take a bite

out of consumer spending.

The stimulus also led to a surge in asset prices from homes to

equities; 2021’s booming stock market led to a round of retail

initial public offerings (IPOs), with multiple newly public retail

concepts 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, pet

concepts, 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 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 have ramped up brick-and-mortar

growth even as department stores and 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 chains were poised to add as many

as 7,000 units through midyear 2023. Dominant players like

Starbucks, Chipotle, Chick-fil-A, McDonald’s, and Dunkin have

67Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

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 consolidation

ahead. 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 need

to 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 account

for the lowest numbers in a decade. New store openings have

significantly outpaced closures since 2021 (the market recorded

its strongest occupancy growth numbers in five years and this

pattern 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 head-

ing 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 about

a recession—can weather the storm. As one retail real estate

analyst put it, “While there’s still hope the Fed can engineer

a 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 get

through committees. We’re expecting things to slow down in the

months 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. Class

A space is in short supply. Most of what is available is substan-

dard 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). Unanchored

strip center vacancy has followed a similar trend. But this

rebound has been uneven; it has overwhelmingly favored

class 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 to

previous 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 the

office, 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 bifurca-

tion in performance greater than in the mall world. Class A and

trophy malls account for roughly one-third of the inventory, but

80 percent of the sales. Those properties have benefited from

flight to quality as well as been the focus of nearly all the growth

from new clicks-to-bricks (digital-native brands opening physi-

cal 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 the

pandemic, it had accounted for little actual occupancy growth out-

side of a few key markets. That is no longer the case. Heightened

online competition and rising customer acquisition costs in the

digital arena are part of the story behind this acceleration. But we

also see it as reflective of the natural evolution of retail in the “phy-

gital age.” As one REIT executive put it, “Clicks-to-bricks is finally

driving 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 most

will 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 move-

ment 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 demol-

ished over 130 million square feet of space to make way for

redevelopment. The lion’s share of this stock consisted of vacant

department store and mall space.

68 Emerging Trends in Real Estate

2023

The other significant factor aiding the recovery of the retail sec-

tor 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 metric

has not surpassed the 0.60 percent level in 15 years. Nearly all

new development has been in strong population growth areas

in the form of retail’s strongest-performing asset class, grocery-

anchored 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 grocery-

anchored 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, with

survey participants particularly citing fast-food properties with

drive-throughs, assuming that long-term leases are in place to

gold standard, national credit tenants. The challenge one broker

told us is one of available product: “Everyone is chasing the

same thing.”

Another investor told us, “Stand-alone retail and community

centers are good opportunities, but don’t have pricing dis-

counts. 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 oppor-

tunistic plays that may arise from changes in the debt markets.

While plenty of challenged assets remain across the wide spec-

trum 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 densi-

fication playing out in the mall arena is likely to expand to other

property 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 grocery-

anchored 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 chas-

ing 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.”

Hotels

The lodging sector has made significant strides in its recovery

since the height of the pandemic, highlighted by strong year-

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

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

New retail space delivered

(millions of square feet)

2022**2021*2020*20192018201720162015201420132 0122011*2010

Deliveries as a percentage of total inventoryNew space delivered

New deliveries as a percentage of

total retail inventory

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.

69Emerging Trends in Real Estate

2023

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 of

in-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 improve-

ment in key performance indicators has been significantly

stronger in these top 25 markets relative to the rest of the

United 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 as

international 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 outbound

travel 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 the

group and business segments. Airlines have reported that while

they still lag pre-pandemic levels, corporate travel spending has

reached its highest levels since the onset of the pandemic. That

said, 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 in

major 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 leverag-

ing the return of in-person group meetings and conferences to

connect with colleagues and clients, all in one place, for the first

time 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

Exhibit 2-18 Hotel Investment Prospect Trends

good

excellent

poor

Full-service hotels*

Limited-service hotels

fair

202320212019201720152013201120092007

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 based

on investment prospects for a single category—full-service hotels.

Hotel Buy/Hold/Sell Recommendations

Buy Hold Sell

Limited-service hotels

Luxury hotels

Midscale hotels

Upscale hotels

0% 20% 40% 60% 80% 100%

33.6% 53.4% 12.9%

33.6 46.9 19.5

28.3 51.3 20.4

24.1 47.3 28.6

Opinion of Current Hotel Pricing

Limited-service hotels

Midscale hotels

Upscale hotels

Luxury hotels

0% 20% 40% 60% 80% 100%

40.0% 50.0% 10.0%

31.5 51.4 17.1

27.3 60.0 12.7

26.2 64.5 9.3

Overpriced UnderpricedFairly priced

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on U.S. respondents only.

70 Emerging Trends in Real Estate

2023

in a unique guest demographic—the “bleisure” traveler. Some

people traveling for work have taken advantage of their new-

found flexibility and now consider adding a few days, or even

weeks, to their business trips to further explore a given destina-

tion, whether it be on their own, with a significant other, or with

family. Similarly, workers with the ability to work entirely remotely

may choose to stay in a destination for an extended period and

work from there. This may end up helping to offset any poten-

tially 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 govern-

ment’s response, resulted in a dramatic shift in demand away

from 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 pric-

ing power to the operators. So far, the resurgence in demand

in these markets is attributed, in descending order, to leisure,

group, and business travel.

Inbound international travel has contributed to the recovery in

several of the top 25 markets and is expected to play an even

larger part in the recovery through the remainder of 2022 and

into 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 in

international arrivals in 2022 represents a 117 percent increase

over 2021.

Inbound international travel restrictions were lifted in early sum-

mer 2022, but the resultant positive impact on inbound travel

is not expected to really emerge until at least the fourth quarter

of 2022. While summer vacationing was a driver of strong hotel

performance domestically for the second summer in a row, the

return of inbound international travel will be a key driver in pro-

pelling the lodging sector’s recovery through the fall months, the

holiday 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 shifted

back to the top 25. Performance in the top 25 markets is trend-

ing upward, although recovery is uneven across these markets.

According to CoStar, New York, Boston, and Los Angeles have

experienced the most robust year-over-year recovery so far in

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 travel

in 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, which

were able to maintain, or even exceed, pre-pandemic rates with

less 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’s

market RevPAR through the first half of 2022 reached 88 per-

cent of 2019 levels.

San Francisco’s struggles have been primarily tied to slower

recovery in international traffic and recent changes in the tech

workforce, 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 still

banned in China as of the late September 2022 publication of

this report, it is uncertain when San Francisco will experience

the same benefits from inbound international traffic as other

markets. The outlook for business traffic in San Francisco also is

unclear, as the tech workforce has largely shifted to hybrid and

remote working models.

Condition of the Labor Market

In the early stages of the pandemic and prior to the rollout of

vaccines, thousands of workers in the lodging industry lost their

jobs through furloughs, layoffs, or permanent property clo-

sures. The industry had also historically relied on an immigrant

workforce and international contract (temporary visa) work-

ers, which was initially halted by government and international

travel restrictions. This reduction in labor forced properties to

adjust their operating models and scale back service offerings,

most notably daily housekeeping, room service, and restaurant

operations.

Following an efficient vaccine rollout nationwide, leisure travel

recovered relatively quickly, driving occupancy and nightly room

rates to levels that allowed properties to once again support an

increased workforce. However, hotel employees did not return

with 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 dis-

placement of these workers are still being felt in hotels across

the United States. According to the Bureau of Labor Statistics,

71Emerging Trends in Real Estate

2023

Chapter 2: Property Type Outlook

July 2022 employment levels in the accommodations (lodging)

sector remained 20 percent below February 2020 (pre-pan-

demic) 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 to

attract an adequate number of employees to support the current

consumer demand for lodging.

Higher costs of living further pushed hourly wage workers out

of the primary markets, and it remains unclear if they will ever

return. While urban markets are finally starting to see increased

demand for lodging, operators are not able to keep up with the

guest 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 capitalize

on the sector’s performance recovery as weekly travel pat-

terns started to normalize and urban markets started to show

promising strides in recovery. The pent-up buyer demand had

begun to translate to increased deal activity in the second half

of 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 number

of deals completed was up over 40 percent from the prior 12

months. Cap rates have compressed for both full-service and

limited-service hotels since 2021, while prices across hotel

asset classes have climbed more than 10 percent, as reported

by MSCI Real Assets.

Although limited-service hotels represented the bulk of the sec-

tor’s deal volume through most of the pandemic, deal flow for

full-service hotels has started to bounce back, particularly with

premium-branded assets in primary metro markets, as well as in

resort locales. According to CoStar, transaction volume for full-

service assets in the first half of 2022 increased 7 percent from

the same period in 2021, compared with a 1 percent decrease

in limited-service deal volume. If business travel continues to

recover, 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 than

portfolio deals. This trend is likely to continue as recovery time-

lines across individual markets remain uneven. Improvement in

RevPAR is driving down delinquency rates, which, in turn, has

decreased instances of distressed sales.

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 the

asset and the borrower. In addition, lenders may become more

averse to lodging assets in drive-to leisure destinations and

more 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 premi-

ums have risen in regions with high risk. These premiums have

been more heavily factored into underwriting, affecting both

debt and equity investment decisions in locations where these

higher risks exist.

72 Emerging Trends in Real Estate

2023

73Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

Markets to Watch

“There’s

always a new bull market

somewhere. You’ve just got to go nd it.”

Our report this year highlights two sometimes-contradictory

property market trends: aspects of the industry are “normal-

izing” or reverting closer to their pre-COVID-19 patterns, while

others appear to have sustained permanent shifts to a “new

normal” as the 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 develop-

ment prospects this year, illustrating that outlooks are darkening

just about everywhere following the brief post-COVID-19 exu-

berance shown in last year’s survey across a variety of metrics.

Similarly, some of the fastest-growing Sun Belt and other high-

flying 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 reinforced

some 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 to

Watch” 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

2023202220212020201920182017201620152014201320122011

Sun Belt markets

Midwest and Northeast markets

Trendline

Number of markets in Emerging Trends Top 20

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

74 Emerging Trends in Real Estate

2023

Exhibit 3-2 Overall Real Estate Prospects

1 Nashville

2 Dallas/Fort Worth

3 Atlanta

4 Austin

5 Tampa/St. Petersburg

6 Raleigh/Durham

7 Miami

8 Boston

9 Phoenix

10 Charlotte

11 San Diego

12 San Antonio

13 Orlando

14 Houston

15 Northern New Jersey

16 Denver

17 Seattle

18 Washington, DC–Northern VA

19 Salt Lake City

20 Los Angeles

21 Las Vegas

22 Fort Lauderdale

23 Washington, DC–District

24 New York–Brooklyn

25 Orange County

26 Inland Empire

27 New York–Manhattan

28 Philadelphia

29 Indianapolis

30 Richmond

31 Chicago

32 Jersey City

33 Minneapolis

34 West Palm Beach

35 San Jose

36 Long Island

37 Kansas City, MO

38 Jacksonville

39 Boise

40 Detroit

41 Pittsburgh

42 New York–other boroughs

43 Oakland/East Bay

44 Cape Coral/Fort Myers/Naples

45 St. Louis

46 Columbus

47 Greenville, SC

48 Westchester, NY/Fairﬁeld, CT

49 Sacramento

50 Virginia Beach/Norfolk

51 Washington, DC–MD suburbs

52 Baltimore

53 Charleston

54 Cincinnati

55 Memphis

56 Portland, OR

57 Knoxville

58 San Francisco

59 Birmingham

60 Cleveland

61 Tallahassee

62 Tacoma

63 Louisville

64 New Orleans

65 Chattanooga

66 Omaha

67 Deltona/Daytona

68 Oklahoma City

69 Providence

70 Des Moines

71 Gainesville

72 Albuquerque

73 Honolulu

74 Tucson

75 Milwaukee

76 Portland, ME

77 Madison

78 Buffalo

78 Spokane, WA/Coeur d'Alene, ID

80 Hartford

Source: Emerging Trends in Real Estate 2023 survey.

Exhibit 3-3 Homebuilding Prospects

1 San Antonio

2 Raleigh/Durham

3 Tampa/St. Petersburg

4 Austin

5 Charlotte

6 Dallas/Fort Worth

7 Denver

8 Houston

9 Atlanta

10 Washington, DC–Northern VA

11 Salt Lake City

12 Las Vegas

13 Phoenix

14 Seattle

15 Inland Empire

16 Kansas City, MO

17 Sacramento

18 Washington, DC–District

19 Miami

20 West Palm Beach

21 Jacksonville

22 Nashville

23 Orlando

24 San Diego

25 Cape Coral/Fort Myers/Naples

26 Tacoma

27 Fort Lauderdale

28 Indianapolis

29 Boston

30 Columbus

31 Orange County

32 Philadelphia

33 Boise

34 Los Angeles

35 Greenville, SC

36 Charleston

37 Oakland/East Bay

38 Portland, OR

39 Norfolk

40 San Jose

41 Washington, DC–MD suburbs

42 Deltona/Daytona

43 Richmond

44 Memphis

45 Minneapolis

46 Cincinnati

47 Louisville

48 Northern New Jersey

49 Oklahoma City

50 Baltimore

51 Chicago

52 Albuquerque

53 Tucson

53 San Francisco

55 New York–other boroughs

56 Omaha

57 Spokane, WA/Coeur d'Alene, ID

58 Knoxville

59 Des Moines

59 Westchester, NY/Fairﬁeld, CT

61 Birmingham

62 New York–Brooklyn

63 Tallahassee

64 Chattanooga

65 Madison

66 New York–Manhattan

67 Jersey City

68 Providence

69 Honolulu

70 Buffalo

71 St. Louis

72 Gainesville

73 Portland, ME

74 Pittsburgh

74 Long Island

76 New Orleans

76 Detroit

78 Cleveland

79 Hartford

80 Milwaukee

Source: Emerging Trends in Real Estate 2023 survey.

More than 1 standard deviation above mean +/– 1 standard deviation of mean More than 1 standard deviation below mean

Key:

Mean

U.S. Markets to Watch

75Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

“Establishment” markets that used to lead in investor prefer-

ences. (The Emerging Trends market groupings are shown in

the nearby chart and defined further in the sections below.)

Emerging Trends in Real Estate 2023 Market Categories

Major group Subgroup Markets

Magnets

Super Sun Belt

Atlanta

Phoenix

San Antonio

Tampa/St. Petersburg

Dallas/Fort Worth

Houston

Miami

18-Hour Cities

Charlotte

Portland, OR

Salt Lake City

San Diego

Denver

Fort Lauderdale

Minneapolis

Supernovas

Austin

Nashville

Raleigh/Durham

Boise

Jacksonville

The Establishment

Multitalented Producers

Chicago San Jose

Los Angeles Seattle

Knowledge and Innovation

Centers

Boston San Francisco

New York–Manhattan Washington, DC–District

Major Market Adjacent

Inland Empire Oakland/East Bay

Jersey City Orange County

Long Island Washington, DC–MD suburbs

New York–Brooklyn Washington, DC–Northern VA

New York–other boroughs West Palm Beach

Northern New Jersey Westchester, NY/Faireld, CT

Niche

Boutique Markets

Chattanooga

Omaha

Portland, ME

Richmond

Des Moines

Greenville, SC

Knoxville

Eds and Meds

Baltimore Memphis

Columbus Philadelphia

Gainesville Pittsburgh

Madison Tallahassee

Visitor and Convention Centers

Cape Coral/Fort Myers/Naples Las Vegas

Charleston New Orleans

Deltona/Daytona Orlando

Honolulu Virginia Beach/Norfolk

Backbone

The Affordable West

Albuquerque

Tacoma

Tucson

Sacramento

Spokane, WA/Coeur d’Alene, ID

Determined Competitors

Birmingham

Louisville

Oklahoma City

Indianapolis

Kansas City, MO

Reinventing

Buffalo Hartford

Cincinnati Milwaukee

Cleveland Providence

Detroit 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.

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 and

infrastructure investment to continued economic growth.

76 Emerging Trends in Real Estate

2023

Changes in Attitudes, Changes in Latitudes

Befitting the changes in economic and market trends and

outlooks that we have highlighted in this report, respondents to

the Emerging Trends survey expressed substantial changes in

market preferences. Many of the changes were relatively minor,

and nine of the 10 highest-rated markets last year repeated this

year (Miami moved in as Seattle moved out).

But there were some material changes over the year as about a

quarter of markets moved up or down in rankings (i.e., relative

ratings) by at least 10 places. And consistent with our “normal-

izing” trend, many of the markets near the top of the standings

last year have fallen this year, while many previously lower-

rate 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.

Some Like It Hot

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 over

time. 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 number

of markets in cold-weather climates in the Northeast and Midwest

has declined from five to just two (as shown in exhibit 3-1).

These climate preferences are even stronger at the top and bot-

tom 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 enough

to 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 north-

eastern 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)

Average Rank

Change 2022–2023

Percentage of markets in category

Group Subgroup 2023 2022

Average

Change in

Rank

% That

Moved Up

% That

Stayed Even

% That

Moved Down

Magnets

Super Sun Belt 7.4 11.9 – 4.4 71% 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%

The Establishment

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%

Niche

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%

Backbone

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).

77Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

previous two years, and only a scattering of others have placed

over the past decade.

Growth Attracts

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 growth

show that are looking in the right places. Population and gross

metro 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.

Accordingly, the Magnets have maintained their dominance at

the top of the Emerging Trends ratings. Although their average

ranking slipped slightly this year, more markets moved up

than down.

Growth is expected to be greatest in the Supernova subgroup

but moderating from its recent torrid pace. For example, popula-

tion growth is projected to slow from 1.9 percent annually over the

last four years to 1.6 percent over the next five—still the highest

of any subgroup but slower than before as these markets experi-

ence some growing pains that we highlighted in our trends

chapter.

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 the

biggest increase from the recent past to the expected near term.

This reversal perhaps accounts for the modest relative improve-

ment in the 2023 ratings of the markets in this group.

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.

Exhibit 3-5 Population and Economic Growth by Market Category

Population Growth (CAGR) Forecast Economic Growth (CAGR)

Group Subgroup

Recent

2019–2023

Forecast

2023–2028

Total GMP

2023–2028

Per capita GDP

2023–2028

Magnets

Super Sun Belt 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%

All Magnets 1.0% 1.2% 3.7% 2.4%

The Establishment

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%

Niche

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%

Backbone

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%

Total, all Emerging Trends markets 0.5% 0.7% 2.7% 2.1%

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.

78 Emerging Trends in Real Estate

2023

Housing affordability is another constraint on growth. For-sale

housing is now less affordable (relative to local incomes) than

the national average in the three market subgroups experienc-

ing the most significant decline in ratings this year, including the

Supernova markets, while rental housing is also less affordable

than average (again, relative to incomes) in two of the three

groupings. That is, a lower share of the local population can

afford 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, especially

those in California. But population growth has outpaced hous-

ing 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 in

some of these markets, absent an easing in home prices.

On the other hand, the three market subgroups that experi-

enced the greatest relative rating improvements over the last

year 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 the

cost of doing business in some of these metro areas has been

rising, investors like the combination of housing affordability and

strong population and economic growth.

Also gaining strongly this year are the highly affordable Eds and

Meds markets. Six of the eight markets in this subgroup improved

their relative rating—with Memphis and Pittsburgh each rising

more than 10 places—and only one market fell modestly.

The situation is the opposite in many of the Establishment mar-

kets, which suffer from not only expensive housing but also high

costs 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 Affordability

Group Subgroup For-Sale* Rental** Transit Quality

†

Cost of Doing

Business††

Magnets

Super Sun Belt 47.3% 75.8% 3.48 102.8

18-Hour Cities 41.7% 61.2% 4.78 109.8

Supernovas 43.6% 78.9% 2.41 99.8

All Magnets 45.0% 71.5% 3.76 104.7

The Establishment

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

Niche

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 10 3.1

All Niche 50.0% 7 7.1% 3.46 82.2

Backbone

The Affordable West 3 4.1% 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

Total, United States 44.0% 65.4% 3.97 100.0

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.

79Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

The More Things Change . . .

Real estate markets are ever dynamic and metropolitan econo-

mies even more so. The relative rankings of the markets tracked

in Emerging Trends changed meaningfully this year as eco-

nomic conditions in the United States appear to be heading for

a slide. Nonetheless, many Magnet markets remain among the

most favored, even if some of them have slipped a bit this year.

At the same time, real estate professionals appear more willing

to consider some markets that had been less in favor in recent

years. The perpetual search for new opportunities ensures con-

stant flux in how markets are viewed over time.

Grouping the Markets

After comprehensively reorganizing how we group our 80 geo-

graphic markets two years ago and a lighter refresh last year,

we are continuing with the same groupings this year and turn

our focus to how the various groups and some key markets

have changed since our previous report. Additional demo-

graphic and economic data and more detailed descriptions

of these market groups are available online, as listed at the

end of this chapter.

Magnets

Magnet markets are migration destinations for both people and

companies, 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” ratings

of 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, the

second-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, most

are among the fastest-growing markets in the United States.

Moreover, their economic performance has been solid through

thick and thin. Though every market lost jobs during the pan-

demic 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 endur-

ing appeal. Though growing less affordable over time, these

medium-sized cities nonetheless continue to attract in-migration

due to lifestyle, workforce quality, and development opportuni-

ties, 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 smaller

markets 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 their

relatively modest sizes, all the Supernovas have above-average

levels of economic diversity and white-collar employment, which

explain their strong investor appeal and should help them sus-

tain 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 67,95 4 34,347 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%

GMP ($ Millions)

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

Average $211.3 $287.1 $ 8 5.1 $9 8.1

Share of all Emerging Trends markets 29.8% 42.6% 14.5% 13.1%

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 nal goods and services produced within a metropolitan statistical area annually.

80 Emerging Trends in Real Estate

2023

Nashville has repeated as the nation’s top market, the first

market to repeat atop the Emerging Trends table since San

Francisco in 2013 and 2014, and Austin repeated as the fourth-

highest-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 some

growing pains, as discussed elsewhere in this report. Housing

construction is not keeping pace with household growth, strain-

ing housing affordability, which has been one of the

chief attractions.

The Establishment

The Establishment markets have long been the nation’s eco-

nomic engines. The 20 markets in this category produce almost

43 percent of the GMP in the 80 Emerging Trends markets while

accounting for only 34 percent of its population base. This pri-

marily 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, the

Establishment markets still offer tremendous opportunities. This

group’s average rating is second among our four major group-

ings. However, the appeal of these markets to investors and

developers 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 more

diverse than others, specifically the multitalented metro areas

of 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 for

some real estate professionals, the Multitalented Producers

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

20%

40% 60% 80% 100%

74% 20% 6%

73 19 8

72 23 5

69 24 8

67 21 11

64 24 12

64 28 8

62 29 10

62 26 13

62 28 11

61 24 15

61 33 6

60 17 23

59 27 14

59 26 15

58 26 16

57 34 9

57 30 13

56 29 15

Buy Hold Sell

Philadelphia

New York–Manhattan

Washington, DC–Northern VA

Jersey City

Raleigh/Durham

Baltimore

Westchester, NY/Fairﬁeld, CT

Jacksonville

New York–other boroughs

Boston

Los Angeles

Orlando

Memphis

Orange County

Charleston

Inland Empire

Nashville

New York–Brooklyn

Miami

Northern New Jersey

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.

81Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

nonetheless continue to attract a disproportionate share of

investment 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, the

ratings 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 in

social media (San Francisco), finance (Manhattan), biosciences

(Boston), or think tanks (Washington, D.C.). With the most edu-

cated 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 most

expensive housing in the country, along with the highest costs of

doing 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 world-

class concentration of higher education to become a world

leader in life sciences.

Major Market Adjacent. This group includes the markets sur-

rounding high-cost CBDs in Los Angeles, Miami, New York City,

San Francisco, and Washington, D.C. Though most are subur-

ban in character, some are more urban. Moreover, several are or

contain metropolitan statistical areas in their own right.

Many of these markets benefited from the out-migration

from their neighboring CBDs during the pandemic, and their

prospects have improved somewhat in the eyes of survey

respondents. But here, too, there is a diversity in trends as seven

of the 12 markets improved this year and five declined. Most of

the improvement was registered in the New York metropolitan

area, while the declining markets are mainly in California.

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

Philadelphia

Miami

Tampa/St. Petersburg

Jacksonville

Knoxville

Dallas/Fort Worth

Richmond

Salt Lake City

Greenville, SC

Denver

Boston

San Diego

Charleston

West Palm Beach

New York–other boroughs

Charlotte

Long Island

Nashville

Raleigh/Durham

New York–Brooklyn

20%

40% 60% 80% 100%

70% 25% 5%

69 20 11

68 19 13

68 25 8

67 23 10

66 32 3

66 21 13

65 27 8

65 28 7

64 26 10

64 27 10

64 27 9

63 25 12

63 31 6

61 31 8

61 32 7

60 23 16

60 21 19

59 29 12

58 29 13

Buy Hold Sell

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.

82 Emerging Trends in Real Estate

2023

Niche

As befitting their moniker, Niche markets are generally smaller or

less 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 mar-

kets offer a lower cost of living and cost of doing business in a

diverse range of settings, primarily noncoastal. All have popu-

lations of less than 1 million, and all maintained their previous

positive in-migration during the pandemic, indicating the appeal

of these towns. Richmond remains the top-rated market in this

subgroup, 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 suffered

disproportionately 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 most

of any subgroup this year, tied with the Super Sun Belt markets.

Convention and Visitor Centers. These Sun Belt (or just

sunny, in the case of Honolulu and Las Vegas) markets draw

substantial numbers of visitors, whether for conventions or lei-

sure, 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

20%

40% 60% 80% 100%

Buy Hold Sell

Washington, DC–MD suburbs

Washington, DC–Northern VA

Denver

Honolulu

Fort Lauderdale

Salt Lake City

Raleigh/Durham

Boston

San Antonio

New York–Brooklyn

Orlando

New York–Manhattan

Washington, DC–District

Greenville, SC

Austin

Charleston

West Palm Beach

Tampa/St. Petersburg

Miami

Nashville

51% 28% 21%

46 32 21

41 38 21

40 24 36

36 42 22

34 42 23

33 33 33

32 44 24

32 39 30

31 31 38

30 45 24

30 49 21

29 53 18

29 48 23

29 43 29

25 47 28

23 58 19

22 56 22

22 48 30

22 52 26

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.

83Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

These markets all endured significant challenges resulting from

COVID-19-related restrictions, particularly those that rely on

air travel, business demand, or both. Several markets in this

grouping 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 and

Charleston both suffered significant declines. Overall, ratings

increased moderately.

Backbone

The final group comprises a wide variety of interesting and

enjoyable 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 to

live at a more affordable price. Notably, they are among the

fastest-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, as

each fell in the rankings this year. Overall, the ranking of this

subgroup declined more than that of any other in the survey and

now has the lowest overall rating.

Determined Competitors. These diverse markets tend to be

strong ancillary locations in their regions, with several success-

fully revitalizing their downtowns and neighborhoods. These

markets tend to be very affordable with a favorable quality of life.

Significantly, all maintained positive population growth through

the pandemic. Though population growth is expected to moder-

ate in some of these markets, the overall ratings for this group

rose strongly in this year’s survey.

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

20%

40% 60% 80% 100%

48% 36% 15%

47 43 10

46 35 19

41 44 15

41 41 18

40 35 25

36 41 23

36 18 45

36 44 19

35 46 19

34 53 13

32 53 16

31 51 17

31 47 22

30 59 11

29 54 17

28 44 28

27 45 27

27 50 23

27 42 31

Buy Hold Sell

Jacksonville

Houston

Madison

Chattanooga

Phoenix

San Diego

Orlando

Raleigh/Durham

Salt Lake City

Charlotte

Tampa/St. Petersburg

Fort Lauderdale

Des Moines

San Antonio

Greenville, SC

Austin

Charleston

West Palm Beach

Nashville

Miami

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.

84 Emerging Trends in Real Estate

2023

Reinventing. Reinventing markets are eastern and midwestern

cities seeking to modernize their economic base. Many were

manufacturing centers and are now moving to a more sustain-

able mix of education, health care, and technology. Though

the economic rebound in most of these markets lags the

national recovery, the federal government’s stimulus programs

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

20%

40% 60% 80% 100%

44% 28% 28%

38 27 35

38 40 21

38 48 15

37 44 19

32 43 24

32 44 24

31 56 13

30 53 16

29 44 27

27 40 32

27 50 23

27 9 64

26 39 34

26 48 26

25 45 30

24 50 26

23 46 31

23 35 42

22 50 28

Buy Hold Sell

Denver

Las Vegas

Boise

Dallas/Fort Worth

Charleston

Orange County

Orlando

Des Moines

Greenville, SC

Charlotte

San Antonio

San Diego

Nashville

Austin

Fort Lauderdale

Tampa/St. Petersburg

Salt Lake City

Raleigh/Durham

West Palm Beach

Miami

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.

have helped cushion the downturn. However, anemic popula-

tion growth remains a problem. Overall, there was no material

change in the outlook for these markets, in the view of Emerging

Trends respondents, but Detroit showed a substantial improve-

ment this year, continuing the gains first seen in Emerging

Trends 2021.

85Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

Exhibit 3-13 Local Market Perspective: Investor Demand

Weak Average Strong

Austin

4.62

Nashville

4.42

Dallas/Fort Worth

4.40

Tampa/St. Petersburg

4.38

Raleigh/Durham

4.28

Charlotte

4.25

Boston

4.23

Miami

4.22

Orlando

4.18

West Palm Beach

4.17

Atlanta

4.16

Fort Lauderdale

4.14

Charleston

4.13

Denver

3.94

New York–Brooklyn

3.91

San Diego

3.88

Washington, DC–Northern VA

3.88

Salt Lake City

3.87

Phoenix

3.83

Seattle

3.81

Columbus

3.77

San Antonio

3.73

Inland Empire

3.70

Cape Coral/Fort Myers/Naples

3.70

Orange County

3.67

Washington, DC–MD suburbs

3.66

Jacksonville

3.62

Houston

3.61

Los Angeles

3.61

New York–Manhattan

3.61

Greenville, SC

3.61

Boise

3.60

Northern New Jersey

3.54

Jersey City

3.52

Washington, DC–District

3.50

Indianapolis

3.45

New York–other boroughs

3.44

Las Vegas

3.43

Deltona/Daytona

3.41

Richmond

3.41

Knoxville

3.39

San Jose

3.37

Philadelphia

3.33

Long Island

3.32

Westchester, NY/Fairﬁeld, CT

3.29

Kansas City, MO

3.26

Tallahassee

3.24

Cincinnati

3.21

Norfolk

3.20

Pittsburgh

3.19

Madison

3.17

Minneapolis

3.13

Gainesville

3.11

Chattanooga

3.09

Des Moines

3.09

Oakland/East Bay

3.08

Portland, ME

3.05

Honolulu

3.04

Sacramento

3.03

Tacoma

2.96

Birmingham

2.95

Tucson

2.89

Spokane, WA/Coeur d'Alene, ID

2.87

Chicago

2.84

Oklahoma City

2.82

San Francisco

2.82

Detroit

2.78

Omaha

2.78

Louisville

2.76

Portland, OR

2.74

Memphis

2.74

St. Louis

2.74

Providence

2.62

Cleveland

2.60

Milwaukee

2.60

Baltimore

2.55

Albuquerque

2.55

New Orleans

2.33

Hartford

2.17

Buffalo

2.05

Exhibit 3-14 Local Market Perspective: Development/

Redevelopment Opportunities

Weak Average Strong

Dallas/Fort Worth

4.04

Nashville

4.00

Tampa/St. Petersburg

4.00

Raleigh/Durham

3.98

Miami

3.91

Austin

3.86

San Antonio

3.82

Charlotte

3.81

West Palm Beach

3.79

Atlanta

3.77

Fort Lauderdale

3.77

Orlando

3.77

Washington, DC–Northern VA

3.73

Kansas City, MO

3.72

New York–other boroughs

3.70

Houston

3.68

Salt Lake City

3.65

Denver

3.63

Charleston

3.57

Cape Coral/Fort Myers/Naples

3.57

Jacksonville

3.55

Cleveland

3.55

San Diego

3.53

Philadelphia

3.53

Des Moines

3.53

New York–Brooklyn

3.52

Phoenix

3.48

Madison

3.48

Richmond

3.46

Detroit

3.45

Orange County

3.45

Greenville, SC

3.44

Chattanooga

3.42

Cincinnati

3.42

Boston

3.37

Boise

3.37

Knoxville

3.35

Deltona/Daytona

3.33

Tallahassee

3.33

Las Vegas

3.31

Inland Empire

3.31

Northern New Jersey

3.29

Birmingham

3.29

Memphis

3.28

Washington, DC–District

3.27

Milwaukee

3.27

Seattle

3.26

Portland, ME

3.24

Gainesville

3.24

Norfolk

3.24

Washington, DC–MD suburbs

3.21

Jersey City

3.21

Pittsburgh

3.21

Indianapolis

3.18

New York–Manhattan

3.17

St. Louis

3.13

San Jose

3.12

Baltimore

3.09

Westchester, NY/Fairﬁeld, CT

3.09

Los Angeles

3.09

Long Island

3.08

Columbus

3.08

Omaha

3.08

Oklahoma City

3.07

Chicago

3.06

Louisville

2.93

Minneapolis

2.89

Tucson

2.88

Sacramento

2.88

Spokane, WA/Coeur d'Alene, ID

2.87

Albuquerque

2.84

Providence

2.81

Tacoma

2.79

New Orleans

2.79

Portland, OR

2.78

Oakland/East Bay

2.76

Buffalo

2.72

Honolulu

2.66

Hartford

2.65

San Francisco

2.40

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reect perspective of local market participants.

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reect perspective of local market participants.

86 Emerging Trends in Real Estate

2023

Exhibit 3-15 Local Market Perspective: Local Economy

Weak Average Strong

Austin

4.61

Dallas/Fort Worth

4.53

Nashville

4.42

Raleigh/Durham

4.35

Tampa/St. Petersburg

4.28

Charlotte

4.23

Charleston

4.19

Fort Lauderdale

4.19

West Palm Beach

4.17

Miami

4.15

Boston

4.13

Columbus

4.08

Atlanta

4.08

Orlando

4.02

San Antonio

4.00

Denver

4.00

Phoenix

3.99

Washington, DC–Northern VA

3.97

San Diego

3.93

Jacksonville

3.89

Salt Lake City

3.89

Houston

3.88

Greenville, SC

3.87

Orange County

3.85

Boise

3.83

Indianapolis

3.74

New York–Brooklyn

3.74

Washington, DC–District

3.71

Seattle

3.69

Washington, DC–MD suburbs

3.69

Knoxville

3.68

Chattanooga

3.67

Inland Empire

3.64

Madison

3.62

Minneapolis

3.61

Cape Coral/Fort Myers/Naples

3.61

Richmond

3.61

Kansas City, MO

3.60

New York–Manhattan

3.55

Des Moines

3.54

New York–other boroughs

3.54

Northern New Jersey

3.53

Cincinnati

3.52

Westchester, NY/Fairﬁeld, CT

3.47

Jersey City

3.44

Los Angeles

3.44

Norfolk

3.42

Las Vegas

3.41

Portland, ME

3.40

Philadelphia

3.39

Deltona/Daytona

3.39

San Jose

3.38

Gainesville

3.38

Tallahassee

3.33

Long Island

3.31

Spokane, WA/Coeur d'Alene, ID

3.30

Birmingham

3.26

Pittsburgh

3.24

Honolulu

3.22

Sacramento

3.21

Omaha

3.20

Louisville

3.20

Oklahoma City

3.19

Tucson

3.13

Milwaukee

3.09

Detroit

3.05

Chicago

3.05

Portland, OR

3.02

Oakland/East Bay

3.02

Tacoma

2.96

Memphis

2.91

St. Louis

2.90

Albuquerque

2.89

San Francisco

2.89

New Orleans

2.88

Providence

2.85

Baltimore

2.85

Cleveland

2.81

Buffalo

2.56

Hartford

2.42

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reect perspective of local market participants.

87Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

Exhibit 3-16 Local Market Perspective: Local Public and

Private Investment

Weak Average Strong

Exhibit 3-17 Local Market Perspective: Availability of Debt

and Equity Capital

Weak Average Strong

Richmond

3.48

Cleveland

3.43

San Jose

3.40

Las Vegas

3.38

Norfolk

3.38

Omaha

3.36

Madison

3.35

Boise

3.34

Deltona/Daytona

3.29

Tallahassee

3.27

Detroit

3.25

Chattanooga

3.25

Pittsburgh

3.20

Gainesville

3.19

Cincinnati

3.16

Oakland/East Bay

3.15

Columbus

3.14

St. Louis

3.11

Honolulu

3.11

Sacramento

3.09

Milwaukee

3.08

Birmingham

3.05

Portland, ME

3.05

Memphis

3.00

Indianapolis

3.00

Portland, OR

2.96

Tacoma

2.88

Louisville

2.86

Tucson

2.85

Chicago

2.84

Oklahoma City

2.81

San Francisco

2.81

Providence

2.81

Minneapolis

2.80

Albuquerque

2.79

Baltimore

2.77

Spokane, WA/Coeur d'Alene, ID

2.73

Buffalo

2.67

Hartford

2.65

New Orleans

2.46

Austin

4.29

Nashville

4.29

Tampa/St. Petersburg

4.17

Dallas/Fort Worth

4.16

Miami

4.15

Raleigh/Durham

4.10

West Palm Beach

4.09

Charlotte

4.02

Orlando

4.00

Boston

3.96

Des Moines

3.95

Atlanta

3.95

Washington, DC–Northern VA

3.93

Fort Lauderdale

3.89

Charleston

3.88

Salt Lake City

3.86

San Diego

3.85

New York–Manhattan

3.79

Denver

3.78

San Antonio

3.74

New York–Brooklyn

3.74

Kansas City, MO

3.73

Jacksonville

3.72

Cape Coral/Fort Myers/Naples

3.71

Northern New Jersey

3.71

Phoenix

3.68

Inland Empire

3.68

Los Angeles

3.67

Seattle

3.64

Orange County

3.63

Knoxville

3.63

Jersey City

3.63

New York–other boroughs

3.57

Philadelphia

3.55

Houston

3.55

Washington, DC–MD suburbs

3.54

Long Island

3.52

Washington, DC–District

3.50

Westchester, NY/Fairﬁeld, CT

3.50

Greenville, SC

3.48

Nashville

3.88

Dallas/Fort Worth

3.86

Raleigh/Durham

3.83

Charlotte

3.80

Tampa/St. Petersburg

3.77

Austin

3.68

Salt Lake City

3.66

West Palm Beach

3.66

Boston

3.65

Orlando

3.64

Miami

3.64

Charleston

3.63

San Antonio

3.63

Denver

3.62

Kansas City, MO

3.57

Washington, DC–Northern VA

3.56

Atlanta

3.51

Fort Lauderdale

3.50

Knoxville

3.50

Houston

3.47

Des Moines

3.44

Orange County

3.44

Chicago

3.44

Washington, DC–District

3.43

New York–other boroughs

3.43

New York–Brooklyn

3.43

Boise

3.41

Phoenix

3.40

San Diego

3.39

Philadelphia

3.33

Greenville, SC

3.30

Jacksonville

3.30

Las Vegas

3.30

New York–Manhattan

3.28

Cape Coral/Fort Myers/Naples

3.28

Richmond

3.27

Jersey City

3.27

Chattanooga

3.26

Madison

3.25

Westchester, NY/Fairﬁeld, CT

3.25

Oklahoma City

3.25

Northern New Jersey

3.24

Portland, ME

3.21

Deltona/Daytona

3.20

Tallahassee

3.20

Washington, DC–MD suburbs

3.20

Cleveland

3.19

Detroit

3.18

Long Island

3.17

Pittsburgh

3.14

Gainesville

3.13

St. Louis

3.13

Sacramento

3.13

Seattle

3.12

Memphis

3.12

Birmingham

3.11

San Jose

3.09

Inland Empire

3.09

Omaha

3.08

Norfolk

3.06

Milwaukee

3.00

Louisville

3.00

Minneapolis

3.00

Providence

2.95

Indianapolis

2.94

Tacoma

2.91

Spokane, WA/Coeur d'Alene, ID

2.90

Los Angeles

2.90

Cincinnati

2.88

Baltimore

2.87

Tucson

2.83

Honolulu

2.78

Oakland/East Bay

2.76

Portland, OR

2.71

Columbus

2.69

Albuquerque

2.63

Buffalo

2.63

Hartford

2.57

San Francisco

2.52

New Orleans

2.50

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reect perspective of local market participants.

Source: Emerging Trends in Real Estate 2023 survey.

Note: Ratings reect perspective of local market participants.

88 Emerging Trends in Real Estate

2023

Exhibit 3-18 Economy

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.

2023 population*

Population distribution

(% of total population) Business costs 2023 employment*

Industry location quotient***

Market

Total

(millions)

5-year

projected

change

(000s)

5-year

annual

projected

% change

Ages

0–24

Ages

25–44

Ages

45–64

Ages 65

and older

2023

real GMP

per capita

Real GMP per

capita 5-year

projected

annual change

2023 real

per capita

income*

Real per capita

income 5-year

projected

annual change

Cost of

doing

business** Total (000s)

5-year

annual

projected

change

STEM

employment

Ofﬁce-using

employment

Goods-

producing

employment

Tourism

employment

United States 334.21 8,334.0 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 1.0

Albuquerque 0.92 33.3 0.7% 30% 28% 23% 18% $45,251 1.9% $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% $65,031 2.4% $5 4,122 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% $ 57,4 43 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% $93,021 2.0% $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% 9 0.1 270 0.1% 0.8 0.8 1.4 1.1

Chicago

9.43 3.9 0.0% 31% 28% 25% 16% $ 67,7 21 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% $5 3,102 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% $ 47,3 41 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% $ 47,6 44 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% $45,312 1.7% $47,0 69 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% $ 57,8 58 1.4% $ 47,3 55 2.4% 144.4 451 0.4% 0.8 0.8 0.6 1.5

Houston

7.4 2 549.0 1.4% 35% 30% 24% 12% $ 67,5 88 2.3% $54,593 2.1% 10 0.1 3,275 0.9% 0.8 1.0 1.3 1.0

Indianapolis

2.17 119.0 1.1% 33% 29% 24% 15% $63,109 2.2% $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% $48,881 2.5% $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 1,10 4 0.7% 0.9 1.1 1.0 0.9

Knoxville

0.94 30.9 0.7% 29% 26% 26% 20% $47,12 9 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% $62,393 2.1% $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% $51,729 1.5% $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

89Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

Exhibit 3-18 Economy

2023 population*

Population distribution

(% of total population) Business costs 2023 employment*

Industry location quotient***

Market

Total

(millions)

5-year

projected

change

(000s)

5-year

annual

projected

% change

Ages

0–24

Ages

25–44

Ages

45–64

Ages 65

and older

2023

real GMP

per capita

Real GMP per

capita 5-year

projected

annual change

2023 real

per capita

income*

Real per capita

income 5-year

projected

annual change

Cost of

doing

business** Total (000s)

5-year

annual

projected

change

STEM

employment

Ofﬁce-using

employment

Goods-

producing

employment

Tourism

employment

United States 334.21 8,334.0 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 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 1.1

Milwaukee

1.56 3.8 0.0% 31% 27% 25% 17% $59,16 6 1.7% $ 57,6 02 2.4% 97.7 851 0.2% 1.2 0.9 1.3 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 0.8

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 7 7.7 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% $56,228 2.4% $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% $58,18 5 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% $7 7,8 32 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% $50,984 2.7% $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 1,16 3 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% $74,514 3.1% $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, 521 2.5% $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% $ 57,08 5 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% $44,014 1.9% $ 47,89 6 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% $197,42 5 2.2% $75,598 2.1% 117.5 783 0.7% 1.0 1.1 0.2 0.6

Washington DC–

MD suburbs

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

Washington DC–

Northern VA

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

90 Emerging Trends in Real Estate

2023

Households Single-family market metrics General market metrics Multifamily metrics

Market

2023 total*

(000s)

5-year

projected

annual %

change

% of owner-

occupant

households

% of all homes

likely affordable

to 4-person

family earning

120% of AMI

Tenure cost

proportion

(own/rent)**

Single-family

homes as

% of new

production

MSA

AllTransit

Score***

% of workers

with commute

of more than

1 hour

Permits

per 100 HH

added

% of renter-

occupant

households

Affordable and

available rental

units per 100

HH at 80% of

AMI

Tenure cost

proportion

(rent/own)**

Multi-unit

buildings

as % of new

production

United States 130,816.0 0.9% 66.1% 52.0% 1.03 65.3% 3.2 7.3% 128.0 34.0% 86 0.97 34.7%

Albuquerque

381.9 1.2% 67.4% 50.1% 1.13 66.2% 3.6 5.4% 186.9 32.7% 96 1.13 33.8%

Atlanta

2,375.4 1.4% 64.2% 40.8% 1.04 67.5% 2.5 14.0% 86.6 35.8% 79 1.04 32.5%

Austin

960.0 2.6% 58.6% 49.3% 1.50 47.7% 2.8 8.2% 109.8 41.4% 64 1.50 52.3%

Baltimore

1,122.4 0.7% 66.6% 48.5% 0.99 47.0% 4.2 12.7% 162.0 33.4% 63 0.99 53.0%

Birmingham

481.3 0.4% 69.2% 58.1% 0.92 73.8% 0.1 6.8% - 30.8% 93 0.92 26.2%

Boise

310.6 2.3% 71.0% 29.2% 1.76 70.8% 1.8 3.8% 90.2 29.0% 96 1.76 29.2%

Boston

1,927.1 0.7% 61.7% 30.9% 1.09 32.4% 5.0 14.2% 109.6 38.3% 41 1.09 67.6%

Buffalo

493.0 0.0% 66.1% 66.6% 0.92 7 7.6% 3.9 3.1% 130.5 33.9% 94 0.92 22.4%

Cape Coral/Fort Myers/

Naples

519.2 2.4% 73.5% 28.9% 1.21 69.4% 2.1 6.4% 129.6 26.5% 76 1.21 30.6%

Charleston/North

Charleston

346.8 1.8% 66.8% 36.2% 1.06 69.5% 1.5 6.5% 111.1 33.2% 80 1.06 30.5%

Charlotte

1,090.2 1.7% 66.0% 63.0% 1.16 65.8% 2.2 7.3% 266.5 34.0% 86 1.16 34.2%

Chattanooga, TN/GA

233.6 0.8% 67.4% 59.0% 1.07 72.2% 1.2 3.9% 145.9 32.6% 95 1.07 27.8%

Chicago

3,714.8 0.4% 64.8% 59.5% 0.85 56.2% 5.1 13.8% 92.8 35.2% 73 0.85 43.8%

Cincinnati

898.6 0.8% 67.1% 76.4% 0.98 70.1% 2.5 5.2% 89.9 32.9% 92 0.98 29.9%

Cleveland

895.6 0.4% 64.7% 64.0% 0.88 83.6% 4.7 4.7% 55.7 35.4% 93 0.88 16.4%

Columbus

867. 2 1.0% 61.8% 68.7% 1.04 60.4% 2.9 4.6% 133.3 38.2% 89 1.04 39.6%

Dallas/Fort Worth

2,982.4 1.7% 59.7% 56.6% 1.01 61.4% 2.8 8.9% 110.7 40.3% 75 1.01 38.6%

Deltona/Daytona Beach

301.0 1.7% 72.1% 49.0% 1.08 71.3% 2.4 9.5% 350.5 2 7.9% 40 1.08 28.7%

Denver

1,219.1 1.5% 64.8% 23.5% 1.40 53.7% 5.3 7.6% 98.3 35.2% 50 1.40 46.3%

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 27. 2%

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%

Houston

2,688.8 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% 6 4.1% 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% 7 7.0 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% 6 7.4% 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%

Exhibit 3-19 Housing

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.

91Emerging Trends in Real Estate

2023

Chapter 3: Markets to Watch

Exhibit 3-19 Housing

Households Single-family market metrics General market metrics Multifamily metrics

Market

2023 total*

(000s)

5-year

projected

annual %

change

% of owner-

occupant

households

% of all homes

likely affordable

to 4-person

family earning

120% of AMI

Tenure cost

proportion

(own/rent)**

Single-family

homes as

% of new

production

MSA

AllTransit

Score***

% of workers

with commute

of more than

1 hour

Permits

per 100 HH

added

% of renter-

occupant

households

Affordable and

available rental

units per 100

HH at 80% of

AMI

Tenure cost

proportion

(rent/own)**

Multi-unit

buildings

as % of new

production

United States 130,816.0 0.9% 66.1% 52.0% 1.03 65.3% 3.2 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% 10 5.1 40.2% 89 0.98 33.6%

Minneapolis/St. Paul

1,487. 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%

New York–

Manhattan††

767.9 -0.1% 51.6% 31.9% 1.11 27.0 % 6.9 22.0% 183.74 48.4% 0 - 73.0%

New York–other

boroughs††

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%

Orlando

1,054.4 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% 157.5 3 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%

Sacramento

887.8 1.0% 61.2% 23.8% 1.47 80.3% 4.0 8.5% 76.00 38.8% 66 1.47 19.7%

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 4 6.1% 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%

Seattle

1,642.6 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/Couer

d'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%

Tacoma

1,642.6 1.3% 60.2% 32.3% 1.47 38.6% 5.1 12.3% 99.31 39.8% 44 1.47 61.4%

Tallahassee

16 0.1 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 4 4.1%

Washington DC–

District†††††

301.1 0.9% 63.9% 41.5% 1.16 45.3% 5.5 17. 3% 126.27 36.1% 32 - 54.7%

Washington DC–MD

suburbs†††††

499.3 1.0% 63.9% 41.5% 1.16 45.3% 5.5 17. 3% 126.27 36.1% 32 - 54.7%

Washington DC–

Northern VA†††††

1,613.1 1.2% 63.9% 41.5% 1.16 45.3% 5.5 17.3% 126.27 36.1% 32 - 54.7%

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 gures, data are for Miami/Fort Lauderdale/West Palm Beach, FL.

††Other than household gures, data are for New York City/Newark/Jersey City, NY/NJ/PA.

†††Other than household gures, data are for Los Angeles/Long Beach/Anaheim, CA.

††††Other than household gures, data are for San Francisco/Oakland/Hayward, CA.

†††††Other than household gures, data are for Washington/Arlington/Alexandria, DC/VA/MD/WV.

92 Emerging Trends in Real Estate

2023

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

Magnets

Super Sun Belt Growth—demographic

Business-friendly

environment

Political extremism

18-Hour Cities Growth—demographic Quality of life

Housing—affordability and

availability, and ination—

persistent higher rate (tie)

Supernovas Growth—economic Quality of life

Housing—affordability

and availability

All Magnets Growth—demographic Growth—economic

Housing—affordability

and availability

The Establishment

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

Niche

Visitor and Convention Centers

Opportunities—

investment

Opportunities—

development

Ination—persistent

higher rate

All Niche Growth—economic

Opportunities—

development

Housing—affordability

and availability

Backbone

Determined Competitors Cost of living

Opportunities—

development

Ination—persistent

higher rate

All Backbone Cost of living Desirable suburbs

Ination—persistent

higher rate

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

93Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

Canada’s real estate industry has had a long and good run.

Capital was plentiful; rents, valuations, and returns continued

to rise across much of the industry; and Canada’s stability and

immigration trends have played key roles in making the country

an attractive place to invest.

To be sure, there were significant challenges, including the

massive uncertainty created by the COVID-19 pandemic. But

the industry always seemed to keep doing well since expected

downturns never seemed to materialize or—when they did—

were short, mild, and fairly localized. Then came 2022, with its

mix of interest rate increases that were sharper and faster than

expected, inflation at levels that Canada has not seen since

the 1980s, and a geopolitical environment that has created

uncertainty that continues to reverberate throughout the global

Emerging Trends in Canadian Real Estate

“Patience during this time of uncertainty will be

a real virtue

for 2023.”

economy. The result has been a significant disruption to the

Canadian real estate market.

While many trends are reshaping the industry now and in the

long term, in this year’s report, we focus on three issues that

are particularly salient for 2023 as financial, environmental, and

social pressures converge:

1. Navigating a period of price discovery amid rising chal-

lenges around costs and capital availability;

2. Addressing urgent imperatives around environmental, social,

and governance (ESG) matters; and

3. Finding meaningful solutions to escalating concerns about

housing affordability.

Other issues we have followed in the past, such as the need

to repurpose assets and reposition portfolios in light of the

continuing evolution of the world of work and changing con-

sumer behaviors and expectations, remain important ongoing

trends that we explore in more detail in our look at specific

asset classes like offices and retail properties. We also track

the regional impacts of recent shifts, which include significantly

brighter prospects for Calgary and Edmonton amid a rising

economic outlook and the relative affordability of these cities’

housing markets.

Even as real estate companies keep a sharp eye on these and

other trends, many of those we interviewed in the summer of

2022 were predicting a continuing pause in market activity as

they watch how the current uncertainty plays out. “We’re putting

a few things on hold,” one interviewee told us. But while the

changing environment in 2022 has been a shock for some, the

Exhibit 4-1 Emerging Trends Barometer 2023

fair

good

poor

Hold

2023202120192017201520132011

Buy

Sell

Source: Emerging Trends in Real Estate surveys.

Note: Based on Canadian investors only.

94 Emerging Trends in Real Estate

2023

the opposite is true now due in large part to a succession of

interest rate increases by the Bank of Canada.

Lenders, according to interviewees, have been tightening bor-

rowing requirements which, along with higher financing costs,

are making it harder for companies to raise capital and move

projects forward. This, in turn, is leading to reduced competition

for deals during a period of price discovery in which sellers and

buyers find themselves at odds over pricing expectations and

valuations as some real estate assets come under pressure.

We can see the impacts in our survey of Canadian industry

players, in which respondents identified interest rates and costs

of capital as the top economic issue for real estate in 2023 (see

exhibit 4-3). We also saw a significant rise in the number of

respondents saying that both equity capital and debt capital are

undersupplied (see exhibits 1-4 and 1-5).

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 have

been rising in recent years, events in 2022 could reverse that

trend. With the value of their equity portfolio holdings having

declined, some may now have real estate allocations beyond

their target 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.

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 height-

ened uncertainty is leading many players to stay on the sidelines

as they wait to see where the market, particularly when it comes

to pricing and valuations, settles. One interviewee noted their

cautious 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.

Cost Escalations amid Supply Chain Challenges and Labor

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, includ-

ing for key materials like steel, have added to the pressures.

Exhibit 4-2

Real Estate Business Prospects, 2023 versus

2022

Abysmal

2 3

Fair

4 5

Excellent

Commercial real estate

developers

Real estate security

investors

Real estate lenders

Real estate equity

investors

Real estate owners

Residential builders/

developers

Real estate investment

managers/advisers

Real estate services

2022

2023

3.38

3.35

3.26

3.24

3.27

3.15

3.04

2.95

3.45

3.73

3.89

3.25

3.15

3.62

3.20

3.05

Source: Emerging Trends in Real Estate surveys.

Note: Based on Canadian respondents only.

long-term outlook is positive. Many of the fundamental underpin-

nings of the Canadian property market remain strong, especially

given the impacts of trends like rising immigration levels on

demand for real estate assets relative to continuing supply prob-

lems. This is why now is the time to invest in solutions to create

value beyond the short-term uncertainty. The key to navigating

this complex and volatile environment is a mix of patience, agil-

ity, and a willingness to take bold actions to deliver sustained

growth and outcomes in 2023 and beyond.

1. Costs and Capital: A Period of

Price Discovery amid Major Shifts for

Real Estate

“Things are changing so quickly. . . . Developers are not panick-

ing, just pausing.”

While overabundance of capital was a significant concern last

year, the sentiment has changed in 2022, with some interview-

ees expecting continuing challenges in 2023. Whereas the

concern previously was about too much capital creating even

more competition for deals and pushing up prices for assets,

95Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

According to Statistics Canada, residential building costs were

up 22.6 percent on a year-over-year basis in the first quarter 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 were

double the number of open positions during the same period in

2020. And then there is the impact of construction wages, which

were up 6.6 percent in the first quarter of this year compared

with 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 in

cost or productivity.

Adaptation Key as the Landscape Shifts for Canadian

Real Estate

What does this mean for real estate companies? For some, it

adds further to the need to take a pause on activity. There have

been rising projections, for example, of developers delaying or

potentially canceling condo projects as it becomes harder to

make the numbers work in these challenging conditions. Others

are trying to manage this by spacing out advanced sales of new

Exhibit 4-3 Importance of Issues for Real Estate in 2023

Threat of terrorism

Higher education costs

Diversity and inclusion

Federal budget deﬁcit

Provincial/local governments budgets

Income inequality

Political extremism

Immigration policy

Climate change

Epidemics/pandemics

Geopolitical conﬂicts

Housing costs and availability

Currency exchange rates

Federal taxes

Provincial and local taxes

Tariffs/trade conﬂicts

Global economic growth

Capital availability

Inﬂation

Job and income growth

Qualiﬁed labor availability

Interest rates and cost of capital

Health- and safety-related policies

Municipal service cuts

Health and wellness features

Risks from extreme weather

Property taxes

NIMBYism

Infrastructure/transportation

Environmental/sustainability requirements

Provincial and local regulations

Tenant leasing and retention costs

Operating costs

Land costs

Construction material costs

Construction labor costs

Construction labor availability

Real estate/development issues

Economic/ﬁnancial issues

Social/political issues

importance

Moderate

importance

Great

4.18

3.64

3.56

3.55

3.53

3.47

3.17

3.12

3.05

2.90

2.86

4.45

4.44

4.43

3.95

3.75

3.59

3.56

3.55

3.51

3.33

3.23

3.11

2.93

2.91

4.47

4.26

4.15

4.13

4.00

3.61

3.11

3.02

2.94

2.93

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

Exhibit 4-4 Real Estate Capital Market Balance Forecast,

2023 versus 2022

Equity capital for investing

2023

OversuppliedIn balanceUndersupplied

27% 39%

2022

3% 35% 62%

34%

Source: Emerging Trends in Real Estate surveys.

Note: Based on Canadian respondents only.

96 Emerging Trends in Real Estate

2023

housing units to ensure that prices reflect rising costs as a project

moves forward. In some cases, companies are proactively shor-

ing up liquidity—even at higher financing costs—as they look to

reduce risk amid uncertainty about the availability of capital.

One interviewee noted that these conditions may be especially

challenging for some industry players, such as real estate

investment trusts (REITs). As valuations come under pressure

and unit prices trade at discounts to net asset values, REITs

will find it increasingly harder to raise the capital they need,

especially those with development projects in the pipeline, this

interviewee suggested.

That said, many interviewees felt that capital is still available and

suggested that those with strong track records and relation-

ships with lenders should have no trouble attracting financing

at reasonable terms in order to move good projects forward. “If

you are a great borrower, it will be easier to get financing. If not,

it won’t be easy to get,” said one interviewee, who felt that the

market is witnessing a flight to quality.

While challenging, an environment like this also presents oppor-

tunities. Companies with less leverage will have greater flexibility

to capitalize on market shifts. And while some sources of financ-

ing may be less available than in the past, many interviewees

predict that the private debt market will help fill some of the gap.

The pause in the market is also a chance to explore solutions to

some of the challenges that builders are facing. Some interview-

ees, 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 Estate

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

Alternative materials like mass timber also offer important

sustainability 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 real

estate 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 have

an advantage in attracting investment from institutional players

and sourcing new forms of capital—such as green bonds and

sustainability-linked loans—that continue to grow in Canada.

While many Canadian real estate players have responded by

increasing their focus on ESG strategies, expectations continue

to rise in key areas, including when it comes to having robust

commitments to address climate change. As we have seen

in other areas of the world, investors are increasingly looking

beyond whether a company has an ESG strategy to ask about

plans to reach 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 inter-

viewees showed that some companies have yet to fully embrace

the net-zero imperative. 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.

Exhibit 4-5 Real Estate Capital Market Balance Forecast, 2023 versus 2022

2023

OversuppliedIn balanceUndersupplied

Debt capital for acquisitions

Debt capital for reﬁnancing Debt capital for development/redevelopment

41%

50% 9%

2023

OversuppliedIn balanceUndersupplied OversuppliedIn balanceUndersupplied

43%

48% 10%

2023

56%

34%

10%

2022

8% 46% 46%

2022

9% 47% 44%

2022

21% 42% 36%

Source: Emerging Trends in Real Estate surveys.

Note: Based on Canadian respondents only.

97Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

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 that

they were waiting for other companies to do the heavy lifting on

exploring and investing in the right technology investments to

address ESG matters in real estate before following suit them-

selves. 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 address

these 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 of

electric vehicle charging locations in residential developments,

companies are taking action on climate change. Others are

focusing on the potential of non-emitting energy sources, with

one interviewee noting that the high prices of traditional fuels are

shortening the cost recovery period for investments in this area.

This interviewee noted that they are looking at creating a service

around providing geothermal energy to customers, which shows

some of the ways that some real estate players are focusing

more on the business and revenue opportunities created by the

low-carbon transition as opposed to the costs.

Navigating a Rising Imperative around Climate Disclosures

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 both

publicly 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 disclosures

about assets in Canada. This would affect private Canadian real

estate companies in a number of ways. For example, they can

expect requests from building tenants for information to help

them meet their own SEC climate disclosure obligations.

The landscape for climate disclosures and reporting is also

evolving quickly in Canada and internationally. The IFRS

Foundation’s International Sustainability Standards Board, for

example, has been working on draft sustainability disclosure

standards that set out detailed requirements in areas such as

climate-related information and make reference to industry-

Exhibit 4-6 Foreign Direct Investment in Canada and Canadian Direct Investment Abroad: Real Estate, Rental, and Leasing

Foreign direct investment in Canada Canadian direct investment abroad

Millions of Canadian dollars

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

202120202019201820172016

$20,000

$40,000

$60,000

$80,000

$100,000

202120202019201820172016

Other countries

Europe

Asia and Oceania

Other Americas

United States

Source: Statistics Canada, accessed August 9, 2022.

Note: Includes rms under the North American Industry Classication System (NAICS) 53.

98 Emerging Trends in Real Estate

2023

in multiple systems across the organization. In some cases, key

workforce inclusion and diversity data comes from areas of the

business that have yet to develop best practices around metrics

and reporting that functions like finance and accounting have

long been leaders in.

Opportunities to Make Headway on Inclusion and Diversity

Metrics and Reporting

The good news is that increasingly sophisticated tools are avail-

able to help organizations improve reporting on inclusion and

diversity matters. These cloud-based solutions pull in data from

disparate sources and connect teams across the organization to

create a single source of truth about ESG matters like perfor-

mance on inclusion and diversity. They can also help automate

many labor-intensive processes and increase the accuracy of

the data presented, which is critical at a time of rising expecta-

tions 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 like

inclusion 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 sure

that 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 in

attracting and developing a more diverse workforce for compa-

nies to recruit from.

3. Housing Affordability: A Growing

Challenge for Real Estate Companies

“In no jurisdiction in the world has affordable housing been

solved with no incentives.”

A key social issue for real estate, of course, is housing afford-

ability. Housing costs and availability ranked as the top social/

political issue among survey respondents this year (see exhibit

4-3), and it comes as no surprise as concerns about 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

based provisions for sectors like real estate. The Canadian

Securities Administrators also is examining these issues, making

ESG and sustainability reporting an even more urgent matter for

real estate companies to address.

While reporting and disclosure obligations will be a critical driver

of activity, many other factors are driving the ESG impera-

tive, 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. One tenant putting an emphasis on this is

the government of Canada, which has a greening government

strategy that includes provisions and targets around new build-

ings, lease renewals, and retrofits. 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 look at retrofitting

buildings will also be key since avoiding emissions associated

with new construction will be a critical part of the industry’s con-

tribution to achieving climate change goals. And when building

new developments, companies will have to consider emerging

trends and standards, including the fact that setting up homes

to use natural gas heating will be an issue in the long run as

Canada and the world move toward net-zero emissions.

Measuring the S Factor an Emerging ESG Focus for

Canadian Real Estate Companies

While environmental matters remain a major focus of the ESG

agenda, concern about social factors was an emerging issue

for interviewees this year. An important consideration for many

interviewees is the need to measure performance on key social

issues like inclusion and diversity.

How, for example, do companies compare to their peers on mat-

ters like workforce representation, diversity at senior ranks, and

pay equity? As employees, community members, and, in some

cases, regulators increasingly look for data in these and other

areas, real estate companies will need to have good processes

in place 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

found that while many companies disclosed policies and mea-

surable targets around gender matters, they tended to be lacking

when it came to transparency about other aspects of diversity.

The challenge for many real estate companies is the complexity

of reporting on social matters like inclusion and diversity. Data

may not be readily available or of sufficient quality, or it may lie

99Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

59.3 percent for single-family homes at the start of 2022 (see

exhibit 4-9).

Moves by the Bank of Canada to raise interest rates as part of

its bid to tackle inflation are having an impact on home prices.

But higher interest rates will counteract the affordability impacts

of any easing of home prices, at least for the time being. And

overall affordability pressures are affecting other classes of

residential 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 rent a home instead. But with supply also constrained and

getting even tighter in the rental market, rising rents are adding

to the growing affordability crisis.

While the RBC report noted that worsening affordability condi-

tions would be particularly marked in relatively high-priced

markets like Toronto and Vancouver, the challenges have been

spreading across Canada as Canadians increasingly move to

other 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 high

rates of international immigration—has been a trend for some

time, 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:

 Toronto and Montreal saw the largest net migration losses to

other regions of Ontario and Quebec, respectively, since at

least 2001–2002.

 Net intraprovincial migration to rural areas increased across

Canada.

 As further evidence of the growth of secondary cities and

suburbs, 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 (see exhibit 1-7).

We can also see evidence of these trends in international

immigration statistics published by Statistics Canada, which

show the changing distribution of new immigrants across the

country over the past 20 years (see exhibit 4-8). The data show

a declining share of new immigrants settling in jurisdictions like

Ontario, with a rising portion going to provinces such as Alberta,

Saskatchewan, and Manitoba as well as the Atlantic region. The

impacts of these trends are also playing out at the city level,

with the share of new permanent residents settling in regions

like Toronto falling over time while the opposite is happening in

places such as Halifax, which is among the markets we have

Exhibit 4-7 Population Growth Rate by Census Metropolitan

Area, 2020–2021

Population growth rate (%)

–1.5 –1.0 –0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0

Thunder Bay

Windsor

Montréal

Peterborough

Regina

Kingston

Greater Sudbury

Winnipeg

Toronto

Saguenay

St. John's

Saint John

Québec City

Belleville

St. Catharines–Niagara

Hamilton

Ottawa–Gatineau

Saskatoon

London

Lethbridge

Edmonton

Calgary

Abbotsford–Mission

Vancouver

Trois-Rivières

Kitchener–Cambridge–Waterloo

Guelph

Sherbrooke

Victoria

Barrie

Brantford

Moncton

Halifax

Oshawa

Kelowna

All census metropolitan areas

Canada

Source: Statistics Canada, accessed August 11, 2022.

100 Emerging Trends in Real Estate

2023

been watching in recent years for signs of changing migration

patterns.

What do all of these trends mean for housing affordability in

a place like Halifax? According to 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 the city.

Supply Insufficient to Meet Housing Demand

The question, of course, becomes what to do about an afford-

ability crisis as it spreads across Canada. Even if affordability

eventually improves with falling housing prices, the reality is

that the key issue underpinning the crisis is insufficient sup-

ply to meet high demand for all types of homes. Demand will

continue to rise, especially as the Canadian government com-

mits to higher immigration targets in the coming years and the

country welcomes large numbers of temporary residents, like

international students, who also need places to live. This means

that even as homebuilding activity has been rising, tight market

conditions have put pressures on affordability that are unlikely

to ease significantly. As we noted, some companies are looking

at pausing housing developments—often condo projects—as

they deal with cost and financing challenges as well as soften-

ing demand due to rising interest rates. As that happens, and

especially 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 this year, the number of new units required to

restore reasonable affordability levels is high. Taking into

account a number of factors, including income and demo-

graphic trends, CMHC estimated that Canada would need to

build an additional 3.5 million units to restore housing afford-

ability 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 the country 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 fewer than 300,000 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 are

a signal that Canada does not have the capacity to meet

housing demand.

Addressing the Supply Issue from All Angles

More recent policy discussions and actions have acknowl-

edged what needs to be done to address affordability. There

has been increased recognition that supply is the crux of the

Exhibit 4-8 Distribution of New Immigrants by Province or Region, 2021 versus 2001

10%

20%

30%

40%

50%

60%

Share of immigrants in 2021

Share of immigrants in 2001

TerritoriesBritish ColumbiaAlbertaSaskatchewanManitobaOntarioQuebecAtlantic provinces

Source: Statistics Canada, annual demographic estimates: Canada, provinces and territories, 2021, accessed on September 1, 2022.

101Emerging Trends in Real Estate

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Chapter 4: Emerging Trends in Canadian Real Estate

challenge, and governments at all levels have announced

efforts to address that. We have seen initiatives from higher

levels of government to encourage faster development approv-

als by municipalities, new money to incentivize construction of

affordable homes, and policy changes aimed at facilitating the

building of modestly denser forms of housing, like duplexes, tri-

plexes, and mid-rise buildings, in urban areas currently reserved

for single-family units.

While the increased acknowledgment of the supply gap is posi-

tive and the initiatives in response are welcome, the actions fall

far short of what is necessary. For one, new funding to incentiv-

ize affordable housing is good, but it is not enough to make a

serious dent in the problem. And without more consistent criteria

around what we mean when we talk about affordability and

affordable housing and how to tailor initiatives for groups with

different 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 their

actions 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 for development as well as more proactive efforts

to facilitate the densification of some existing neighborhoods.

These are just some of the changes required, but the cen-

tral theme is a focus on having consistent alignment around

increasing supply. And in many cases, that will require provin-

cial 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 sec-

tors have a role to play in helping address the crisis. Beyond

concerns about societal trust and impacts on the industry’s repu-

tation, the issue also increases regulatory risk, especially when it

Exhibit 4-9 Housing Affordability

Canada

Quebec City

Edmonton

Saskatoon

Winnipeg

Halifax

Calgary

Montreal

Ottawa

Toronto

Vancouver

0% 20% 40% 60% 80% 100% 120%

1Q 2017

(single-family detached)

1Q 2018

(single-family detached)

1Q 2019

(single-family detached)

1Q 2020

(single-family detached)

1Q 2021

(single-family detached)

1Q 2022

(single-family detached)

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 detached

homes and condo apartments, as well as for an overall aggregate of all housing types in a

given market.

102 Emerging Trends in Real Estate

2023

comes to potential policy changes like rent controls and mea-

sures targeting investment in the housing market. The industry

may have good arguments against such policies, but that does

not mean that governments won’t introduce them anyway.

Many interviewees say that they are ready and eager to help

address affordability. As one interviewee told us: “We are not the

enemy; we are part of the solution.” So, what can the industry do?

For a few interviewees, there was a recognition of the good

years they have been having, with one going as far as sug-

gesting that the industry should prepare for a reset of profit

expectations. Some interviewees noted modest actions they

have been taking on their own, with one describing efforts to

make a small number of units more accessible by modifying

deposit structures. Actions by real estate companies to incorpo-

rate technology innovations—which we explore in more detail

further below in this report—as well as process changes that

reduce the cost of and speed up the time to build housing will

also help. One interviewee discussed their efforts to increase

efficiencies by shifting certain engineering and construction

activities to happen earlier in the design process. Another

interviewee emphasized the need for more collaborative part-

nerships among industry players, nonprofit organizations, and

governments to deliver affordable housing. There are many

examples of creative partnerships and approaches to building

affordable homes in Canada that, with the right funding and

incentives from governments, can make a difference if applied

more broadly.

Labor Shortages Amplifying the Affordability Challenge

The other key issue is that even with better, more consistent, and

more 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 demo-

graphic trends mean that that issue is not going away. While

much has been made of the so-called great resignation and

the notion that many Canadians are reevaluating their relation-

ship with the workplace in the wake of the pandemic, Statistics

Canada has shown that the labor force participation rate by

those 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 indus-

try. This makes it even harder to see how Canada will build the

5.8 million homes that CMHC has suggested are necessary to

restore housing affordability.

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 under-

represented and marginalized groups to work in this area also

will help relieve these challenges over time.

The Path to Sustained Outcomes for Canadian Real Estate

Companies

“Being a trusted organization is good for business.”

All these trends add up to a significant reset for Canadian real

estate companies, many of which are revisiting their strategies

for a period in which inflationary pressures, market volatility,

supply chain challenges, and geopolitical uncertainty are add-

ing to the existing forces of change that have been affecting

the industry. For some, this has led to a pause on making big

moves. While that will be part of the strategy for some compa-

nies navigating this period of price discovery, now is not the time

to hold off on actions necessary to set the organization up for

sustained outcomes and growth. So, what is the path forward for

real estate companies preparing for 2023?

1. Investing in Technology That Enables the Business

Investments in property technology (proptech) and other

aspects of the digital journey remain on the agenda of real

estate companies, but the focus has shifted to tools that

deliver tangible business outcomes. This is a good way to

approach technology, especially when many companies have

already made foundational investments and the challenge now

becomes how digitization can create value and differentiate an

organization from its competitors. Key opportunities to enable

the business through technology in the coming year include

the following:

Managing costs and efficiencies: At a time of cost, labor, and

affordability pressures, it is important to look for technology solu-

tions to create new efficiencies. And the solutions do not have

to involve the latest emerging technologies or big investments in

new areas like virtual real estate. In the past, we have discussed

opportunities involving construction technology, which ranked

as the top real estate disrupter this year (see exhibit 1-10).

Interviewees say they are incorporating construction technology

solutions in a number of ways, such as modeling tools that help

coordinate building activities more effectively. In other cases,

companies are using technology to streamline operations. One

interviewee, for example, said that they have been introducing a

103Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

platform to monitor operations across the portfolio. This allows

them to monitor more assets with the same number of staff.

Improved decision-making through data analytics: From

identifying revenue and deal opportunities to generating insights

on asset performance, data analytics is a critical business

enabler in light of the trends reshaping the real estate mar-

ket. While the goal for many interviewees is to embrace data

analytics, reporting, and dashboarding tools that improve deci-

sion-making, others are focusing on the key foundational step

of trying to better organize their data to create a single source

of truth. This could mean working with third-party organizations

that help connect the many sources of information across the

company to better manage and generate insights from the data

it already has.

Tracking and enhancing ESG performance: Technology will

be a critical part of the ESG journey. It is key to generating the

data needed to assess baseline ESG metrics. Interviewees also

acknowledged the role of technology in improving ESG perfor-

mance, and many told us about the solutions they are already

adopting or looking at incorporating. Several, for example, men-

tioned technologies for detecting water leaks in buildings, while

others are looking at solutions to reduce the carbon footprint of

using concrete. In another case, an interviewee said they are

investing in technology that anticipates surges in electricity use

so that they can take proactive measures to manage demand

peaks. They are now looking to apply artificial intelligence to

the technology to automate the process and further optimize

operations.

These are just some of the ways that technology can be an

enabler for real estate companies navigating this challenging

period. But the key to ensuring better outcomes from technol-

-ogy also means focusing on other important elements of the

digital journey, such as ensuring strong cybersecurity protec-

tions. Cybersecurity was a clear concern for interviewees this

year, with many increasing investments in this area amid a

rising threat environment and the evolving ways that real estate

companies are incorporating data analytics, smart building,

and other digital tools. As real estate companies increasingly

work with vendors of proptech solutions, they will need to make

sure they have strong third-party risk management practices

in place.

2. Capitalizing on New Opportunities amid a Reset for

Real Estate

While challenging for many real estate players, the current

environment will also create opportunities for some compa-

nies—particularly those that are well capitalized and were

able to reduce leverage ahead of the recent market shifts—to

acquire assets on more attractive terms, including in cases

where projects have run into trouble. Optimizing portfolios will

be key, and for some interviewees, opportunities are emerging

around providing credit, particularly as traditional lenders like

banks pull back on lending activities, focus on their best clients,

and introduce more restrictive terms. And some companies are

looking at combining credit strategies with covered land plays.

For example, a company could provide credit to the owner of an

older office building that has a key tenant with a few years left on

the lease. The company enjoys the upsides of lending at higher

interest rates and, if the tenant leaves and the borrower finds

itself in trouble, the lender would still have an asset that it could

repurpose to a more attractive use, like housing.

Other opportunities to optimize portfolios include niche assets

and subsectors of the real estate market, which some inter-

viewees expect to perform better than core property types. Key

opportunities cited this year include self-storage, data centers,

student housing, and life-sciences facilities. In fact, life-sciences

assets ranked as one of our best bets this year. While many of

these niche areas show strong underlying fundamentals and

offer attractive opportunities to generate income, they do raise

Exhibit 4-10 Importance of Real Estate Industry Disrupters

in 2023

Drones

Blockchain

3D printing

Augmented/virtual reality

Autonomous vehicles

Sharing/gig economy

Coworking

Internet of things

5G implementation

Artiﬁcial intelligence/machine learning

Automation

Big data

Cybersecurity

Construction technology

Real estate industry disrupters

3.76

3.61

3.45

3.24

3.22

3.17

3.10

2.99

2.97

2.91

2.75

2.71

2.58

2.44

importance

Moderate

importance

Great

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

104 Emerging Trends in Real Estate

2023

questions about liquidity and complexity. Still, given that Canada

is likely to need more of these types of spaces, there are good

reasons for real estate companies to consider them. But as with

all assets during a period of uncertainty and price discovery,

it will be even more important to invest time in due diligence

to ensure that an acquisition lives up to its promise of creating

value and delivering successful outcomes. Prudence will be

critical.

3. Focusing on the Long Term

Our interviews and survey results suggest that many in the

industry have entered a pause on activity that will likely last

through the rest of 2022 and may continue into a good part

of next year. But while conditions are more challenging, it is

important to focus on the long-term challenges affecting all

organizations—including broader global megatrends like rapid

urbanization, demographic pressures, polarization, social

inequality, and disruption caused by technology and climate

change—as well as ongoing issues reshaping real estate.

Preexisting trends, like the impact of a changing workplace

across all classes of real estate, remain salient, even if it has

become harder to act on some of the changes they might

require for the time being. Real estate continues to evolve to

be more flexible and service-oriented, and the trends toward

developing mixed-use properties, repurposing assets, and

repositioning portfolios are not going away. And while a com-

pany may pause a condo or purpose-built rental project for now,

long-term demographic trends remain favorable for residential

asset classes.

For real estate companies, the slowdown is an opportunity to

further explore these fundamental trends so that they can be

ready to transact when activity picks up again. At the same time,

they can focus on investing in digital tools and other solutions

to manage costs and talent pressures and increase their agility

to act on market opportunities. And with expectations around

issues like net-zero commitments set to rise quickly, Canadian

real estate companies can also use this pause to develop even

stronger ESG strategies.

As part of a focus on the long term, real estate companies also

need to focus on trust. Trust is a broad concept, but it is playing

a role in many of the trends we’ve explored, whether it is the loss

of key talent amid labor shortages and changing demographics,

skepticism about a company’s ESG metrics, or calls for restric-

tive measures to rein in the housing market. We have seen that

the most trusted organizations have better business outcomes

and are more successful at navigating relationships with key

stakeholders, like employees, customers, government agencies,

and investors. And for real estate companies, being a trusted

business partner will be critical to tapping both the opportunities

that will arise during this period of uncertainty as well as those

that will emerge in the long term.

The real estate industry has, of course, always kept a sharp

eye on the long term. But what is different now is the need

to consider a wider and more complex array of factors and

stakeholders when assessing what to do next and planning for

the future. This rising complexity, layered on top of increased

uncertainty and volatility, isn’t easy to navigate, and it requires

companies to think and act differently than in the past. But

the Canadian real estate industry has successfully managed

through periods of challenge and uncertainty in the past, which

should give companies confidence in their ability to see value

beyond the short term and deliver sustained outcomes in 2023

and the years that follow.

Property Type Outlook

Office

There is continued uncertainty in the office market, with many

tenants seeking short-term lease renewals. Challenges include a

rising vacancy rate in the national office market, which reached

16.9 percent in the second quarter of 2022 (up from 14.9

percent in the first quarter), according to CBRE. As employers

strategize a return to the office, some are moving forward with

plans to offload significant amounts of office space, while others

are looking at distributed office models with urban headquarters

and suburban satellite locations. CBRE second-quarter data

showed suburban offices performing better on some measures,

like vacancy rates, than downtown locations.

A key issue for the office market is the changing world of work,

and studies suggest that the hybrid and remote working trend

has been stronger in Canada than elsewhere. PwC’s 2022

Hopes and Fears survey, for example, found that of Canadian

respondents who said they could do their jobs from home, 51

percent were working remotely full time. This compares to 31

percent for global respondents. On the other hand, while a large

number of Canadian employees say they want to keep working

remotely, they are not sure whether their employers will agree.

According to the survey, 39 percent of Canadian respondents

would prefer to have a full-time remote working arrangement 12

months from now, but just 21 percent think that their employer

will expect them to work that way by that time.

Evidence of these trends is clear on the streets of Canada’s larg-

est cities. While downtown foot traffic has been rising in recent

months in Toronto, Montreal, and Vancouver, it remains far

below pre-pandemic levels. But some interviewees did express

105Emerging Trends in Real Estate

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Chapter 4: Emerging Trends in Canadian Real Estate

a sentiment that an economic downturn could give employers

more sway to bring employees back to the office. One inter-

viewee summed up a sentiment expressed by a number of

industry players when they told us: “The office environment is

not dead; we just need to be more careful.”

Overall, interviewees did show a greater tendency this year to

acknowledge the fundamental headwinds in this asset class.

Facing the most challenging outlook are class B and C offices,

which have been struggling and are most likely to see impacts

on their valuations amid the current reset for real estate.

In this shifting and uncertain environment, we also saw more talk

from interviewees than in previous years about the need to repur-

pose offices in light of the changing world of work. This includes

converting office space to residential uses, although there are

ongoing questions about the feasibility of this. In many cases,

government incentives will be key to making this work. We have

also seen instances of companies redeveloping suburban office

lands to accommodate more attractive industrial uses.

Industrial

The industrial market continues to see strong demand, though

concerns exist that the market is overheated. The availability

rate for industrial real estate was just 1.8 percent in the second

quarter of 2022, according to Colliers.

Nationally, the vacancy rate fell below 1 percent, while some

major markets dipped even further. Rents are rising quickly, with

Colliers noting increases of up to 30 percent on a year-over-year

basis in some cities. The market has been particularly hot in

Montreal, where Colliers found asking net rents rose 64 percent

on a year-over-year basis. One interviewee noted that rents have

increased so significantly that building new space may make

sense despite high costs and lofty valuations for industrial land.

Key trends driving industrial demand include onshoring of

manufacturing activities and the need for space for last-mile

delivery, fulfillment, and flexible office uses. Some industrial

tenants are holding more inventory on site to manage supply

chain issues, which is further bolstering demand for space.

But PwC Canada’s recent Canadian Consumer Insights survey

shows stabilizing e-commerce activity as pandemic restrictions

subside, and some interviewees questioned whether demand

for industrial space will soften, especially if predictions of an

economic downturn materialize. Others wondered whether

momentum for this asset class will continue given concerns

about potential overheating in the industrial market amid large

increases in net effective rents and valuations in the past year.

Overall, industrial property remains a best bet for many inter-

viewees, and some real estate companies with strong balance

sheets are looking to see whether a pause in the deals market

will create opportunities for them to enter or expand their pres-

ence in this asset class. Other important trends in this asset

class include construction of stacked or multistory industrial

buildings. While still rare, they offer opportunities to navigate

a market where land is scarce and can support sustainability

goals by helping combat urban sprawl.

Exhibit 4-11 Canadian Downtown Office Markets Statistics, 2Q 2022

Under construction (sq ft) Class A vacancy rate Overall vacancy rate

Vancouver 2,916,547 7. 2 % 7.2%

Toronto 6,884,299 10.6% 11.9%

Montreal 624,577 12.7% 15.3%

Ottawa 34,384 6.9% 10.0%

Edmonton 0 19.6% 21.7%

Calgary 0 28.7% 33.7%

Source: CBRE, Canada office gures, 2Q 2022, accessed July 21, 2022.

Exhibit 4-12 Industrial Space, 2Q 2022

Availability

rate

Under construction

(sq ft)

Greater Vancouver 0.5% 7,757,58 3

Greater Toronto 0.6% 12,487,920

Greater Montreal 1.2% 2,550,703

Greater Ottawa 1.3% 583,596

Halifax — 478,233

Winnipeg — 699,084

Greater Edmonton 7.4% 5,584,864

Calgary 7.0 % 4,376,089

Source: Colliers Canada, accessed July 21, 2022.

— = data not available.

106 Emerging Trends in Real Estate

2023

Retail

The retail market is continuing to rebound from the effects of

pandemic lockdowns, with vacancy rates and rents starting

to recover as Canadians return to brick-and-mortar shopping.

E-commerce activity has stabilized since the start of the pan-

demic, according to PwC Canada’s 2022 Canadian Consumer

Insights survey, which found that the percentage of consumers

shopping in a physical store at least monthly increased mod-

estly to 72 percent from 69 percent. More Canadians are also

returning to in-person work, giving a boost to retailers depen-

dent on office-based foot traffic.

Exhibit 4-13 Prospects for Commercial/Multifamily Subsectors in 2023

Abysmal

Fair

Excellent

Abysmal

Fair

Excellent

Investment prospects Development prospects

Regional malls

Suburban ofﬁce

Power centers

Outlet centers

Central-city ofﬁce

Urban retail

Lifestyle centers

Neighborhood/community

shopping centers

Lower-income apartments

Stand-alone retail

Flex

Student housing

R&D

High-income apartments

Single-family rental housing

Manufacturing

Senior housing

Warehouse

Self-storage

Medical ofﬁce

Workforce apartments

Fulﬁllment

Data center

Life science

Regional malls

Suburban ofﬁce

Outlet centers

Power centers

Central-city ofﬁce

Urban retail

Lifestyle centers

Stand-alone retail

Lower-income apartments

Flex

Student housing

Single-family rental housing

Manufacturing

High-income apartments

R&D

Neighborhood/community

shopping centers

Senior housing

Self-storage

Warehouse

Data center

Medical ofﬁce

Workforce apartments

Fulﬁllment

Life science

3.97

3.86

3.71

3.67

3.63

3.62

3.6 0

3.59

3.58

3.57

3.56

3.55

3.40

3.39

3.35

3.21

3.06

2.92

2.80

2.73

2.63

1.94

3.95

3.78

3.74

3.62

3.59

3.57

3.51

3.50

3.47

3.44

3.39

3.38

3.28

3.16

3.10

3.06

2.98

2.74

2.56

2.54

2.4 0

2.39

2.35

1.73

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

107Emerging Trends in Real Estate

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Chapter 4: Emerging Trends in Canadian Real Estate

These trends have given some momentum to the need for a

brick-and-mortar presence in the retail sector. And our survey

did find very high interest in at least one type of retail property.

Neighborhood/community shopping centers ranked as respon-

dents’ top investment recommendation among commercial/

multifamily subsectors for 2023 (see exhibit 4-14), reflecting the

rising focus on necessity-based retail properties.

Despite some evidence of improving conditions for retail proper-

ties, a potential economic downturn could lead to decreased

consumer spending, which would add to the cost pressures,

labor shortages, supply chain issues, and other challenges

faced by retailers. Valuations of retail properties also have come

under added pressure amid rising interest rates, and some inter-

viewees said that the current environment is creating challenges

for shopping center redevelopment projects that are under

construction.

Even so, changing consumer buying habits, an evolving world

of work, and strong demand for residential space mean that

interest in reinventing retail properties to incorporate denser,

mixed-use developments will remain a trend in this asset class.

We also continue to see examples of retailers that turned to

e-commerce during the pandemic and are now repurposing

their physical space to incorporate deliveries or return centers.

Purpose-Built Rental Housing

Purpose-built rental housing is a key focus for interviewees this

year, given underlying demand drivers—such as immigration,

international students, and people who no longer qualify under

Exhibit 4-14 Investment Recommendations for Commercial/Multifamily Subsectors in 2023

Buy Hold Sell

Neighborhood/community shopping centers 62% 29% 10%

Life science 50 34 16

Fulllment 49 38 13

Self-storage 45 43 12

Medical office 44 40 16

Warehouse 39 49 12

R&D 37 50 13

High-income apartments 36 46 18

Workforce apartments 36 46 18

Lower-income apartments 36 46 18

Single-family rental housing 36 46 18

Student housing 36 46 18

Senior housing 36 46 18

Manufacturing 36 58 7

Data center 35 51 15

Flex 31 40 29

Central-city office 26 50 24

Power centers 25 29 46

Lifestyle centers 24 48 29

Urban retail 19 57 24

Stand-alone retail 19 57 24

Suburban office 16 50 34

Outlet centers 8 44 48

Regional malls 2 31 68

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian investors only.

108 Emerging Trends in Real Estate

2023

the mortgage stress test—that support rent increases. Rental

demand has recovered from 2020 lows, and vacancy rates

have tightened.

But challenges facing the sector mean that it can still be hard

to make the numbers work. Rising construction costs and other

financial issues we discussed earlier are causing some devel-

opers to think carefully about pursuing purpose-built rental

projects.

Overall, we can expect higher rents to drive down affordability.

Affordability challenges will continue to affect a growing number

of communities across Canada—not just the most expensive

cities like Toronto and Vancouver—as rents in some cases reach

or surge past pre-pandemic levels. Demand will be especially

strong given trends in the ownership market, where rising inter-

est rates are making it increasingly difficult for people to buy a

home and make the transition from renting.

While CMHC and other government programs are critical to

building affordable housing, concerns remain about the amount

of funding available and whether these initiatives truly target the

right groups in the most effective ways. One solution that some-

times comes up is the possibility of converting excess office

space and retail properties to affordable housing. Effective

government support will be critical to making the numbers

work in these cases.

Condominiums

While the real estate slowdown is creating challenges, condo-

miniums have been a growing area of the Canadian housing

market. Almost 143,000 condo units were under construction

across Canada in the second quarter of 2022, according to

CMHC, up from about 140,000 units last year (see exhibit 4-15).

But, as with other areas of the housing market, higher interest

rates, rising construction costs, and labor shortages are creat-

ing challenges for condo builders. A number of projects could

be postponed or even canceled and, in some cases, builders

have been holding back on pre-sales activity to better man-

age cost increases. In the Greater Toronto Area, Urbanation

estimates that developers could delay or cancel anticipated

launches of up to 10,000 condo units over the course of 2022.

Such slowdowns in supply are among the reasons why afford-

ability pressures are unlikely to improve significantly even with

sales declines in the housing market.

Looking beyond the current challenges, underlying trends—

such as immigration, seniors downsizing, densification,

transit-oriented development, a desire to live in mixed-use

communities, and relative affordability compared with detached

homes—remain positive for this asset class. This means that a

rebound in the market is a question of timing and degree.

Exhibit 4-15 Housing Starts by City

2010 2015 2021 1Q 2022 2Q 2022

Home-

owner Rental Condo

Home-

owner Rental Condo

Home-

owner Rental Condo

Home-

owner Rental Condo

Home-

owner Rental Condo

Vancouver 4,395 952 10,542 4,240 4,152 19,767 3,353 10,138 31,551 3,455 10,134 30,167 3,826 11,155 29,478

Toronto 11,094 2,599 32,830 14,913 5,023 44,862 11,822 11,471 62,870 11,735 11,393 64,528 12,238 12,270 66,640

Montreal 3,428 1,807 8,941 1,530 7,4 4 6 10,797 2,516 26,025 11,726 2,435 26,588 11,427 2,610 27,9 00 12,579

Ottawa 2,754 364 2,055 2,611 819 1,496 5,700 2,820 5,058 5,210 2,891 5,326 5,555 2,711 5,505

Halifax 802 935 244 480 2,335 544 867 5,700 2 758 5,887 2 811 6,710 1

Winnipeg 855 834 445 1,16 3 1,940 1,503 1,824 4,227 978 1,727 4,617 957 1,899 4,260 839

Edmonton 4,369 417 3,786 5,121 3,392 6,399 4,987 5,285 1,249 4,884 5,556 1,137

5,662 5,834 1,659

Calgary 3,004 382 3,813 3,312 2,346 8,115 4,966 4,375 5,097 5,202 4,832 4,699 5,760 6,074 4,657

Quebec City 632 1,286 1,102 432 2,808 745 740 8,112 364 822 8,286 263 988 9,438 275

Saskatoon 1,027 221 555 853 553 1,550 695 1,269 376 643 1,227 460 742 1,128 594

Canada 43,486 14,245 69,802 45,996 38,833 103,661 55,434 100,171 140,347 54,194 103,583 138,883 58,501 111,575 142,859

Source: CMHC Starts and Completions Survey, accessed July 25, 2022.

Note: Dwelling types include single-family, semidetached, rowhouse, and apartment.

109Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

Among the trends in the condo market are demands related to a

changing world of work, including the desire of some buyers for

bigger unit sizes to incorporate or accommodate home offices.

Some interviewees said they are also responding to these

demands by including meeting and work spaces in common

areas of condo buildings.

Single-Family Residential Housing

The outlook is mixed for single-family residential housing, after

a flurry of activity during the pandemic. In many markets across

Canada, strong demand for larger, more expensive homes was

driven by, among other factors, a desire for more space to work

from home. With limited supply, prices rose quickly.

But high prices, combined with rising interest rates, are putting

a damper on the single-family housing market. The result has

been faster sales declines for single-family housing than for

multifamily homes.

But while affordability challenges are a headwind for single-

family homes in the most expensive regions, some interviewees

say they are looking further afield at midsized communities for

opportunities to build low-rise subdivisions.

Overall, a desire for more space still exists, so the single-family

market is evolving as it shifts to slightly denser and more afford-

able forms of low-rise homes compared with detached housing.

Among the opportunities cited by interviewees are duplexes,

townhouses, and other types of low-rise housing. This is also an

area where technology will be key. As one interviewee noted,

the low-rise market is an area of real estate where technology

adoption has been particularly slow, making this an important

opportunity for dealing with costs and other pressures on the

industry.

Markets to Watch

Vancouver

Vancouver continues to be the top market to watch for both

its investment and development prospects, according to this

year’s survey results (see exhibit 4-16). The Conference Board of

Canada (CBoC) is also predicting healthy economic growth of

3.3 percent in 2023 (see exhibit 4-18).

Rental demand is strong, while CMHC’s 2022 spring housing

market outlook suggests that construction activity will not be

enough to increase vacancy rates or reduce rents. And amid

rising interest rates and slowing migration from other provinces,

housing starts are forecast to decline by 15.8 percent in 2022,

according to the CBoC. It predicts a further decline in hous-

ing starts of 6.4 percent next year. Among the opportunities for

the real estate industry are developments along the Broadway

subway project, which is finally underway.

The office market is seeing declining vacancy and climbing

rents with new developments in the works (the majority of which

are already pre-leased). The all-class downtown vacancy rate

dropped to 7.2 percent in the second quarter of 2022, down

Exhibit 4-16 Canada Markets to Watch: Overall Real Estate

Prospects

Development

Investment

Saskatoon

Winnipeg

Quebec City

Halifax

Ottawa

Edmonton

Calgary

Montreal

Toronto

Vancouver

Abysmal

Fair

Excellent

3.76 3.71

3.41 3.22

3.47 3.22

3.15 2.92

3.05 2.87

3.09 2.97

3.11 3.08

3.08 3.00

3.00 3.06

2.91 2.90

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

Exhibit 4-16A Canada Markets to Watch: Homebuilding

Homebuilding

Saskatoon

Winnipeg

Quebec City

Ottawa

Halifax

Edmonton

Calgary

Montreal

Vancouver

Toronto

Abysmal

Fair

Excellent

3.62

3.57

3.36

2.78

2.74

2.10

2.08

1.33

0.68

0.64

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

110 Emerging Trends in Real Estate

2023

from 7.7 percent at the start of the year, according to CBRE.

Among the factors buoying the office market are a vibrant tech-

nology sector as well as a higher propensity for employees to

return to the workplace in Vancouver and other cities in western

Canada.

The amount of developable industrial land continues to shrink,

with much of the city’s remaining inventory made up of small

pockets, according to Colliers. The industrial vacancy rate of 0.1

percent is the lowest in Canada, according to Colliers, which

reported a 22.5 percent year-over-year rise in the asking net

rent. While some interviewees said that they were watching for

signs of a slowdown in Vancouver’s industrial market and the

impacts of rising interest rates, others emphasized that land

scarcity makes this asset class a best bet.

Toronto

Toronto remains a top market to watch among survey respon-

dents, driven in part by strong population growth projections.

“Toronto is going to get into a boom based on strong fundamen-

tals,” said one interviewee who expressed optimism about the

region’s prospects despite some uncertainty in the short term.

Among the factors helping to bolster the market is continued

economic growth. According to the CBoC’s spring 2022 major

city insights report, gross domestic product will rise by 3.5 per-

cent in 2023, which is down slightly from an estimated increase

of 3.8 percent in 2022.

But the short-term outlook for some areas of the region’s real

estate market is mixed. Amid fewer preconstruction sales, total

housing starts will fall in 2023 before rising in 2024, CMHC

predicted in its spring 2022 housing market outlook. Rental units

are in high demand, driven by rising youth employment, the

return of foreign students, and increased immigration, but there

is uncertainty around new developments. In the condo market,

construction backlogs have delayed new projects from breaking

ground; some projects have been put on pause or canceled as

preconstruction sales fall amid higher borrowing costs. Adding

to the challenges are plans by the city of Toronto to raise resi-

dential development charges by 46 percent by 2024, while the

industry remains concerned about the impacts of the municipal-

ity’s plans for inclusionary zoning requirements.

There also is ongoing uncertainty around the office market, as

tenants wait to see how return-to-office strategies evolve. While

downtown foot traffic has risen, it remains below pre-pandemic

levels. Demand is strong for high-quality downtown offices, but

older properties could see valuations reduced since tenants

now have more options for newer, amenity-rich space.

The outlook for industrial assets remains strong, although some

concern exists that demand could drop if a broader economic

downturn materializes. Limited availability has contributed to

surging rents, which Colliers reports as having risen by 35.4

percent on an annual basis in the second quarter of 2022.

Montreal

At 2.7 percent, the CBoC is predicting slightly more modest

economic growth for Montreal in 2023 than some of our other

markets to watch. Even so, the city’s attractiveness for invest-

ment activity and a very low unemployment rate that the CBoC

expects to dip to 5.3 percent this year continue to be sources

of strength.

A key focus of activity is the rental housing market, where

low vacancy and healthy rental rates are driving construction

growth. Condos also are attractive, and many projects are

moving forward despite rising interest rates and other industry

challenges. For many interviewees, the focus is on cost controls

and finding solutions to financing challenges. Developers also

see opportunities around transit-oriented development, includ-

ing those related to the ongoing development of the Réseau

express métropolitain network. But in some communities, they

are facing local opposition to increased density.

In the office market, many large tenants are still considering

whether to downsize or sublease space. Pressure remains high

on landlords of class B and C offices. While it is hard for them

to compete with newer class A spaces and recently renovated

buildings, many landlords want to make sure they have secured

tenants before embarking on a major revitalization.

With a vacancy rate of 0.6 percent during the first two quarters

of 2022, the industrial market is extremely tight, according to

Colliers. Asking net rents rose by a whopping 64 percent on a

year-over-year basis, Colliers reported.

Calgary

Calgary is a key market to watch, rising to number four in our sur-

vey from number eight last year. Stronger oil prices are welcome

news for the city, which is also seeing high levels of investment in

the local technology and film sectors amid the drive to diversify

the economy. The CBoC is predicting strong economic growth

of 6.6 percent in 2022 and 4.7 percent in 2023.

111Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

The result is a rebound in sentiment about Calgary among

interviewees compared with the last couple of years. The city

has a strong outlook for residential activity, with its economic

recovery, job growth, relative affordability, and rising recognition

as a desirable place to live, making it attractive for many looking

ahead to 2023. Rising construction costs could hamper the

market, but CMHC is predicting a positive outlook for housing

starts this year before activity eases in 2023–2024. The rental

market will continue to tighten as demand rises.

Calgary’s office market will be challenging for some time to come,

with too much supply and insufficient demand amid further con-

solidation in the energy sector and the ongoing reevaluation of

space requirements by employers navigating a changing world

of work. The city’s high downtown office vacancy rate contin-

ues to spark discussions about repurposing office space into

residential units. One interviewee noted that they have pursued

opportunities with the help of a municipal incentive program aimed

at turning excess office space into residential units and develop-

ing more vibrant downtown neighborhoods. While CBRE reported

a very high vacancy rate of 33.7 percent for the city’s downtown

all-class office market in the second quarter of 2022, it also cited

a flight to quality that is benefiting some landlords.

The industrial market is seeing high levels of activity, with the

vacancy rate falling to just 2.4 percent in the second quarter

of 2022, according to Colliers. Calgary remains attractive

compared with even tighter markets, with affordable land still

available on the city’s periphery.

Edmonton

The economic outlook for Edmonton is bullish, with the city ris-

ing in our survey rankings of markets to watch over last year. The

CBoC is forecasting that economic growth will reach 5.6 percent

in 2022, followed by another healthy rise of 4.2 percent next

year. Rising international and interprovincial migration trends are

expected to benefit Edmonton’s economy in the coming years

as new residents bring additional wealth and capital into the city,

spurring further residential investments. CMHC is predicting a

strong economy will bolster demand across the homeownership

and rental markets through 2024.

Another advantage for Edmonton is the fact that it, like Calgary,

remains relatively affordable. And unlike many cities where

CMHC criteria for affordability supports can be a barrier to

pursuing projects, interviewees see more opportunities to build

affordable housing in Edmonton, where the structure of the

programs is less of a challenge.

Among the trends in Edmonton are efforts by the municipal

government to increase density by encouraging the develop-

ment of mixed-use communities. As a result, it is considering

taxing low-density properties at a higher rate than multiunit

buildings. We are also seeing a focus on the development of

lifestyle centers, where residents can live, work, and play within

their communities.

While the office market is beginning to stabilize, leasing activity

remains sluggish as companies continue to assess space needs

amid a changing world of work. The downtown all-class vacancy

rate sat at 21.7 percent in the second quarter of 2022, according

to CBRE, which noted that suburban markets are faring better.

As in many cities, the industrial market is strong, with Colliers

reporting a 5 percent year-over-year rise in rental rates in the

second quarter of 2022. Apart from the traditional demand

drivers related to warehousing and fulfillment, interviewees told

us that some industrial users are looking for additional space to

keep more inventory on hand to manage supply chain issues.

Ottawa

Ottawa continues to thrive alongside Canada’s top markets, with

many interviewees expressing optimism about the city’s pros-

pects. “Ottawa is . . . on everyone’s radar, especially out-of-town

investors,” one interviewee told us.

The CBoC is predicting that the region’s economy will grow 2.6

percent in 2023, which is down from an estimated 3.2 percent

this year. In the housing market, migration from more expensive

regions like the Greater Toronto Area continues to be a driver of

demand. A key source of residential and other types of building

activity across the city is the ongoing expansion of light-rail tran-

sit in Ottawa. As construction of the second stage of the light-rail

line continues, developers are eagerly eyeing and pursuing mul-

tifamily and mixed-use development opportunities close to transit

stations. Another noteworthy development is LeBreton Flats, a

government-owned site just west of downtown Ottawa that has

been vacant for decades. A long-awaited redevelopment of the

site is seeing fresh momentum, with a renewed effort underway

to solicit proposals and sign agreements for new residential,

commercial, and entertainment space on several parcels.

The retail sector is steady outside of the downtown core,

where food and beverage retailers are struggling due to low

office-related foot traffic. But throughout the pandemic, Ottawa

has still seen steady investment activity in the office sector

with historic highs on pricing. A key area of activity is Kanata,

Ottawa’s suburban technology hub. But all eyes are on the

112 Emerging Trends in Real Estate

2023

federal government, which is a major office tenant. With no

singular return-to-office strategy— the government is leaving it

up to individual departments to decide—landlords are facing

significant uncertainty. Demands from some federal govern-

ment unions to enshrine remote work in collective agreements

during bargaining rounds this summer are making the outlook

for office landlords even more opaque. Another consideration

for owners of older office buildings is the trend toward short-term

lease renewals by some federal government tenants. Among the

reasons cited by interviewees are evolving government sustain-

ability requirements, which we explored earlier in this report’s

discussion of ESG matters.

Ottawa’s industrial market continues to see strong demand, with

a vacancy rate of just 1.1 percent, Colliers noted in its report for

the second quarter of 2022. The asking net rent was up 13.3

percent on a year-over-year basis, according to Colliers, which

noted that a significant portion of space currently under con-

struction is already committed.

Halifax

The CBoC is expecting economic growth of 2.6 percent for

Halifax in 2023, up slightly from 2.5 percent this year. The city is

benefiting from people moving from other provinces. According

to the CBoC, interprovincial migration in 2020 and 2021 was

more than 10 times the annual average of the previous decade.

While housing starts in 2021 reached the highest levels since

the mid-1980s, the CBoC reported, activity is expected to

decline this year and in 2023.

The rental market is very tight, which CMHC predicts may

continue in 2022 before easing in the next two years. Temporary

provincial rent control measures also are creating challenges by

discouraging tenant turnover, which, in turn, is adding to tight

market conditions. Multiresidential housing construction is a sig-

nificant source of building activity, but more supply is needed to

address affordability challenges. As concerns about affordabil-

ity mount, the provincial government is working on solutions to

accelerate development approval timelines in Halifax, although

the industry is still waiting for these efforts to make an impact.

Downtown class A office vacancy rates are high, sitting at 26.2

percent in the second quarter of 2022, according to CBRE.

While there is some discussion about repurposing outdated

and vacant office space into multifamily inventory, the costs of

conversion, combined with challenges around labor availability,

make it hard for the numbers to work.

The Halifax industrial market continues to grow, with Colliers

reporting a record-low vacancy rate of just 1.8 percent in the

second quarter of 2022. While a significant amount of new

industrial space is under construction, much of it has already

been pre-leased, according to Colliers. The strength of the

industrial market extends to other areas of the Atlantic region,

Exhibit 4-17 Survey Respondents’ Views of Their Local Markets

Poor Fair Good Excellent

Average

Strength of

local economy

Investor

demand

Capital

availability

Development/

redevelopment

opportunities

Public/private

investment

Local

development

community

Vancouver 3.77 3.85 3.92 3.77 3.62 3.69 3.75

Toronto 3.68 3.80 3.80 3.93 3.47 3.67 3.43

Montreal 3.39 3.60 3.40 3.20 3.40 3.40 3.33

Calgary 3.72 3.48 3.75 3.89 3.72 3.68 3.76

Edmonton 3.23 3.56 3.17 3.33 3.08 3.17 3.09

Ottawa 3.35 3.58 3.42 3.33 3.25 3.36 3.18

Halifax 3.03 3.10 2.70 3.00 3.20 2.90 3.25

Quebec City 3.68 3.73 3.82 3.70 3.64 3.60 3.60

Winnipeg 3.79 3.83 3.76 3.88 3.76 3.63 3.88

Saskatoon 3.31 3.63 3.13 3.43 3.25 3.29 3.14

Source: Emerging Trends in Real Estate 2023 survey.

Note: Based on Canadian respondents only.

113Emerging Trends in Real Estate

2023

Chapter 4: Emerging Trends in Canadian Real Estate

which could see a further boost from liquified natural gas ter-

minal projects now being given another look in light of shifting

global energy needs. If they do move forward, these projects

would strengthen the region’s overall economy and prospects

even more, making this an important issue to watch in the future,

along with growing discussions about the possibilities for hydro-

gen facilities in Atlantic Canada.

Quebec City

Quebec City’s economy will grow at a solid pace in the near

term, rising by 3.4 percent and 3 percent, respectively, in 2022

and 2023, according to the CBoC.

A key source of activity in the residential market is rental

construction, which in 2021 helped housing starts reach their

highest level in 30 years, CMHC noted in its spring 2022 hous-

ing market outlook. Still, CMHC expects demand to exceed

supply.

An ongoing issue to watch is the evolution of Quebec City’s

tramway project. It received the province’s go-ahead in April

and is expected to move forward in 2023. But delays and ques-

tions about the route are continuing to create uncertainty for the

real estate community around the transit-oriented development

opportunities that this will create. Like in many markets, inter-

viewees are struggling with shortages of labor for projects, with

many saying that demand for workers for government infrastruc-

ture activities is adding to the challenges.

In the office market, tenants are signing short-term lease renew-

als amid uncertainty over return-to-office strategies. But the

market is proving resilient, according to CBRE, which projects

that the downtown office vacancy rate will fall to 9.9 percent in

2022 from 10.2 percent in 2021.

The city is seeing some redevelopment of shopping centers,

with retail space complemented by multiresidential towers and

nontraditional tenants, such as post-secondary institutions.

On the industrial side, there is a lot of appetite for space but a

limited amount of land available.

Winnipeg

The CBoC is projecting a solid outlook for Winnipeg, with eco-

nomic growth of 3.5 percent next year following a projected rise

of 4 percent in 2022. Growth was even higher last year, at 4.1

percent.

On the residential side, home prices have risen just as in other

cities, but the affordability picture is much more favorable in

Winnipeg than elsewhere in Canada. According to RBC’s afford-

ability measure, ownership costs as a percentage of median

household income were 30.4 percent in the first quarter of 2022

for single-family homes, which compares favorably to a national

average of 59.3 percent.

In the office market, CBRE is reporting a downtown class A

vacancy rate of 14.5 percent for the second quarter of 2022.

Exhibit 4-18 2023 Forecast Economic Indicators by City

Real GDP

growth

Total

employment

growth

Unemployment

rate

Household income

per capita growth

Population

growth

Total housing

starts

Retail sales

growth

Vancouver 3.3% 1.7% 5.5% 2.6% 1.1% 20,482 2.8%

Toronto 3.5 1.3 6.9 2.3 1.5 41,078 2.0

Montreal 2.7 0.6 5.6 2.3 0.6 22,600 1.5

Ottawa-Gatineau 2.6 1.9 5.1 2.9 1.2 11,4 42 2.0

Halifax 2.7 2.0 6.0 2.3 1.4 2,673 0.5

Winnipeg 3.5 1.9 5.3 2.3 1.5 5,618 0.1

Edmonton 4.2 2.7 7.0 3.0 1.7 11,433 1.4

Calgary 4.7 2.2 7. 3 2.7 1.9 11,7 72 1.7

Quebec City 3.0 1.4 3.2 2.7 0.8 5,637 1.7

Saskatoon 4.1 1.1 5.2 1.5 2.3 2,212 1.2

Source: Conference Board of Canada, Major City Insights, May 2022, accessed August 2, 2022.

114 Emerging Trends in Real Estate

2023

This was up slightly from 14.4 percent in the first quarter, accord-

ing to CBRE, which found a lower all-class suburban vacancy

rate of 9.4 percent compared with 16.4 percent downtown.

On the industrial side, absorption is high, rents are rising, and

construction activity remains strong, according to Colliers. The

industrial vacancy rate was just 2.3 percent in the second quar-

ter of 2022, Colliers found.

Saskatoon

Economic growth in Saskatoon is projected to be strong as the

world’s need for commodities like potash gives a boost to local

prospects. The CBoC is projecting growth of 5.3 percent this

year, followed by 4.1 percent in 2023.

After a projected decline in 2022, the CBoC is expecting hous-

ing starts to rise next year. While affordability remains attractive

compared with many other parts of Canada, CMHC expects

rising demand for more affordable types of housing, such as

townhouses and condos.

The overall office vacancy rate is expected to fall in 2022 to 19.1

percent from 19.4 percent last year, according to CBRE. And

on the industrial side, Saskatoon’s market is seeing an uptick

in leasing activity, which helped lower the city’s vacancy rate to

2.1 percent in the second quarter, according to Colliers. That is

down from 2.5 percent in the first quarter of 2022.

Expected Best Bets for 2023

Industrial property: Industrial real estate remains an expected

best bet, with subcategories like warehousing, fulfillment, data

centers, and self-storage ranking high among survey respon-

dents’ investment and development recommendations. Even

with the possibility of an economic downturn creating doubt

about the extent to which e-commerce activity will continue to

drive growing demand in this asset class, many factors remain

in its favor: increasing rents, shortages of space and land

availability, and the rising need for industrial property to accom-

modate onshoring of production activities.

While supply chain issues have been creating many challenges

for real estate companies, they can in some ways bolster the

outlook for industrial property as users, whether manufactur-

ers or retailers, look to hold or produce more goods locally to

differentiate themselves as trusted suppliers. But the pressures

affecting real estate as a whole, such as rising interest rates, are

also affecting industrial properties. As interviewees noted, this

will make it important for buyers to assess opportunities even

more closely than before to find the sweet spot of fundamentally

good assets that trade at reasonable terms.

Multifamily residential housing: This was also a frequently

mentioned best bet this year, although the outlook was mixed.

On the one hand, factors like rising immigration activity are driv-

ing demand both now and looking further out. But how does this

square with discussions about delays in condo and purpose-

built rental apartment projects amid current market pressures?

One explanation is that the current environment favors invest-

ment in multifamily housing as opposed to developing it. And

investing in rental housing has become attractive at a time of

rising rents spurred by demand from people refraining from pur-

chasing or unable to buy a home during a period of increased

interest rates.

Life sciences: While we have discussed health-related uses,

like life sciences, as an expected best bet in the past, this sector

was even higher on the agenda of interviewees this year and

was a favorite among survey respondents. Like our other best

bets, this category also has its limitations, including the fact

that it remains a relatively small niche sector in the Canadian

real estate landscape. Still, this category fits with the overall

increased focus on niche sectors this year as an opportunity

to navigate headwinds in other asset classes. Canada is also

home to several clusters of life-sciences facilities spanning

research, manufacturing, and other areas of activity, and this

growing sector offers attractive opportunities to those real estate

companies that can meet the complex space needs of end

users in the industry.

115Emerging Trends in Real Estate

2023

3650 REIT

Malay Bansal

Adi Development Group

Tariq Adi

AEW Capital Management LP

Michael Acton

Michael Byrne

Sara Cassidy

Josh Heller

AGF Investments

Ash Lawrence

Alate Partners

Courtney Cooper

Alberta Investment

Management Corporation

Paul Mouchakkaa

Ian Woychuk

Alignvest Management

Corporation

Sanjil Shah

Aline Capital

Scott Williams

Alliance Global Advisors

Jennifer Stevens

Alliance Prével

Laurence Vincent

Alliance Residential

Company

Bob Weston

Allied Properties Real Estate

Investment Trust

Michael Emory

Almadev

Rafael Lazer

Almanac Realty Investors

Matthew Kaplan

Alston & Bird LLP

Jason Goode

Altree Developments

Zev Mandelbaum

American Constructors

Belinda Santolucito

American Realty Advisors

Stanley L. Iezman

Amica Senior Lifestyles

Christine Albinson

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

Arnon Development

Corporation Limited

Gillie Vered

Asana Partners

Sam Judd

Stefan Neudorff

Brian Purcell

Aspen Properties Ltd.

Rob Blackwell

Greg Guatto

Scott Hutcheson

Associated Bank

Shawn Bullock

AvalonBay Communities

David Gillespie

Avenue 31 Capital Inc.

Jennifer Murray

Michel Pilon

Avenue Living Asset

Management

David Smith

Bain Capital

Benjamin Brady

Joe Marconi

Balch & Bingham LLP

Patrick W. Krechowski

Bank of America

Ada Chan

The Bank of Nova Scotia

Stephen Morson

Barclays Capital

P. Sheridan Schechner

Bard Consulting

Roy Schneiderman

Barron Collier Companies

Brian Goguen

Barton Malow Builders

James Morrison

Basis Investment Group LLC

Mark K. Bhasin

Bateh Real Estate Advisors

Tarik Bateh

Beedie Group

David Pearson

BentallGreenOak

Jonathan Epstein

Andrew Yoon

BentallGreenOak (Canada)

Limited Partnership

Christina Iacoucci

Phil Stone

Berkshire Residential

Investments

Gleb Nechayev

Eric Schrumpf

Billingsley Interests

Alan Billingsley

Blackstone

A.J. Agarwal

Janice Lin

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

CA Health & Science Trust

Jesse Ostrow

Cabot Properties

Franz Colloredo-Mansfeld

Carey Herrlinger

Bradford Otis

Cadence Bank

Tim Williamson

Cadillac Fairview

Sal Iacono

Duncan Osborne

Caliber Companies

Chris Loefﬂer

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

Canyon Partners Real

Estate LLC

Robin Potts

Capital Associates

Thomas Huff

Capital City Development

Corporation

Alexandra Monjar

Capital One Bank

John Hope

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 Leitner

CenterSquare Investment

Management LLC

Rob Holuba

Centric Architecture

Gina Emmanuel

Charter 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

Francisco

Daniel Adams

City of Raleigh, North

Carolina

Patrick O. Young

Clarion Partners

Jeb Belford

Hugh Macdonnell

Tim Wang

Codds Creek Capital

Ken Crockett

Colicchio Consulting

Phil Colicchio

Colliers International

Annie Labbé

Warren Wilkinson

Colliers Nashville

Janet Miller

Colonnade Bridgeport

Hugh Gorman

Columbia Business School

Leanne Lachman

Combined Properties

Incorporated

Drew Faha

Steven Gothelf

Cominar

Adam Medeiros

CompassRock 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 Group

Mark 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 Group

Jan D. Freitag

CPM Texas

Dave Stauch

CRE Tax Planning LLC

Dawn Polin

Cremona Consulting

Sera Cremona

Cresleigh Homes

Robert Walter

Crombie REIT

Donald Clow

CrossMarc Services

John Crossman

Crow Holdings Capital

Cyndy Silverthorn

Crux Capital

Peter Aghar

Interviewees

116 Emerging Trends in Real Estate

2023

CT REIT

Kevin Salsberg

CubeSmart

Christopher P. Marr

Cushing Terrell

Sheri Blattel

Cushman & Wakeﬁeld

Barrie Scardina

Rebecca Wells

Deka Immobilien Investment

GmbH

Alexander Heijnk

Simona Vigneron

Dermody Properties

Kathleen S. Briscoe

Desjardins Gestion

internationale d’actifs

Michel Bédard

Developing Solutions LLC

George J. Carfagno

Devmont

Sam Scalia

DIALOG

Mona Lovgreen

Dilweg

Kelsey Reside

Distrikt

Paul Simcox

DivcoWest

Gregg Walker

Doucet & Associates

Tracy A. Bratton

Downtown Austin Alliance

Michele Van Hyfte

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

Empire Title LLC

Tayler Tibbitts

EOA Architects

Sheila Dial Barton

Equiton

Jason Roque

Equus Capital Partners

Arthur P. Pasquarella

Federal Realty

Jeff Berkes

Jeff Kreshek

Fengate Capital

Management Ltd.

Jaime McKenna

Fiera Real Estate

Kathy Black

Fiﬁeld Companies

Joe Pitsor

FINFROCK

William A. Finfrock

First Horizon Bank

Christina Blackwell

First Merchants Bank

Rick Baer

First Southern Mortgage

Corp.

Stephen Brink

Graham Gilreath

First Washington Realty

Daniel Radek

Fitzrovia Real Estate

Adrian Rocca

Focus Strategies

Investment Banking

Terese Everson

FORE Institute, University of

Denver, Burns School of Real

Estate

Glenn Mueller

Forest Gate Financial Corp.

Daniel Marinovic

Forgestone Capital

Management LP

Trevor Blakely

Franklin Street

Laura Gonzales

Freddie Mac

Steve Guggenmos

GarzaEMC

Rudy Garza

GEM Health Care Group Ltd.

Mahmood Hussain

Syed Hussain

John Yuan

Gemdale USA Corporation

Michael Krupa

Gensler

Diane Hoskins

Giarratana LLC

Tony Giarratana

GID

Gregory Bates

W. Jeffrey Beckham

Hisham Kade

Suzanne E. Mulvee

Thad D. Palmer

Gilbane Co.

Morgan Beam

The Glenview Corporation

Jake Shabinsky

Goldman Sachs

Alex Cheek

Nick O’Neill

Neil Wolitzer

Government of New

Brunswick

Todd Selby

Green Cities

Molly Bordonaro

Green Mesa Capital LLC

Randy C. Norton

Green Street

Cedrik Lachance

Greenberg Traurig

Chuck Abrams

Greystar

Michael Joyce

Groupe Commercial AMT

Jérôme Jolicoeur

Grubb Properties

Clay Grubb

GWL Realty Advisors

Paul Finkbeiner

H.J. Russell & Company

Delilah Wynn-Brown

Hawkeye Partners

Bret Wilkerson

Hawkins Partners Inc.

Landscape Architects

Kim Hawkins

Hazelview Investments

Michael Tsourounis

Heitman

Aki Dellaportas

Herity Limited

Brad Foster

Hugh Heron

Hersha Hospitality Trust

Ashish Parikh

Jay Shah

HH Fund

Tony Shen

High Street Logistics

Properties

Robert Chagares

Andy Zgutowicz

Hilco Redevelopment

Partners

Jason Gill

Hines

Mark Cover

Josh Scoville

David Steinbach

H.J. Russell & Company

Delilah Wynn-Brown

HKS Architects

Emir Tursic

Holladay Properties

Allen Arender

Homes by WestBay

Willy Nunn

Hopewell

Murray Degirolamo

Jason Kraatz

David Loo

Houlihan Lokey

Nick Way

Hughes Investments Inc.

Phil Hughes

Hullmark Development Ltd.

Jeff Hull

iA Financial Group

Claude Sirois

ICM Realty Group

John Courtliff

IDI Logistics

Chris Kazanowski

Shawn Warren

Immeuble populaire de

Québec inc.

Michel Côté

Independence Title

Colin Parker

Industrious

Craig Robinson

Intercontinental Real

Estate Corporation

Jessica Levin

Invesco Fixed Income

Kevin Collins

David Lyle

InvestPlus REIT

Domenic Mandato

Ivanhoé Cambridge Inc.

Michèle Hubert

Jamestown LP

Catherine Pfeiffenberger

Jayman Built

Aasit Amin

Jesta Group

Anthony O’Brien

JBG Smith Properties

Moina Banerjee

Steve Museles

Dave Paul

Angie Valdes

JLL

Jeff Coddington

James Cook

Mehtab Randhawa

Vineet Sahgal

Ryan Severino

John Burns Real Estate

Consulting

John Burns

Kairos Asset Strategies

Rachel Lee

Katz, Sapper & Miller

Josh Malarsky

Kayne Anderson

John Wain

Kearny Real Estate Company

Hoonie Kang

KennMar

Allie Rosenbarger

KHP Capital Partners

Ben Rowe

Killam Apartment REIT

Philip Fraser

Dale Noseworthy

Robert Richardson

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

117Emerging Trends in Real Estate

2023

Levcor Inc.

Justin Levine

Liberty Development

Corporation

Marco Filice

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 Aiello

Manulife Investment

Management Limited

Gregory Sweeney

Jeffrey C. Wolfe

Marcus & Millichap

Geoffrey Bedrosian

John Sebree

Marcus Partners

Paul Marcus

Markee Developments

Jason Marks

MarketStreet Enterprises

Dirk Melton

The Mathews Company

Bert Mathews

Jody Moody

Mattamy Homes

Brad Carr

MCAN Mortgage Corporation

Floriana Cipollone

McMillan Pazdan Smith

Architecture

K.J. Jacobs

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

Metrolinx

Michael Norton

Metrontario Group

Lawrie Lubin

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

Multiplex Construction

Canada Ltd.

Terr y Olynyk

MURAL Real Estate Partners

Robin Zeigler

MW Builders Inc.

Su Jones

National Development

Brian Kavoogian

National Multifamily

Housing Council

Douglas Bibby

Nelson\Nygaard

Transportation Consultants

Lauren Mattern

New City Development

Isaac Bamgbose

New York Life Real Estate

Investors

Brian Seaman

Ross Berry

New York University

Arpit Gupta

NewQuest Properties

Jay K. Sears

Nordblom Company

Kris Galetti

Norris Design

Matthew Taylor

Northcrest Developments

Derek Goring

Northern Trust

Brian Bianchi

David Dagley

NorthWest Healthcare

Properties REIT

Shailen Chande

Northwood Ravin

Jeff Furman

Nuveen Global Cities REIT

Steve Hash

Nuveen Real Estate

Donna Brandin

Brian Eby

Jack Gay

Jason Hernandez

Chris McGibbon

Carly Tripp

OnPlace

Monica Onstad

Ontario Infrastructure and

Lands Corporation

Michael Fedchyshyn

Ontario Real Estate

Association

Tim Hudak

Opus Development Company

Ryan Carlie

Orchestra Partners

John Boone

Ownly

Jason Hardy

Oxford Properties

Michael Turner

Paciﬁc Elm Properties

Billy Prewitt

John Rutledge

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 Group

Ken Grimes

Pebblebrook Hotel Trust

Thomas Fisher

Peerage Capital Canada

Limited

Gavin Swartzman

PEG Companies

Robert Schmidt

Pensford Financial Group

J.P. Conklin

PGIM Real Estate

Stephen Bailey

Alyce Dejong

Joanna Mulford

Soultana Reigle

Jaime Zadra

Plymouth Industrial REIT Inc.

Anthony Saladino

Pen White

Jeff Witherell

Port of San Francisco

Diane Oshima

Porte Realty Ltd.

David Porte

PREA

Greg Mackinnon

Preferred Apartment

Communities

John Isakson

Pretium Partners LLC

Zain Butt

Charles 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

Public Sector Pension

Investment Board

Carole Guerin

Luc McSween

Public Square

Clay Haynes

QuadReal Property Group

Limited Partnership

Anthony Lanni

Quinn Residences

Richard Ross

RATIO.CITY Inc.

Monika Jaroszonek

RBC Capital Markets

Dan Giaquinto

David Switzer

David Tweedie

William Wong

RCLCO

Charles A. Hewlett

RCLCO Fund Advisors

Taylor Mammon

Real Property Association

of Canada

Michael Brooks

RealPage

Jay Parsons

Realstar Management

Partnership

Colin Martin

Regency Centers

Christopher Widmayer

The Regional Group

Sender Gordon

Kelly Rhodenizer

Regional Municipality of

Durham

Lorraine 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

The RMR Group

Adam Portnoy

Rockpoint

Spencer Raymond

Rohit Group of Companies

Rohit Gupta

Rosen Consulting

Kenneth Rosen

The Roxborough Group

Marc Perin

Munezeh Wald

Roy-L Capital Corporation

Matthew Fishman

RVi Planning + Landscape

Architecture

Jared Pyka

118 Emerging Trends in Real Estate

2023

RXR

Mike Maturo

Mike O’Leary

Scott Rechler

Schneider Electric

Stuart Whiting

Seamon Whiteside &

Associates

Chip Buchanan

Sienna Senior Living Inc.

Nitin Jain

Signature Development

Group

Paul Nieto

Signorelli Company

John Montaquila

SilverCap Partners

John Scott Trotter

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 of

Companies

Edward Sorbara

Société de gestion COGIR

S.E.N.C.

Mathieu Duguay

Sonesta International Hotels

Corporation

John Murray

Southwest Properties Ltd.

Gordon Laing

Paul Murphy

Jim Spatz

Spirit Realty

Ken Heimlich

Stafford Developments

Jonathan Goldman

Starwood Capital Group

Ethan Bing

Anthony Murphy

Starwood Land Advisors

Mike Moser

STG Design

Jim Susman

Stiles Corporation

Scott MacLaren

Stillwater Capital

Clay Roby

Stockbridge

Terry Fancher

Seth Kemper

Stephen Pilch

Kristin Renaudin

Nicole Stagnaro

Stock Development

Keith Gelder

Strathallen

Cathal O’Connor

Structure Development

Sarah Andre

Structures

Dante Angelini

Heidi Cisneros

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

Sunstone Hotel Investors Inc.

Robert Springer

The Swig Company

Stephanie Ting

TA Realty

Randell Harwood

James Raisides

Sean Ruhmann

Tanzola Corp.

Greg Tanzola

Taylor Derrick Capital

Nick Etherington

Townline Homes Inc.

Rick Ilich

Dan Jekubik

Trammell Crow Company

Jim Casey

Matt Khourie

Trammell Crow Residential

Ken Valach

Transwestern Development

Company

Ashley Grigsby

Doug Prickett

Trepp

Lonnie Hendry

Trez Capital

Vikram Rajagopalan

Tricon Residential Inc.

Gary Berman

Tridel Corporation

Bruno Giancola

Len Gigliotti

Triovest Realty Advisors Inc.

Prakash David

Ted Willcocks

Triple Group of Companies

Steve Apostolopoulos

Tristan Capital Partners

Douglas Poutasse

Truist

Andy 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

Will McIntosh

Vantage Point Development

Brannon Butler

Vential Investments

Dino P. Christoforakis

Veritas

Yat-Pang Au

The Viera Company

Todd J. Pokrywa

Village Green

Diane Batayeh

Virtu Investments

Ritesh Patel

The Vision Foundry

David Stoller

W. P. C ar e y

Jason Fox

Brooks Gordon

John Park

Toni Sanzone

Walton Street Capital

Raphael Dawson

Washington Capital

Sean Whitﬁeld

Waterstone Properties

Group Inc.

Herb Evers

Watson Land Company

Jeff Jennison

Westbank Corp.

Judy Leung

Weston Urban

Reeves Craig

Mark Jensen

WeWork

Nicholas Shya

White 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

119Emerging Trends in Real Estate

2023

At PwC, our purpose—to build trust in society and solve important

problems—is at the core of everything we do. It guides how we serve

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are committed to advancing quality in everything we do.

Global Real Estate Leadership Team

R. Byron Carlock Jr.

U.S. Real Estate Leader

Dallas, Texas, U.S.A.

Frank Magliocco

Canadian Real Estate Leader

Toronto, Ontario, Canada

Thomas Veith

Global Real Estate Leader

Frankfurt, Germany

K.K. So

Asia Pacific Real Estate Leader

Hong Kong, China

Angus Johnston

European, Middle East & Africa Real Estate Leader

London, U.K.

www.pwc.com

The Urban Land Institute is a global, member-driven organization

comprising more than 45,000 real estate and urban development pro-

fessionals dedicated to advancing the Institute’s mission of shaping the

future of the built environment for transformative impact in communities

worldwide.

ULI’s interdisciplinary membership represents all aspects of the indus-

try, including developers, property owners, investors, architects, urban

planners, public officials, real estate brokers, appraisers, attorneys,

engineers, financiers, and academics. Established in 1936, the Institute

has a presence in the Americas, Europe, and Asia Pacific regions, with

members in 80 countries.

The extraordinary impact that ULI makes on land use decision-making

is based on its members sharing expertise on a variety of factors affect-

ing the built environment, including urbanization, demographic and

population changes, new economic drivers, technology advancements,

and environmental concerns.

Peer-to-peer learning is achieved through the knowledge shared by

members 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.

Drawing on the work of its members, the Institute recognizes and

shares best practices in urban design and development for the benefit

of communities around the globe.

More information is available at uli.org. Follow ULI on Twitter, Facebook,

LinkedIn, and Instagram.

W. Edward Walter

Global Chief Executive Officer, Urban Land Institute

ULI Center for Real Estate Economics and Capital Markets

Anita Kramer

Senior Vice President

www.uli.org/capitalmarketscenter

Urban Land Institute

2001 L Street, NW

Suite 200

Washington, DC 20036-4948

202-624-7000

www.uli.org

Sponsoring Organizations

Atlanta’s Midtown skyline from the vantage

point of Piedmont Park.

Emerging Trends in Real Estate

2023

What are the best bets for investment and devel op ment in

2023? Based on insights from a select group of the most

influential and experienced ULI members, this forecast will

give you a heads-up on overarching trends that will affect

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offer the best prospects. A joint under taking of PwC and ULI,

this 44th edition of Emerging Trends is the forecast that you

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ULI is the largest network of cross-disciplinary real

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globe. As a ULI member, you can connect with members

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find ULI opportunities to lead and volunteer on Navigator

(navigator.uli.org), and explore ULI’s latest research and best

practices on Knowledge Finder (knowledge.uli.org), including

all the Emerging Trends in Real Estate

reports published

since 2003. Visit uli.org/join to learn more about ULI’s

exclusive member benefits.

Highlights

• Tells you what to expect and what the expected

best opportunities are.

• Elaborates 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.

• Describes the impact of social and geopolitical trends on

real estate.

• Explains how locational preferences are changing.

• Elucidates the increasingly important intersection

of real estate and technology.

www.pwc.com

www.uli.org

ISBN 978-0-87420-481-0

9 780874 204810

U.S. $49.95

54995

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