Austin, Texas has continued to see a surge in the suburban office and home building sectors.
The Urban Land Institute and PwC US have released a new report, Emerging Trends in Real Estate 2021, highlighting the evolving trends shaping the real estate industry.
The report, which includes proprietary data and insights from more than 1,600 leading real estate industry experts, explores how Covid-19 spawned new trends such as an increased focus on social justice and health and wellness, and stopped others in their tracks, like the appeal of big cities.
The report examines how the pandemic heightened the desirability of lower density areas for both residential and commercial real estate, with interest concentrated in the Sunbelt markets.
Cost-conscious companies will gravitate toward cities that are business friendly and low cost with large, growing workforces. Raleigh/Durham, North Carolina, for example, is nicknamed the Bay Area of the East Coast, due to a surge in technology jobs and the area’s reputation as an education mecca.
First introduced in the 2015 report, 18-hour cities continue to dominate the Top 10 overall real estate prospects, powered by strong growth, home building outlook, affordability and job prospects.
Raleigh/Durham; Austin, Texas; Nashville; Dallas/Fort Worth; Charlotte, North Carolina and Tampa/St. Petersburg, Florida are just some of the examples of 18-hour cities, so called because they tend to have downtowns that flourish outside the 9-to-5 workday.
While growth in the suburbs has been a consistent trend since the report first predicted it five years ago, greater family formation among Millennials and flexible work from home policies are boosting this shift.
Homebuyers will look for suburban locations with low taxes, affordable housing, auto-oriented transportation and good job prospects.
Anita Kramer, senior vice president of the Urban Land Institute’s Center for Capital Markets and Real Estate and one of the report’s authors, said the pandemic sped up a demographic trend called The Great American Move, which is Millennials leaving densely packed urban centers to live in suburbs, especially in the Sunbelt markets.
“There was already a kind of movement of that segment out to the suburbs as the older edge of the Millennials are starting families and looking for more space and maybe school districts,” said Kramer. “That has been accelerated by people’s experience working from home and schooling from home and wanting more space. If they ever have to go to the office, it would be for a smaller number of days. Their commute is no longer as onerous as it once was.”
Appearing first in the 2020 report and now ranked second for 2021, Austin, Texas has continued to see a surge in the suburban office and home building sectors.
With a greater emphasis on health and safety, the need for lower density environments and more space has only grown. Remote work and higher taxes in large cities due to declining tourism and business tax revenue are contributing to the shift away from an urban core.
The report examines the value of open space and parks and how that relates to a neighborhood’s perception and satisfaction.
“In the same way that suburbs have become urbanized because people enjoy that urban feel, now at the same time cities will most likely look for creative ways to create the type of amenities that people search for in the suburbs,” said Kramer. “So as much as cities have been very aware that open space and parks are essential to a good quality of life, we think that’s going to become even more so.”
Social unrest and protests in cities across the country have also played a role in the re-evaluation of presence in urban cores. Seventy percent of respondents agree that the real estate industry can address and help end systemic racism – from promoting diversity, equity and inclusion within the sector, to looking for ways to develop underserved communities.
On a rating scale of social issues in real estate, income and racial inequality moved from little to moderate importance last year, to moderate to great importance.
The pandemic’s economic fallout is exacerbating the housing affordability crisis, with job losses affecting those most likely to be renters or housing insecure.
“We don’t have enough affordable housing, and people were struggling already,” said Kramer. “But when there is no income, it has a dramatic impact and kicks it into an entirely different crisis.”
Real estate taxes, generally the largest source of local government revenue, are likely to decline as hotels and shopping centers, and potentially offices, lose tenants and value.
The next few years promise to be retail’s great transition period as demand for larger retailers and department stores dwindles in favor of discount stores, fast fashion and online retail. More than 80% of participants agreed that Covid-19 accelerated the shift in retail that likely would have occurred over the next few years.
Expect to see a much smaller physical retail presence and vast amounts of vacant space with lower rents. Top brands will take advantage of lower prices to upgrade their locations, while malls will leverage empty space to improve their tenant roster or convert to distribution centers for online retailers.
Long-term revenue declines will affect all government services but could be particularly impactful on infrastructure investments, a critical need, not just for real estate, that this report has highlighted for many years.
An analysis by the National League of Cities predicts that 65% of cities will delay or cancel infrastructure projects due to the pandemic.
With state and local governments facing large revenue declines, experts agree that the federal government has the wherewithal to provide programs and resources to this problem, including the expansion of the Low-Income Housing Tax Credit and Section 8 vouchers.
“Times of great change always present significant opportunities,” said W. Ed Walter, global CEO of ULI. “In the near term, our suburbs will benefit from new growth spurred by shifting demographics and changes to living and working patterns resulting from the COVID crisis. Our cities will have the opportunity to respond by reimagining their public realm, building more resiliently, and reinventing assets, such as retail, that were already struggling before the pandemic. As an industry we have the opportunity to strengthen by truly embracing diversity and tackling the challenges faced by our communities.”