Top Most Important Real Estate Challenges for 2022–2023

The Counselors of Real Estate recognised the current and emerging concerns likely to have the largest influence on all real estate sectors through polling, discussion, and debate within the membership. The 1,000-member association is concerned about inflation and interest rates as the commercial real estate industry faces unprecedented uncertainty. Geopolitical risk and hybrid work are also important.

The 2022-23 Top Issues Affecting Real Estate can be categorised into Economy & Markets, Government & Regulatory, and Change & Risk Management. The compilation has included infrastructure, macroeconomics, demographic trends, housing, technology, and, more recently, sustainability, logistics, and the global pandemic. This year’s purpose is to identify the Top Ten Issues, how they’ve changed, and their impact on commercial real estate’s professional disciplines.

Inflation and Interest Rates

After focusing on employment, the Fed is now focused on inflation. Along with geopolitical risk and fading fiscal stimulus, tighter monetary policy will raise cap rates and market volatility. The volume of real estate transactions will certainly rise next year. The pandemic and policy errors are current hazards to economic growth.

2019 COVID

When teaching a fall 2019 honours finance course, I informed my students an inverted yield curve foretold a recession in 12 to 18 months. In early September 2019, the curve was -50. (bps). From late July until early October, it was negative. Fed intervened in overnight lending markets. Simply speaking, the longest U.S. economic upswing ended before COVID-19.

Impact & Response

Initially a demand shock, COVID-19’s effects persist. From early March to early June 2020, about 40 million Americans filed first-time UI claims. The unemployment rate quadrupled in 2020. By Q2 2020, real output had fallen 10%. During the epidemic, market volatility reached levels not seen since the GFC.

The crisis prompted a big policy reaction. Extended UI payments, 2020 Paycheck Protection Plan, 2021 American Rescue Plan. This response amounted to a quarter of the yearly U.S. GDP and focused on direct cash infusions to promote consumption. The Fed dropped its overnight lending rate to zero and doubled its balance sheet. The 10-year U.S. Treasury decreased to 54 basis points in March 2020, while the average 30-year fixed mortgage plummeted to 270 basis points.

Political, capital market, and real estate uncertainty

Geopolitical hazards to real estate are difficult to measure. These global and domestic risks often manifest as market volatility due to uncertainty about their potential impact. Whether it’s the war in Ukraine, manufacturing shutdowns owing to COVID infection rates in China, or municipal rent rules and sustainable development and renovation standards, they’re hard to separate and measure. Increasing loan rates and 40-year high inflation complicate these dangers. Supply chain stress, an improving but unresolved pandemic hangover, and energy costs blur the distinctions between these hazards. While the Ukraine-Russia war and recent Chinese lockdowns are the most apparent geopolitical threats, they are not the only ones affecting markets.

Prices, supply chain, and inflation

Inflation and supply chain issues are affected by reasons other than political threats, but the impact is amplified. Russia and Ukraine export 30% of the world’s wheat, a vital food staple. Wheat futures climbed 40% year-to-date and 57.8% year over year. Russia and Ukraine export a third of the world’s ammonia and potassium, key fertilizer materials. Much of the damage is already being seen in less affluent nations, sparking concerns of a global food catastrophe. Steel and nickel prices rose 30 and 45% between early 2022 and late April but have since fallen.

China’s zero-COVID policy and concomitant lockdowns have driven output and port activity to pandemic-era levels. Automobile and electronics production hasn’t recovered from the initial pandemic period, and new obstacles are increasing the burden. Aluminium, copper, and nickel from Russia and Ukraine increase inflationary pressure.

Higher energy costs can hurt real estate, especially over time. High gas prices can impair consumer sentiment and expenditure, harming retail and hospitality. As the likelihood of a prolonged conflict rises, it could entail greater heating expenditures on top of rising gas prices.

Traditional distribution’s impact on product availability has countries rethinking supply chain management, especially sourcing. “Dual sourcing,” “near shoring,” and “friend shoring” characterize collaborative approaches to managing the issues. Short-term difficulties may worsen before improving.

Cyber Security

Cyberattacks on crucial infrastructure continue to threaten global stability. On February 24, the date of the Russian invasion, cyberattacks grew considerably, disrupting Ukrainian military communications, power systems, and telecommunications. Resources are focused on protecting and mitigating these threats. Smart building investments expose granular building infrastructure to cyber vulnerability.

Frequently asked questions:

What is the biggest challenge in the real estate industry?

The biggest recession risk for real estate is increased unemployment and reduced household income.

What is the future of real estate?

Future real estate will emphasize roof access, common rooms, and allocated workspaces. Multifamily investors may witness these changes this year, but they will continue to evolve.

Will property prices go up in 2022?

Construction expenses have grown 25-30%, which may affect unit prices over time. We estimate house values to rise 10-15% in the next 3-6 months.