The market is split into the haves and have-nots in terms of where capital is flowing.
In the recent real estate runup, Zillow had turned from its core business model of providing real estate listings to gain consumer interest and then selling the consumer’s contact information to real estate agents and brokerages. Zillow had transformed into a real estate brokerage and, with deep-pocketed investors, was buying thousands of homes in 25 major market areas. Then, what seemed to be an abrupt pump of the brakes on new purchases, the company admitted the algorithm made it difficult to determine property values in three to six months during one of the strongest markets in history.
Zillow laid off 25% of its workforce and is arranging bulk sales of property to institutional investors that plan to put the properties on the market as rentals in a buy-and-hold strategy that will not dump much-needed inventory into the market for sale. There is also a shortage of rental property and that has created a spike in rental rates at a time when most renters have had a reduction in income.
The National Association of Realtors remained cautiously optimistic at its recent annual conference in San Diego, California. Buyer demand is expected to continue through 2022, although we have seen a tapering of multiple offers in our local market as sellers realize there is a limit to how high home prices can climb in one or two years.
Here are the top 10 trends impacting commercial and residential real estate as we move into 2022:
- Bifurcation of Capital Markets
The market is split into the haves and have-nots in terms of where capital is flowing.
Industrial real estate has been the darling of commercial investment, so much so that cap rates have fallen from 2% to 3%. Phoenix currently has 29 million square feet of new industrial space under construction and there is little supply in the Prescott area.
Multi-family investments are attracting capital but there are just not enough properties to satisfy the decade-high demand for multi-family rentals. The Phoenix metro area is on the list of top areas in rental demand and has the strongest apartment rental growth of 21% according to a NAR analysis of Costar data.
Ecommerce is booming but brick and mortar is gaining market share particularly in open air centers or strip malls anchored by a grocery store.
Restaurants overall are suffering, but we are seeing a demand for quick-service spaces that accommodate drive-thrus, and not just one, but two, three and even four drive-through lanes with small or non-existent dining rooms.
- The Need for Adaptive Re-Use
There are many empty big box stores and regional malls that need to be reimagined with the needs of the community in mind. In Prescott, we have seen hotels repurposed into apartments and that is the kind of thing developers and communities need to be working on together.
- Economic Structural Change
The U.S. economy is still strong internationally; however, the pandemic continues to cause uncertainty and we are experiencing inflation. Interest rates are so low that many see that as a sign of an economy not as strong as we would like it to be.
- Political Polarization
The country has been more focused on what divides us than on what we agree on and that has made it difficult to find solutions as the political aisle widens across the parties in Washington and at home. Real estate needs a strong, stable government to thrive.
- Housing Supply and Affordability
Costs of both for-sale and rental housing are rising much faster in secondary and tertiary markets like Prescott as people flee pricier gateway markets and are able to bid up residential prices past the point that local workers can afford.
Housing production overall has fallen short of new household formations as millennials approach their peak buying years and more baby boomers are aging in place. Many first-time homebuyers struggle with putting together their down payment, with only 28% receiving assistance from family or gifts.
About 80% of renters earn $36,000 to $60,000 annually and only 3% of construction of rentals in the past 10 years was for B and C class units, which would be considered affordable. Millions of moderate-to-lower income families are severely housing cost burdened, spending more than half of their income on housing.
- Infrastructure
This is perhaps the biggest issue facing our Prescott area. Commercial agents working with companies looking to bring business and jobs to the area cite the distance from I-17, the lack of a rail line or port to deliver goods and even the cost to bring utilities to an area or upgrade water mains and sewer systems to increase demand on an area. Matt Fish from BHGRE Commercial said, “Modern and reliable infrastructure is an essential building block of commercial development. Without the roads to access it, without the power to run it, without the gas to heat it, and without water and sewer, it’s not profitable to build it. Our economy is changing as fast as our society. In order to continue attracting new jobs, economic opportunities and essential services, we must constantly invest in the infrastructure needed to ensure economic growth.”
There is also a social equity concern with infrastructure such as widely available broadband. As more shopping, work and school moves online, we have a great need for expanded service to rural areas.
- Logistics
The economics of the last mile of service are growing ever more important to the field of logistics as companies struggle to predict demand and manage their supply chains with significant challenges not always in their control.
- Environmental, Social Governance, or ESG
ESG is at a tipping point, especially in major market areas. A reported 82% of the people making the world’s real estate decisions are considering ESG. Most of our carbon footprint comes from the buildings we live in, work in and construct. Buildings without the proper retrofitting are falling out of favor in large funds as a preference for buildings that are newer and constructed with attention to clean energy are garnering the most attention and, of course, capital. This has not been a big concern for seekers of commercial real estate in our area, but it will be someday.
- Tech Acceleration
This year has taught us that adoption of tech is a must. Some technology solutions were adopted easily, especially those that aided us in working from home and doing more business in a contactless environment.
- Remote Work and Mobility
A third of workers were able to work from home specifically because of the pandemic, according to the BLS, but there were sharp differences by educational level. More than half of workers with a college degree worked from home, while only 5% of those with a high school diploma did.
NAR economist Lawrence Yun believes we are only in the first innings of work-from-home options. We now have “WFA,” or Work From Anywhere! The great resignation is in sectors where employees cannot work from home – in retail, hospitality and entertainment/events.
Working from home is trending down as employees go back to work, but it remains elevated above pre-pandemic levels. Office occupancy levels are increasing but the vacancy rate is still high in metro areas. In downtown Prescott, we have had high demand for office space and there are almost zero available listings. QCBN
By Leslie Guiley
Leslie Guiley is chief operating officer at Better Homes and Gardens Real Estate | BloomTree Realty, which includes BHGRE Commercial and she is an area ambassador with Inman News.
