10 Headwinds the Real Estate Market Faces Next Year

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Both the residential and commercial real estate markets face an “extraordinary era of unpredictability,” William McCarthy, 2023 global chair of The Counselors of Real Estate, said Friday at a session during NAR NXT, The REALTOR® Experience in Orlando, Fla. Whether it’s inflation, rising interest rates, geopolitical risks, or labor shortages, issues of domestic and international importance are having an impact on real estate at the local level.

“Communities are reflected by the stability of their real estate market and the quality of people who choose to live and work there,” said McCarthy, president of W.P.J. McCarthy and Company in Burnaby, British Columbia. Addressing these key issues and how they could reshape communities are paramount, he said.

The Counselors of Real Estate surveyed its members to uncover the top 10 issues affecting real estate in the next year.

1. 

   Inflation and interest rates. These forces are having a surmountable impact on the housing market and consumers’ pocketbooks. Mortgage rates have more than doubled over the last few months, and inflation is at a 40-year high. “An economic slowdown is underway, and the greatest recession risk to real estate is whether rising unemployment and lower household income cuts demand for residential and commercial property,” the CRE report finds.
2. Geopolitical risks. The ongoing COVID-19 pandemic, the war in Ukraine and cybersecurity threats, among other risks, are creating uncertainty for financial markets. “Continued geopolitical uncertainty provides significant headwinds to the economy,” the report notes. “The longer it takes to moderate, the greater the negative implications for real estate.”
3. Hybrid work models. Only 40% of workers in large metro areas have returned to the office since the beginning of the pandemic, the report says. Nearly 80% of workers say they want to work remotely at least one day per week, and economists estimate that 50% of the workforce could continue working in a hybrid format in the future. The long-term consequences of this shift could dramatically alter real estate, McCarthy said. Workers could leave urban hubs, where offices are plentiful, which would spark a rise in office vacancies and a decrease in surrounding retail. Also, cities could lose a crucial part of their tax base as more workers move to the suburbs or exurbs.
4. Supply chain disruption. Bottlenecks in the supply chain have created delays in new-home construction, renovation projects and home repairs. That’s also caused costs to rise. “While the general consensus is this is improving, we still have so much uncertainty right now, especially as we still need more workers,” McCarthy said.
5. Energy. Increasing demand for alternative energy is changing practices and expectations for healthy buildings and operations. Sustainability initiatives are addressing energy consumption, demand management, renewable energy, clean energy and carbon reduction. Commercial buildings are faced with the costs of retrofitting existing buildings with green energy or building new to adopt such measures.
6. Labor shortages. McCarthy pointed to data that shows a mismatch between the number of job openings and available workers willing to fill them. The pandemic may have accelerated trends like the “great resignation” and low birth rates, he added. The labor shortages are causing a dip in productivity—compounding supply chain issues—and demand for office space.
7. Housing imbalance. Studies estimate that more than 4 million new rental units nationwide will be needed by 2035, McCarthy said. The ratio of housing to workers is greatly unbalanced, with 3.9 jobs for every one house, he added. “Homeownership can be the backbone of communities, economies and societies,” McCarthy said about the dire need to address shortages.
8. Regulatory uncertainty. Ever-changing regulations can add time, risk and cost to completing development projects and impose “new and often burdensome operating restrictions on existing properties,” the CRE report says. The regulatory uncertainty is occurring at all levels of government, particularly when it comes to land use and zoning, rentals, sustainable development and renovation requirements. “The emerging conflict between state preemptive legislation and local control over land use—and the litigation from these conflicts—will create regulatory uncertainty for some time to come,” the report says.
9. Cybersecurity. The number of both domestic and foreign cyberthreats, including ransomware and data breaches, is rising. As buildings add smart-home technology, risks are increasing even more, the report says. “We will need to retrofit buildings to take into account the threat of hacks and data breaches,” McCarthy said. The CRE report warns that “we are entering the perfect storm from the confluence of decades of tech buildup, lack of skill sets, cultural ignorance, savvy bad actors and a dependency on commercial real estate as critical infrastructure.”
10. ESG requirements. Environmental, social and governance issues are playing a bigger role in the innovation of the design, development and construction of new buildings as well as retrofitting existing stock. Though environmental aspects get the most attention, ESG issues as a whole are having a greater impact on real estate, McCarthy said. “Increased recognition of the importance of social factors like diversity, as well as health and wellness, in commercial real estate are setting new expectations from investors, employees and the communities where real estate operates,” the report finds.