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24 JANUARY 2023
 POLICY PAGE
CREATIVE DEALS FUELED
BY INVESTORS’ DEMAND FOR
NICHE PROPERTY TYPES
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 repositioned to remain competitive.
CAPITAL MOVING TO THE SIDELINES OR TO OTHER ASSETS
After a robust first half of 2022,
real estate property transactions began declining, primarily because buyers and sellers cannot agree on pricing due to heightened market uncertainty. Also, rising debt
costs and restrictive underwriting standards are limiting transaction volumes. The denominator effect may force some institutional investors 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 noninstitutional investors.
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 government 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.
GIVE ME QUALITY, GIVE ME NICHE
Investment demand for commercial real estate assets is still healthy, but more tentative, as noted above. 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: (1) the security of major product types with the strongest demand fundamentals, notably industrial
and multifamily housing; (2) best- quality assets in sectors undergoing significant demand disruption, especially retail and office; and (3) narrowly targeted subsectors, like student housing, and newer “niche” asset types, like single-family rentals. There is much less appetite now for riskier opportunistic investments. The survey also confirms continuing strong interest in Sun Belt markets.
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 as 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. Many of those surveyed felt that there is too much retail space and too many office buildings, and not enough residential units or modern industrial space. Also, there is not enough developable land on which to build all the housing and warehouses where needed.
REWARDS AND GROWING PAINS IN THE SUN BELT
Despite their continued popularity among residents, employers, tenants and investors, some Sun Belt markets are experiencing growing
By Michael G. McGuinness
In late October, PwC and the Urban Land Institute jointly published Emerging Trends in Real Estate
2023: United States and Canada.
This year’s annual report was based on interviews and surveys with nearly 2,000 individuals including property owners, developers, asset managers and investors of real estate properties. The consensus is 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, although a short and mild recession is expected. The article highlights
10 trends for 2023 as summarized below. Many of these trends have led to creative project deals throughout New Jersey, such as Ironside Newark, ON3, Bell Works, Party City’s new headquarters and the HalRay Newark Portfolio.
NORMALIZING
Defying nearly all predictions during the uncertain days of the COVID lockdown, U.S. commercial property markets subsequently made a remarkable run, with some of the strongest returns, rent growth and price appreciation rates ever recorded. Now, more than two
years later, property investors and
managers are learning that enormous growth and profits eventually fall back to earth. Property market fundamentals are “normalizing”
as some markets weaken due to diminishing pandemic tailwinds and the potential for a cyclical economic downturn. Some property sectors may cool, including residential and industrial, while others may heat
up to historical average levels,
such as hotels and retail. Finally, 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.
STILL, WE’VE CHANGED SOME
Even as some property markets begin to “normalize” in many
ways, many activities — shopping, business travel and office space
— and how we use space are not likely to return to the old ways. The pandemic forced structural shifts in how and where we live, work and recreate in ways that seem destined 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
 























































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