Top Ten Issues Affecting Real Estate in 2021
With over 20 years of experience, Antonoplos & Associates group of real estate attorneys have the knowledge and experience required to identify the most prominent current and emerging issues that are expected to impact real estate during 2021. Antonoplos & Associates has identified the 10 following real estate issues as the most important to look out for in 2021:
- Economic Renewal
- Capital Market Risk
- Public & Private Indebtedness
- Affordable Housing
- Flow of People
- Space Utilization
- Technology & Workflow
- Environmental, Social, and Governance (ESG)
Covid-19 is one of the most disrupting forces the modern American real estate market has ever seen. When looking at real estate markets, you should consider existing fragility, adaptability to new demands, and potential relevance to new markets. Our firm defines demand by the extent that Covid-19 forces our country to leave old habits behind and adopt new ones. Another important factor to consider is the duration of lockdowns throughout the country and the confidence with which consumers and real estate investors come out of state and area-specific lockdowns. This is especially true when considering commercial real estate as you will have to ask will people go back to shopping in crowds, sit in theatres, and live in close proximity to each other.
Additionally, both commercial and residential real estate buyers must think about people moving from high-density cities to lower-density rural areas, and will social distancing habits persist, and require reduced density in airplanes, airports, stores, restaurants, theaters, offices, banks, and government buildings. If social distancing habits persist, either company will not be able to continue to operate or these companies will need more physical space to accommodate demands while keeping up with social distancing guidelines.
Even before the Covid-19 pandemic began, the U.S. economy was moving toward a dip due to deep and persistent challenges facing both the general economy and real estate industry.
The statistical signals of a contracting economy include Annual job growth in the U.S. had dropped from roughly 3 million in early 2015 to about 2 million in 2019. Industrial production expansion peaked in mid-2018 and had decelerated into negative territory by late 2019. Growth of the labor force had declined from the double-digit pace of the final three decades of the 20th century to less than 8 percent from 2000 to 2019, driven in part by the reduction in the U.S. birth rate.
Because of the above issues couple with the Covid-19 pandemic, leisure and hospitality, retail, air travel, and construction can expect slow and partial rebounds into 2022. Further, lower-income workers in the healthcare industry—and low-income workers in general—will continue to experience significant financial hardships moving forward. Another issue real estate investors must consider is that lower tax revenues could hurt state and local employment levels while also delaying large-scale infrastructure projects.
Capital Market Risk
With economic volatility being the new normal over the last year, pricing debt has become much more challenging. Additionally, given near-zero interest rates, valuation metrics and underwriting assumptions are vital. For example, the percentage of rent being paid in each area of the country is important along with late debt service payments.
While the federal government’s economic stimulus stopped the economy from completely seizing up, that are still longer-term concerns about defaults and losses. Even as price stability has continued to return, late payment and loan defaults have seen a significant increase.
These issues will especially affect commercial real estate properties related to lodging, retail, and office space.
Public & Private Indebtedness
Real estate is a local asset and demand for commercial real estate is especially driven by local indebtedness funded by local taxes.
To fully understand the indebtedness of local governments and private communities, one must understand the interconnections of air travel, ports, logistics infrastructure, and public transportation that influence commercial real estate demand, value, and investment activity.
Below are some important observations regarding public and private indebtedness:
- The U.S. national debt has gone from $23 trillion to $26 trillion in just six months. This level of debt now equates to $210,000 per taxpayer which is just under the median home price in the country. This level of debt will inhibit savings and investment activity.
- Currently, state debt in the U.S. is around $1.2 trillion and local debt is just under $2.1 trillion.
- Student loan debt is now up to $1.7 trillion and has surpassed the $1 trillion in credit card debt that the country holds. Millennials hold and the largest share of this debt and are also the largest generation in the U.S. workforce. As Millennials work to pay off these loans, it will lower their ability to purchase homes and participate in the high-level consumption behavior that has become common in the U.S.
- The final statistic is that total personal debt is now past $20.5 trillion—which is close to the total U.S. annual GDP. With trillions more in debt coming from further economic stimuli, this level of debt will eventually become unsustainable. With this level of debt, commercial real estate will be affected by reduced product demand and private housing values will have to decrease as interest rates will inevitably rise to attract new capital to fund the national debt and future critical infrastructure projects.
Currently, America is in need of affordable housing. However, there is also a strong sentiment among many that they do not want affordable housing near their homes.
Many organizations focused on low-income housing state that there is a shortage of around 7 million affordable homes for low-income renter households. Additionally, rental prices are being driven up due to the lack of affordable homes for sale. The lack of affordable housing was one of the direst U.S. housing market issues before the Covid-19 outbreak. This is largely due to home prices in the bottom 20 percentile of homes has increased 126 percent since 2000.
Flow of People
For centuries, the flow of people within countries has been one of the main drivers of the economy. Because of Covid-19, the world’s people face a variety of challenges to travel and overall mobility. Due to the increased social distancing, nearly 40 percent of those living in urban settings are considering leaving the city. The addition of working from home makes moving from a city much more realistic than ever before. The main reason for this is that employees can work across the country from their company headquarters.
The new flexibility workers have could easily move housing prices up in rural areas while making city living more affordable.
Real estate design and space will likely be affected for years to come due to Covid-19. COVID-19 has stressed the use, location, mechanical infrastructure, and interior configuration of commercial buildings. Due to these required changes, many retail formats and retailers will be required to redevelop or repurpose their retail spaces.
Additionally, urban planners will have to deal with the density and affordability of housing, job opportunities, social services and health care, and cultural, sports, and recreational activities.
Technology & Workflow
The pandemic has required many companies to utilize new technology to monitor, manage, and mitigate financial and social risk. This is especially true as companies try to balance the risk and reward of having workers move back to physical office spaces, the need for reconfiguration and change in operating methods, and the general desire employees have for working remotely.
Because of these dilemmas, many existing technologies have gone from nice to have to almost mandatory. This includes private online meetings, safety standards, remote collaboration tools, and robust cybersecurity.
The pandemic has forced companies to adopt these measures. Companies will hopefully become safer and better prepared for future surprises when dealing with tenants, residents, and consumers.
The type of infrastructure in a given area will affect the type of employment available in a given area. This in turn will affect housing prices and the environment in the area. Updating existing infrastructure will be a large project in helping the country recover both economically and socially.
Creating or updating infrastructure is a critical issue that each country must address. However, it is estimated that infrastructure will be underfunded by $15 trillion by 2040. If basic infrastructure needs are not met, this could affect real estate values and development progress in already underdeveloped areas. Further complicating the matter is that the American Society of Civil Engineers rates U.S. infrastructure a dismal D+. In addition to already poor infrastructure, the pandemic, extreme weather, cyber-attacks, and terrorism all make improving existing infrastructure or creating new infrastructure more difficult.
Not only do office, retail, and residential infrastructure need updating, but logistics infrastructure also needs improvement. Though retail orders have increased online, as the U.S. opens back up, in-store retail demand will increase sustainably. Putting more pressure on warehouses and other distribution facilities.
Environmental, Social, and Governance (ESG) used to be an emerging trend. However, it is now a vital component of real estate investing. Covid-19 has temporarily put ESG issues on the back burner. However, with an end to Covid-19 insight, ESG will pick back where it left off. Focusing on trends already underway, including dramatically changing acceptance of the risks of climate change, innovations in the measurement and tracking of ESG performance, new innovative ESG investment alternatives, the growing influence of millennial investors, and substantial recognition of ESG initiatives from corporations.
Concerning real estate, ESG requires more input from different perspectives. These perspectives include investors and clients, tenants, residents, building staff, and contractors. Further, equity, sustainability, health and wellness, and diversity will all continue to play a part in decision-making.
One example of changes already made to ESG includes walkable urban areas. This change has worked to capture a younger class of professional workers.
Antonoplos & Associates attorneys have the experience required to assist clients with real estate litigation in DC, Maryland, and Virginia. Furthermore, our attorneys have a strong background in real estate, construction law, and business law. Thus, we can assist clients with a variety of real estate issues.
Contact Our DC Law Office for More Information
Finally, for more information regarding the top ten issues affecting real estate in 2021, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding real estate law, check out our blog.