Will the “REAL” Real Estate Market Please Stand Up

June 27, 2023 • The VUCA environment. We get it. See our posts Volatility is the Name of the Game: Part 1 and Part 2. It’s hard to prepare for, feels chaotic and confusing, and the root of the problem is unclear. In other words, it’s often hard to discern what’s really going on. 

A North American Snapshot

As we traveled north to Canada for ULI’s Spring Meeting and west to Las Vegas for ICSC’s annual global conference, we tried to make sense of a real estate market that continues to be characterized by rapid and often unpredictable change. 

Here’s what we saw and our attempt to make sense of it all.

ICSC • Las Vegas

The mood at the ICSC Las Vegas conference in May was exuberant. Although attendance (roughly 24,000 strong) was still well below pre-pandemic levels, it felt like a pre-pandemic conference. Public and private shopping center owners from all parts of the U.S. were enthusiastic about leasing velocity and sales numbers. In fact, one national owner of Class A centers noted that their tenant population is financially healthier than anything they’ve experienced over the past 15 years. But other owners had very different stories to tell about diminished leasing activity, increasing vacancy rates, and the ramifications of their inability to refinance underlying debt. Brookfield for example has eight malls across the country that are distressed and on watch lists, including NYC’s Brookfield Place, Chesterfield Town Center in Virginia, and River Town Crossings in Michigan. 

ULI • Toronto

Right before ICSC Las Vegas, I joined thousands of real estate professionals in Toronto for ULI’s Spring Meeting. I spent most of the conference touring retail, residential, and mixed-use projects throughout the city. One of those projects, The Well, is a new mixed-use development consisting of 1.1M SF of office, 500,000 SF of retail, and 1,700 residential units. We saw one multi-floor state-of-the-art office that was leased and actually occupied by the tenant’s employees, but their highest profile anchor office tenant — Shopify — abandoned its lease in December. While Toronto boasts that it currently has more construction cranes in the sky than any other North American city, most of the Torontonians that I spoke with complained about shrinking residential condominium values and dismal office occupancy rates. 

So, What’s the Real Scoop? 

After coming back from these conferences, I remembered ULI’s Emerging Trends Report for 2023 which was released in October 2022. Although a report published over 8 months ago would normally be considered old news at best, I think it provides a useful lens through which some of these inconsistencies begin to make sense. Here’s a summary of what I found to be most insightful.

Things Are Normalizing, But It’s a New Normal

While property market fundamentals are in many cases reverting from pandemic-fueled distortions to pre-pandemic norms, it’s been bumpy. For those sectors that were negatively disrupted, such as retail, office, and hospitality, there’s a clear bifurcation between the haves and the have-nots as tenants, lenders, and investors flock to best-in-class assets. Even the term “best-in-class” means different things for different product types and markets, which makes for a murky view of where things stand. 

The Sugar Rush Is Over 

Now that the U.S. government has turned off the monetary and fiscal spigots that helped fuel robust real estate earnings during the past two years, property valuations and real estate returns across all property sectors and geographic markets are diminishing. Take multi-family housing in the Sunbelt cities: one of the strongest asset classes in some of the strongest U.S. markets. In spite of all this strength, starting in the second half of 2022, tenant demand has weakened as a result of double-digit rent increases over the past few years coupled with historic increases in supply. As a result, according to CoStar, apartment rent growth in the Sunbelt cities is expected to be lower than in the gateway cities that are among the weakest of the U.S. markets.

Rewards and Growing Pains

The Covid-induced hypergrowth of the Sunbelt cities is a case study of unintended consequences. Despite their continued popularity among residents, employers, tenants, and investors (nine of these cities are on the Emerging Trends Top Ten Favored Market’s list) these cities face turbulent times ahead. In addition to the big-city gripes that followed the massive population inflows, the increasing risks of climate change loom large. The low tax/low regulatory climate that characterizes these cities (and is part of their appeal) may well limit their ability to effectively address these problems.