Discover what was top of mind for our guest panelists at our recent real estate roundtable.
By Brad Kettmann, Director, Advisory
The last two years have been unlike any that we have ever seen in our lifetimes. All of the assumptions that we had about how the world works, and about how businesses function, have been completely up ended by the Covid-19 pandemic. As a result, individuals and companies that own and manage property are entering uncharted territory when it comes to managing and expanding their portfolios.
As trusted business partners to our clients, we at BPM don’t want our clients to remain in the dark. We’re always looking for ways to help our client businesses succeed. That’s why in late 2021, BPM convened a panel of real estate CFOs to discuss what the next 12 months may have in store for this critical sector. In conjunction with this panel discussion, we polled a swath of our real estate clients to help uncover the trends that will drive the real estate industry over the next year. We hope you find these valuable as we head into the great unknown we call The Future.
(Please note that all panel comments have been edited for length and for clarity and have also been anonymized.)
Survey: Real Estate Market Outlook 2022
One of the most interesting findings of our survey is that a third of respondents see the multifamily real estate space as being prime for steady or even rising occupancy rates in 2022. After a year of declining occupancy rates (and rents) in urban areas in 2020, the market turned early in 2021. Better times may be here to stay, too, as more than half of our respondents do not see a major event disrupting the property industry in the next year.
That result is in sharp contrast to what the industry has experienced over the last 22 months. In fact, the major potential concerns that the respondents had related to operations staffing, financing and interest rates — all of which are factors only indirectly tied to the pandemic. Similarly, the majority of our respondents indicated that steady or rising construction costs will have a potential negative affect on the industry.
Throughout the event, our participants showcased a range of viewpoints. Below are their perspectives on some key topics that came up during the discussion.
Real Estate Outlook: Residential and Hospitality
- “There’s just not much room for occupancy rates to increase further. In most of our locations, we’re running above what we would consider a stabilized … occupancy number. And there’s been tremendous upward pressure on rents. I think multifamily will continue to be strong. The increase in home prices will continue to make it harder for people to buy homes. And so demand for multifamily will continue. … I can’t think of any examples where we have a vacancy to fill.”
- “We’re seeing that corporate travel has been slow to start up again. So, occupancies are pretty low, but there is definitely a lot of room to grow there. And interestingly enough, the revenue per average room is still pretty comparable to 2019 because of the labor shortage and with the hotels doing what they can with the staff that they have. … You have GMs who are going around helping cleaning rooms because the labor shortage is real in those areas. So, we are anticipating as things open up, as Covid is kept under control, for there to be increases in occupancy.”
Real Estate Market Outlook: Commercial and Industrial
- “I was at a real estate conference a few weeks ago where I heard from a lot of different owner operators in that space, and I didn’t leave feeling convinced that office occupancy would increase. There was really a lack of consensus of opinion. … If you were to talk to owner/operators who were 60 years-plus, they were pretty optimistic about the increase — the return to office and the belief that companies are organizing around that. And then if you were to talk to people who are younger than 50 years old, that group would’ve argued that it’s not going to happen, and that office occupancy will fall because other models are emerging that are working.”
- “We are still seeing strong revenue increases year over year — it’s a generational cycle. These are the good times of the industry, so the question is, how long are they going to last And are the developers, or the speculative developers going to build us out of the good times I think the party will last another couple years. … I don’t see year-over-year revenue growth continuing to increase unless we have inflationary pressures. Going to work in San Francisco every day, people are coming back to the office. I’ve heard some of the smaller 2000- to 3000- foot spaces, the commodity spaces, are being rented for VC-funded tech companies in San Francisco. Other than that, the big multi-floor tenants are continuing to move out. So, the Institutional assets will probably start to see print declines as the sublet and the direct tenants start to roll. So, I don’t see any positive outlooks for office space in 2022.”
Climate Change and Impact on Real Estate
- “The issue that I think about around this question is, will there be some weather event or climate-related event that hits a sector or a geography so dramatically that it changes perspective on valuations We all know different areas of the country that have been hit by some problems, whether it’s fires in some parts of the country, including our own, or maybe lapping water on the shores of Miami. But it just feels like that sits in the background, [while] I’m just waiting for when an insurer in a dramatic way exits a geography or product type. That worries me.”
- “A month ago, we had a storm and a tree branch fell on a customer’s car out in the parking lot of one of the hotels. I think for us, just in hospitality and with the holidays coming up and Covid not completely being under control, there’s fear of the flu coming into the mix and other variants — it’s just if things end up shutting down again, then that will obviously affect the hospitality industry.”
- “I wonder if all of these green energy new funding initiatives will solve that problem or if we are going into some kind of an energy war with Russia and some of the other controlling OPEC nations that could stir up major issues. I know energy is something that affects everybody and the whole economy, so I’m wondering if energy is going to be an issue in the short-term, not something far out, like in the next quarter. We’re doing these huge spending initiatives, such as the Build Back Better plan and $2 trillion approved to be spent. It needs to be taxed, and we haven’t heard all of the tax plans, but could that become a major issue for real estate because of the way it’s taxed. It might shift investor focus in the US or certain sectors, so that’s something that should be on our radar.”
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About Our Real Estate Industry Group
BPM’s Real Estate group is skillfully positioned to provide comprehensive “one-stop” accounting, tax and consulting services to those in the real estate industry, such as investors, developers, managers, REITs, and family-owned real estate enterprises. Our real estate accountants and consultants understand the regulatory and business challenges facing your industry and are dedicated to staying ahead of the curve to help you navigate a changing market. In this way, you can focus your time and efforts on the management and operations of your business instead. To learn more, visit our Real Estate Industry page, or contact Brad Kettmann, Director in our Advisory Practice, today.