Emerging Trends in Real Estate



Climate change hits the property sector

The spring and summer of 2021 may be remembered as the time much of the world finally began to take climate change seriously. The theoretical turned terrifyingly real for millions around the globe. Devastating wildfires, record heat and drought plagued the US West. Massive flooding inundated New York City, Louisiana and elsewhere around the globe, including China and parts of Europe. A United Nations climate change report concluded that nations must act now to save the planet from even worse weather disasters.

What does that mean to the property sector? A lot. The sector is the largest contributor to greenhouse gasses and global warming. Buildings account for upwards of 40% of global energy use and carbon emissions. Sector leaders and investors are ideally positioned to play a leading role in muting climate change’s worst effects. But many aren’t convinced. Executives and investors often talk up environmental, social and governance (ESG) values, but many executives remain skeptical that ESG pays off in enhanced returns.

Climate change can seem to be an intractable problem, too big to solve. But the property sector is ideally positioned to help reduce impacts and increase resilience to environmental risks.

It’s time to stop talking and start taking concrete steps to battle climate change. The goal is not simply to tick a regulatory box, but to create sustainable advantage and value. One way to get there is to set performance-based standards in ESG and zoning codes and then let developers and other stakeholders work out the specifics.

ESG, climate change and the property sector

“People want that 15-minute lifestyle if they can get it. They want walkable, amenitized, real places that allow them to live fuller lives without having to get into a car and transition from one segment of their life to another.”

A senior real estate developer

The pandemic’s lopsided impact on real estate

Even though the pandemic has spared no state or city, its impact on US property markets and sectors now diverges in ways significantly different than in the last recovery. That divergence means that some sectors, like industrial properties, have barely paused because a surge in online spending spurred tenant demand. The same is true for multifamily properties, with tenant demand still increasing and rents back to record levels throughout much of the country.

Despite this surge, the pandemic accelerated the retail property sector’s long slide, with store closings and vacancies rising. The only exceptions are grocery-anchored centers, dollar stores and home improvement retailers, all of which are thriving. The office sector is, unsurprisingly, in the midst of a major reset—with vastly different outcomes based on location and whether a building has flexible layouts and better ventilation systems. Even so, vacancies are likely to keep rising.

Vacation travel is recovering, with hotels within an easy driving range of population centers appearing set to reap some of the greatest benefits. But business and international travel may not return to pre-COVID-19 levels for years. That would take a toll on hotels, luxury retailing and upscale dining that’s often fueled by company expense accounts.

The pandemic magnified an ongoing shift away from expensive downtown markets and toward smaller, more affordable ones. As a result, businesses need to stay nimble. Uncertainty can be a curse, or an opportunity.

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