The Counselors of Real Estate released a report, “2022-23 Top Ten Issues Affecting Real Estate,” that pinpoints the most critical concerns in the real estate world. Based on extensive discussions among its members, this year’s report highlights how inflation and interest rates impact real estate in these uncertain times.

To help keep folks in San Diego in the loop about what’s going on in real estate, we’ve condensed and simplified the report for you.

The New Focus of the Federal Reserve and What It Means for the Economy

The U.S. Federal Reserve has recently turned its focus toward controlling inflation. Global uncertainties and less government help are influencing this shift.

So, what does this mean for regular folks? Borrowing money is more challenging, which leads to higher interest rates and more ups and downs in the stock market. 

Lingering issues from the COVID-19 pandemic persist, and concerns about potential government decisions impacting the economy loom. In 2019, warning signs of economic fragility were apparent even before the pandemic struck. In response, the government increased spending and eased borrowing, resulting in price surges due to supply constraints.

The Federal Reserve aims to maintain price stability by planning to raise interest rates and reduce the money supply in the financial system. This move could impact government bonds and real estate earnings unless demand remains sufficient. The Federal Reserve has been inching up rates since March of 2022.  The last meeting was held steady; the next meeting is December 12-13. We shall see if the rate holds steady once again.

Currently, the economic landscape presents mixed signals. The stock market’s behavior remains unpredictable, and supply chain challenges persist. However, there is a silver lining as the economy continues to expand, with increasing job opportunities. A recession appears unlikely in the near term, barring unforeseen developments.

Navigating Geopolitical Risks in Real Estate

Navigating the intricate world of geopolitical risks and their impact on real estate proves to be a formidable challenge. These risks, from global-scale crises or local quandaries, frequently introduce volatility into the economy and financial markets, leaving expectations uncertain.

Instances like conflicts such as the Ukraine-Russia war, disruptions caused by the COVID-19 pandemic in Chinese factories, the unrest in Israel and Palestine, or local political issues all contribute to the complexity of predicting how these risks will reverberate within the real estate sector.

The situation is compounded by rising interest rates and escalating prices across essential commodities. The entanglement of supply chain bottlenecks, ongoing pandemic-related challenges, surging energy costs, and uncertainty about whether you can obtain insurance in high fire zones make it increasingly arduous to disentangle one issue from another.

While headline-grabbing events like the Ukraine-Russia conflict and China’s stringent COVID-19 measures garner significant attention, they also trigger repercussions such as soaring global goods prices, supply chain bottlenecks, and inflation.

China’s stringent COVID-19 protocols and the resultant supply chain disruptions are particularly vexing for industries like automotive and electronics, intensifying price hikes. High energy costs can notably impact real estate, particularly in sectors already grappling with adversity, such as retail and hospitality.

Compounding the problem is the ongoing shift in consumer behavior driven by supply chain constraints, further clouding short-term predictions. Moreover, the specter of cyberattacks targeting buildings equipped with smart technology introduces an additional layer of concern.  Even the major title companies just had a cyberattack scare this past week before the Thanksgiving Holiday, which slowed closings for homes since their companies shut down to secure the funds on hand.

The level of consumer confidence in purchasing, influenced by price levels and product availability, profoundly affects industries like retail and travel, adding another layer of complexity to the equation.

Banks endeavor to navigate the inflationary surge through interest rate adjustments, though it’s a precarious balancing act. Striking the right balance is challenging, as they aim to prevent the economy from sliding into the undesirable ” stagflation ” scenario characterized by high prices and stagnant growth. Geopolitical turmoil exacerbating inflationary pressures only amplifies the complexity of their task.

The Impact of Remote Work and Decentralization on Real Estate

The pandemic has unmistakably solidified the permanence of remote work, prompting employers to reevaluate their operational strategies and prioritize the well-being and productivity of their workforce.

Even predating the COVID-19 outbreak, we witnessed emerging trends such as the proliferation of remote work, the surge in online shopping, and a shift of individuals towards smaller cities and warmer locales. However, a remarkable transformation unfolded in the post-pandemic era, defying expectations. Instead of witnessing a continued influx of people and resources into major urban centers, the “Great Decentralization” emerged, with individuals and businesses leaving metropolises.

This profound shift reshapes various regions and significantly impacts specific real estate markets. Governments, businesses, and the American people must grapple with the challenges this migration poses away from major cities, even as some urban areas experience decreased utilization compared to the past.

This transition transpires concurrently with other sweeping changes in our society and economy. Factors such as inflation, rising interest rates, increased income levels, climate change, heightened crime rates, political challenges, and stark wealth disparities are all part of this evolving landscape.

Amidst these multifaceted transformations, the paramount question arises: Will these new modes of development and living, characterized by greater dispersion, equip us better to confront future challenges and pandemics?

Supply Chain Challenges in Real Estate: Disrupting the Equilibrium

The challenges plaguing supply chains have created widespread issues, from grocery shopping to property maintenance and construction. These ongoing supply chain predicaments have disrupted the balance between supply and demand, which typically underpins economic stability.

It’s crucial to understand that these challenges didn’t suddenly appear with the COVID-19 pandemic – they were lurking beneath the surface and have now been exacerbated. High-profile events like cargo ship congestion and material shortages have highlighted the global nature of these supply chain issues.

Our modern society has become highly efficient, relying on just-in-time production and delivery of goods. However, the surge in online shopping during the pandemic revealed the vulnerabilities of this system. Lousy weather, material shortages (like timber, steel, semiconductors, and electrical components), and labor shortages further complicate real estate operations.

More workers are needed, affecting various industries, including real estate construction. This shortage of skilled labor is causing project delays, impacting the real estate market, and leading to concerns about potential economic stagnation.

Despite these challenges, the industry is finding ways to adapt. Some vacant retail spaces are being repurposed as quick delivery warehouses, and older buildings are getting new life. People in logistics are exploring better ways to deliver products to customers. However, the real estate sector is navigating uncharted waters with these complex supply chain issues.

Prioritizing Healthy Workspaces in Response to COVID-19

The COVID-19 pandemic has prompted a heightened focus on creating healthier work environments to boost employee well-being and productivity. Companies and building owners follow guidelines from organizations like ASHRAE and the CDC to enhance building safety.

These measures include improving ventilation, ensuring clean indoor air, optimizing lighting and acoustics, and redesigning spaces to encourage collaboration – all to improve health and well-being.

However, these changes have downsides, as they often consume more energy and contribute to greenhouse gas emissions, particularly in heating, ventilation, and lighting systems. To address this, the industry is turning to smart buildings connected to the Internet, leveraging technologies like IoT (Internet of Things), AI (Artificial Intelligence), and ML (Machine Learning) to operate more efficiently and use less energy.

Concerns about rising sea levels and the imperative to reduce carbon emissions by 2050 also drive investments in more resilient and sustainable buildings, further reshaping real estate. The adoption of ESG (Environmental, Social, and Governance) principles is becoming increasingly central to how real estate operates, fostering sustainability and energy conservation.

Worker Shortages and Their Impact on Real Estate

The aftermath of the pandemic has triggered a significant labor shortage, affecting various industries, including real estate. This shortage initially stemmed from COVID-19-related fears and government support programs during challenging times.

What’s surprising is that, even after some time, we still need more workers. There are far more job openings than people looking for work – nearly twice as many job openings as unemployed individuals.

Several factors contribute to this problem. Some job seekers don’t live where the jobs are or lack the necessary skills. However, a significant reason is that the pandemic has changed how workers view their jobs. Many now seek higher pay, better working conditions, and improved career prospects, leading to a significant increase in job resignations compared to pre-pandemic times.

This high rate of job resignations exacerbates the worker shortage, with the number of people quitting their jobs now 25% higher than before the pandemic. Meanwhile, many businesses, especially those offering lower-paying jobs, seek more workers, further intensifying the situation.

These worker shortages have far-reaching consequences. They disrupt the supply chain, affecting the production of various products. Some companies rent less space because they can’t find enough workers, impacting the real estate market. The Federal Reserve is also trying to control rising wages and costs, potentially affecting the economy and real estate transactions.

The U.S. Housing Crisis: The Elusive Quest for Affordable Homes

The United States faces a longstanding and escalating issue of inadequate affordable housing. Numerous factors contribute to this problem, including regulations hindering new home construction, rising land and material costs, and community resistance to new housing developments.

The COVID-19 pandemic exacerbated the situation, with increased demand for housing leading to soaring prices. While more apartments were constructed, the production of single-family homes failed to keep pace with demand.

Addressing this challenge requires a collective effort involving businesses, local leaders, and policymakers. Building more affordable homes in various locations and at different price points is crucial. By 2035, over 4 million new rental homes must be made to alleviate the housing crisis.

The Challenge of Uncertain Rules in Commercial Real Estate

Commercial real estate stakeholders desire clear, stable planning, construction, and property management rules. Unfortunately, the regulatory landscape governing commercial real estate in the United States is often characterized by ambiguity and inconsistency, leading to uncertainty.

At the national level, rules can change due to political dynamics and government policy shifts. At the same time, an increasing number of federal regulations are introduced concerning real estate, land use, and the environment. The COVID-19 pandemic added further complexity, with health and safety regulations impacting real estate operations.

Concerns about the environmental, climate change, and clean energy adoption drive rule changes. States and local governments, particularly places like California, introduce their own rules related to water quality, emissions reduction, affordable housing, and more, influencing land use and construction practices.

The commercial real estate industry yearns for transparent, stable, and predictable rules to facilitate informed decision-making. Presently, stakeholders harbor concerns that such conditions remain elusive.

Cybersecurity Risks in Commercial Real Estate

The commercial real estate sector faces significant challenges in safeguarding digital systems from cyber threats. These risks have grown as technology increasingly integrates with building operations. Through ongoing property management, investors, owners, and building users must confront these complex challenges from the early design and construction stages.

One critical issue is the increasing difficulty in obtaining insurance coverage for cyberattacks, including those perpetrated by nation-states and profit-driven hackers. This has increased insurance costs and coverage gaps, exposing organizations to legal liabilities.

The vulnerability isn’t limited to state-of-the-art “smart” buildings or IoT technology – it extends back to integrating computer systems into fundamental building functions, such as heating, cooling, elevators, lighting, security, and parking.

Another challenge is the need for more skilled technology professionals in commercial real estate, from design and construction to property management. Recent years have seen a surge in cyber threats, including state-sponsored attacks and financially motivated hacking. These threats can lead to various issues, from safety hazards to equipment damage, network breaches, property shutdowns, and damage to a company’s reputation.

These factors present a formidable challenge for the commercial real estate sector. Investors and owners must lead in establishing rules and standards to mitigate these risks, cascading these protocols to property managers to ensure vigilance against potential threats.

Transformation of Environmental, Social, and Governance (ESG) Regulations in the Real Estate Sector

The rules and regulations governing commercial real estate are undergoing substantial global changes. Government regulatory bodies worldwide are introducing new directives emphasizing environmental sustainability, social responsibility, and corporate governance within the real estate sector. These changes are compelling real estate investors to carefully consider their properties’ energy and water consumption, waste management practices, carbon footprint, and ability to manage climate-related risks, often necessitating public disclosure of such information.

These novel regulatory frameworks are expected to encourage practices to reduce carbon emissions and foster a more environmentally conscious economy. Additionally, they promote innovation in the design, construction, and ongoing maintenance of structures, particularly those anticipated to remain in use for extended periods.

The driving force behind these changes is the growing concern among market participants, especially the younger generation and policymakers, about the imperative of addressing climate change. Within the real estate industry, assessing ESG risks (comprising environmental, social, and governance factors) and devising strategies to address them has become a pivotal facet of investment decision-making.

Recognizing the heightened interest in ESG and climate-related issues, the U.S. Securities and Exchange Commission (SEC) has established a dedicated unit to ensure companies provide accurate information concerning these risks. In 2022, the SEC unveiled proposed regulations that may compel publicly traded U.S. companies to commence reporting their greenhouse gas emissions and climate-related vulnerabilities as early as 2024.

In Europe and the United Kingdom, ESG regulations are already more stringent, with a particular emphasis on adhering to guidelines outlined by the Task Force on Climate-Related Financial Disclosures (TCFD).

Cities and municipalities worldwide are also crafting their own ordinances mandating energy usage disclosure for buildings. In certain jurisdictions, legislation has been enacted requiring substantial structures to curtail their carbon emissions under the threat of significant penalties for non-compliance.

In addition to environmental considerations, there is a growing emphasis on addressing social issues such as diversity, health, and well-being in commercial real estate. This shift is redefining the expectations of investors, employees, and local communities in relation to real estate properties.

Consequently, ESG, encompassing environmental, social, and governance considerations, is emerging as an integral and enduring component of the real estate industry, exerting a profound influence across various facets of the sector.

Final Thoughts

The real estate industry is undergoing significant changes and facing various challenges, from adapting to the impacts of the COVID-19 pandemic to addressing critical issues such as supply chain disruptions, workforce shortages, regulatory transformations, and cybersecurity risks. 

To explore opportunities in the San Diego market and navigate these challenges effectively, contact San Diego Realty Gals. 

Our team is ready to provide you with the information and expertise to make informed decisions. Reach out to us today and discover the possibilities in San Diego’s real estate market.