Bill Staffieri, Partner at PwC, closed this year’s ULI Philadelphia Annual Real Estate Forecast 2023 in the keynote presentation titled “Taking the long view – Near term concerns offset by long term optimism”.

While there are plenty of uncertainties up on Staffieri’s wall of worry, from labor shortage to war, darkening the current real estate outlook, there is confidence in the long-term outlook. The surveyed market sentiment has ping-ponged over the past year – dropping in COVID, rebounding significantly in 2021, and dropping once again to an all-time low in anticipation of the upcoming recession.

We’ve all heard the term “new normal”, but what is it? Staffieri noted that “normal” does not mean the same thing to everyone.” The transition to this new version of normal has been messy and will continue to be so. As an industry, we’ll need to acclimate our best practices to the increasing interest rates, inflation, and a reset of real estate returns.

Not only have the economic factors changed, but we have as well. Staffieri predicts the following trends are expected to stick around: online shopping, virtual meetings in lieu of business travel, and the push and pull between employers and employees for work-from-home friendly policies. Capital markets are also adjusting and are hesitant to move forward on deals until prices settle. As such, settling into the post-pandemic “new normal” continues.

Outlook by property type has remained consistent in recent years, with industrial and multi-family on top. Hospitality now comes in third after making significant strides in its recovery since the height of the pandemic. “Leisure travel came roaring back” said Staffieri but business travel is still lagging as we are seeing “a bifurcation between hotels in the leisure space and hotels in the downtown convention center space.”

Regardless of property type, it is quality and niche product that is driving demand. Investors are playing favorites and prefer the security of an industrial or multi-family property type, a best-in-quality retail or office asset, or a niche property like student housing or single-family rentals. So, what about the aging, oversized or underperforming assets? “This whole idea of obsolescence and how to reposition assets – that is a big focus” for Staffieri’s clients. Conversion to one of these preferred deal types is the obvious solution – office to multifamily, retail to last-mile distribution. However, that is much easier to envision than to execute.

In our “new normal” some things have changed, but some things have stayed the same. The pandemic has reinforced the dominance of magnet markets, mostly in the warmer Sun Belt region. “They were growing before that at above-average pace, but the pandemic just accelerated their growth” said Staffieri. Looking ahead, these markets, including Atlanta, Dallas/Fort Worth, Houston and Miami, may experience growing pains like inadequate infrastructure and housing prices. Their success will depend on how they deal with the challenges ahead.

Focusing in, Philadelphia ranks at #28 this year, down a bit from #27 in 2021, but Staffieri says it reflects “a stable outlook”. The region overall reflects the national trends, including industrial and multi-family properties showing up as the star players. We have a few things going for us in our economic diversity, promising redevelopment opportunities, and a competitive cost of living compared to other major cities. Specific local concerns are the boomerang of people from NYC, the need to address aging infrastructure and really… when are people coming back to Center City?

Bottom line is that housing in Philadelphia is too expensive. “It’s no different than any other city across the country, but that is something that we need to focus on and figure out how to address” notes Staffieri. In this “new normal” many people are moving to a market where they can go buy a house that’s more affordable – and maybe work from home in their pajamas. Rents nationally are up 15%. Rents in Philadelphia are up 22% and overall affordability is down 35% since 2019. For many people neither for-sale nor rental housing is affordable. In Philadelphia, like all major cities, we are also facing aging infrastructure and the impacts of climate change. The real estate industry is likely to find itself at the center of more regulation aimed at addressing these issues. Additional regulations add complexity, time, and additional cost to the development process, even further worsening the affordability of housing.

To wrap up Staffieri ended with a quote: “The next couple of years may be bumpy, but we likely come out on the other side in an environment where the best operators differentiate themselves.”

See below for links to additional recaps from the Annual Real Estate Forecast 2023:

Contributed by Chelsea Bellay. Chelsea oversees business development efforts in Pennsylvania, New Jersey and Delaware for Bozzuto Construction Company.