Kicking off the afternoon portion of the day at the Annual Real Estate Forecast 2022, ULI Philadelphia featured PwC partner, Bill Staffieri, and his Emerging Trends in Real Estate presentation on national and local trends. This presentation broke down the outlook on real estate investment and development trends, real estate finance, capital markets, property sectors, metropolitan areas, and other real estate issues through the United States, with an additional focus on Philadelphia’s market.

Overall, the industry feels better about the future compared to last year. Data showed that 84% of PwC national survey respondents indicated a good to excellent business outlook in 2022 and expressed confidence in the continuing economic recovery. Philadelphia beat the national sentiment, sitting at 88% of Philadelphia respondents expressing confidence for the next year.

With this optimism comes moderate to considerable concerns in areas including inflation and the rising costs of construction materials, qualified labor, and capital; job & income growth; housing, land, and capital availability; state and local regulations; political extremism; climate change; immigration policy; and the pandemic. With these issues at the forefront of industry concerns, 2022 proves to be a new age of uncertainty and confidence remains volatile in the current market. Across the nation, 69% of survey respondents indicated they felt confident making long-term strategic decisions in 2022, which jumps in comparison to the 44% of respondents indicated confidence for 2021 in last year’s survey. Notably, Philadelphia surpasses the national sentiment with a lofty 82% of respondents indicating long-term confidence for the region.

A somewhat unanimous sentiment between the Philadelphia region and the rest of the nation is that the temporary adjustments we experienced due to the pandemic may become permanent change. The majority, or 60% of respondents, believe changes implemented as a result of COVID-19 won’t revert to pre-pandemic activity in 2022. Last year only 40% of respondents felt industry changes were long-lasting, and the length of the pandemic is changing fundamental thinking about multiple issues.

The unknown factor creates opportunities and challenges, particularly surrounding the mixed divergent outlooks borne out of the different ways markets and demographics were affected. Philadelphia’s employment rate dropped more sharply than the national average, but the recovery is projected to be similar to national growth. All markets move toward recovery, but pace varies due to severity of the downturn and local industry mix.

We can also see changes in the way real estate gets done. Staffieri notes a shift in interest toward investing in property technology intended to transform how we think about our overall industry, ESG usage, the return to the office space, and the customer intended experiences in our properties elevated through apps and new technology. COVID-19 has catapulted the innovations of the property technology prop-tech industry to center stage and there’s plenty of room for growth. The goal is for companies to combine people and the right technologies, apply an innovative mindset to help drive the right business outcomes, and use data, automation, and analytics to design space better and ensure greater safety. Data analytics, space use and design, and Health/wellness ranked among the top 3 focus areas of prop-tech adoption.

And everybody wants in! There is an abundance of new capital and investors the market. Staffieri notes the increase of real estate investment allocation from 3% – 7% in pre-pandemic average to the 10% – 14% range in today’s market. Investors aren’t just drawn to the traditional, core real estate centers like industrial, housing, retail, office, and hospitality; they’re drawn to alternatives such as data centers and the life sciences.

Philadelphia’s property sales and transaction volume since the pandemic have rebounded much stronger than the U.S. average. Staffieri speculates a significant amount of capital is priced out of cities such as New York for example, and it is only natural for that money to glow into markets like Philadelphia at this time. National transaction volume is returning to pre-pandemic levels.

Trends show flexibility and convenience will drive the next decade, drawing into question the necessity for traditional office space. Staffieri presents that employees will return back to the office for an average of 3 days. Across the nation, the majority of respondents feel that office space needs will reduce over the next 3 years, but there is a component that feels space needs will increase. With demand for office decreases, tenants are looking for more amenities and flexibility going forward. Trends note a slow return to cities but attracting a labor force remains a challenge. Flexibility will be considered a recruiting tool, which benefits a global labor pool.

The 2022 outlook exceeds the pre-pandemic rate in housing crisis reduction, retrofitting cityscapes, and taking responsibility for climate change. We note the impact on housing COVID-19 had from the supply chain concerns borne out of a housing boom during a recession. Staffieri details that suburbanization of urban areas will remain a quality to Philadelphia’s metro, such as permanent outdoor eating options, and we will likely see this spread out of the city core into its surrounding suburbs. Institutional investors are looking to tackle climate change by turning to ESG and green building technology alternatives.

Staffieri closes out the presentation with comments surrounding climate change the need to take concrete steps toward resilience. 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.

The goal is not simply to tick a regulatory box, but to create sustainable advantage and value. One way to encourage that is to set performance-based standards in ESG and zoning codes and then let developers and other stakeholders work out the specifics. In this year’s survey, 82% of respondents consider ESG when making operational investment decisions, and yet only 48% of those same respondents are doing it to meet tenant and investor requirements.

Contributed by Sigourney Young. Sigourney Young is a student of Business Management at Jefferson University. She is an associate at ULI Philadelphia.