AUSTIN, Texas – Nov. 2, 2023 – The report’s overarching theme is “The Great Reset,” determining that the industry must form new ‘norms’ and can no longer rely on past benchmarks to determine how the market will function in the future. It explores shifts in the property sector since the pandemic, changing investor sentiment toward climate risks, the emergence of impact investing, and other real estate issues within the United States and Canada.

“It’s clear that the real estate industry is entering a new era of thinking, building and operating. The emergence of hybrid work models, the strength of the retail sector, and the growth of Sun Belt markets underscore the new reality on the ground, specifically in our top cities – Nashville, Phoenix, Dallas/Fort Worth, Atlanta and Austin – to watch in 2024,” said Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets.

Since 2010, Austin has ranked seventh or higher in each Emerging Trends in Real Estate® report. The capital city placed No. 4 in the 2023 forecast, No. 4 in the 2022 forecast, No. 2 in the 2021 forecasts and No. 1 in the 2020 forecast. Other noteworthy Texas cities earning spots on the list include Dallas-Fort Worth at No. 3, San Antonio at No. 8 and Houston at No. 11. Nashville earned the top spot in this year’s rankings, following by Phoenix, Dallas/Fort Worth and Atlanta.

To view the full report, visit ULI.org/et24.

ULI Austin will host an Emerging Trends in Real Estate event on Wed., Dec. 6, from 11:15 a.m. – 1 p.m. at the J.J. Pickle Research Campus of The University of Texas at Austin. Guests will hear national evaluation and insights from one of the report’s co-authors, after which a local panel will provide a unique perspective on the high-level results.

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Austin maintained its place in the “supernova” category of fastest-growing markets that consist of 1-2 million residents, joining Nashville, Raleigh/Durham, Jacksonville and Boise. It also falls within a grouping of magnet cities that are migration destinations for both people and companies, with most growing more quickly than the U.S. average in terms of both population and jobs.

The report indicated that Austin is starting to show growing pains as it begins to experience ‘big-city’ problems – a downturn in its office sector as its tech status has left it with a high share of remote workers plus a rising cost of living challenge which is pricing residents out of the center. It also called attention to the shifting migration trends impacting the city. While Austin experiences the largest in-migration from California markets (Los Angeles and San Jose), the out-migration from the city is pronounced. The largest out-migration is San Antonio, followed by Killeen, Texas and Denver, Colo.

Ten of the report’s top trends include:

Higher and Slower for Longer. Real estate professionals have been keenly anticipating a recession, but the U.S. economy has demonstrated remarkable resilience despite rising rates, confounding predictions, and raising questions about when the downturn will materialize. While some concerns linger, including household savings, student loan payments, and inflation, there is an emerging view of a “soft landing” for the economy, albeit with higher interest rates, which has implications for real estate deals and space demand in a slower-growth environment. Navigating the complex interplay of these economic factors is the challenge facing industry leaders who must grapple with the reality of “higher for longer” in both the broader economy and the real estate sector.

The Great Reset. The commercial real estate market, which thrived after the Great Financial Crisis thanks to low interest rates, is struggling with a new era of “higher for longer” rates initiated by the Federal Reserve’s actions. This shift is posing challenges for industry professionals, leading to adjustments in response to rising borrowing costs and the anticipation of slower income and rent growth. Although this transition may bring some challenges, the diverse nature of the industry still provides opportunities in certain segments, such as well-located assets and niche markets, requiring thoughtful adaptation to navigate this changing landscape.

A Painful but Needed Capitulation. Real estate professionals are faced with a shifting landscape in the office space sector. The consensus among experts suggests that the traditional office model is undergoing a significant reevaluation, with challenges similar to those faced by retail a decade ago. Reduced tenant demand, particularly in downtown areas, has led to a split market, with premium, modern properties gaining favor. Although there are optimistic voices and potential avenues for recovery, the economics of remote work and the impact of artificial intelligence cast doubt on a full return to pre-pandemic office norms.

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It’s All About the Debt. Debt plays a crucial role in both the U.S. economy and the commercial real estate (CRE) market. While the nation is confronting a substantial debt load, the situation differs between government and non-government entities. Government debt, particularly the rapidly rising federal debt, is a cause for concern due to potential long-term consequences, while non-government debt appears well-managed. In the CRE market, the reduced availability of debt, higher financing costs, and a looming wave of maturing debt are challenging, but they present opportunities for private lenders as traditional lenders retreat. The overall outlook for CRE lenders is marked by opportunities for new loans but challenges in existing portfolios.

Eco-Anxiety Comes Home. In the wake of a record-breaking summer and escalating climate events, 2023 is poised to become one of the hottest years on record, with temperatures significantly surpassing previous averages. This surge in climate-related challenges is having a profound impact on the real estate industry, with sustainability performance now tightly linked to the quality and financial returns of real estate assets. Rising insurance costs and their implications for property owners and tenants are catalyzing an urgent reevaluation of strategies, alongside mounting government regulations and increasing focus on Environmental, Social, and Governance (ESG) initiatives. In this context, both residential and commercial real estate markets face the possibility of overvaluation due to inadequate consideration of climate risks, prompting a need for greater awareness and preparedness within the industry.

Even Further Out of Reach. The housing affordability crisis has reached a critical stage in the real estate industry. The Federal Reserve’s role, marked by interest rate adjustments, has significantly impacted affordability in both for-sale and rental markets. While increased rental supply has temporarily eased rent growth, rising household formation rates and a persistent housing shortage are expected to drive rents upward. The imperative solution remains to increase housing supply, particularly affordable units for lower-income individuals, while addressing regulatory impediments and construction costs. Industry professionals are urged to explore innovative solutions to tackle this complex challenge.

Portfolio Pivot. Constructing a commercial real estate portfolio has become increasingly complex in the face of evolving market dynamics. Portfolio managers must now consider diversification, ESG factors, and alternative property types to replace traditional pillars like offices and retail. Additionally, they must adapt to smaller specialized sectors, and the growing importance of environmental considerations, making portfolio management a multifaceted challenge for real estate professionals in today’s market.

Not Remotely the Same. The paradigm shift towards remote work is profoundly reshaping property market dynamics, mirroring the historical significance of events like the Federal-Aid Highway Act of 1956. This transformation extends beyond office spaces and touches migration patterns, housing preferences, and urban vitality. The prevalence of remote work has nearly tripled, with tech-heavy cities experiencing the most substantial increases, and

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the rise of remote work is ushering in a new era of property market trends, with an emphasis on suburban and smaller city markets.

Downtowns Need to Reinvent Themselves – Again. In the post-pandemic landscape, there’s a consensus that a return to pre-pandemic office occupancy levels is unlikely. Larger cities are struggling with the challenges of underutilized office spaces in downtown areas. Some anticipate a potential economic decline due to reduced foot traffic, while others are more optimistic, citing cities’ historical adaptability. To revitalize city centers, repurposing vacant office buildings, particularly into residential spaces, is pivotal. Emerging solutions include the promotion of “third places” and regulatory reforms to reshape urban environments. This transition will be challenging given its economic and infrastructural implications.

An Artificial Boom. The emergence of consumer AI programs like Google’s Bard and OpenAI’s ChatGPT has propelled artificial intelligence (AI) into the real estate industry. These programs represent “generative AI,” with the ability to mimic human intelligence by analyzing data patterns and making predictions. While AI’s full potential in commercial real estate remains untapped, early applications focus on automating mundane tasks, and as the technology matures, it is poised to revolutionize various aspects of the industry. AI’s impact on employment is multifaceted, with the potential to boost productivity, create jobs, and spur economic growth, while also raising concerns about job displacement in white-collar roles. AI firms are driving demand for innovative office spaces in tech hubs, underlining the dynamic interplay between AI and the real estate sector.

Now in its 45^th year, Emerging Trends in Real Estate®, undertaken jointly by PwC and ULI, is one of the most highly regarded annual industry outlooks for the real estate and land use industry. It features proprietary data and insights from more than 2,000 leading real estate industry experts, exploring shifts post-pandemic and analyzing both U.S. and Canadian markets.

About ULI Austin:

The Urban Land Institute (ULI) is a member-led organization shaping the future of the built environment for transformative impact in communities worldwide. ULI is a network of people in every profession and sector in real estate development and land use from all over the world and in every career stage. While global in scope, ULI is local in impact through sharing knowledge and making connections. The Austin District Council was founded in 1994 and now includes over 1100 members. Our members are involved in all aspects of the development and city planning process – private, public, and nonprofit. For more information, visit Austin.ULI.org.

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