“Short and Shallow” Recession in 2023, Predicts ULI/PwC Report

A panel discussion of the ULI/PwC joint-release Emerging Trends in Real Estate^® 2023 United States and Canadareport discussed the right path forward for the commercial real estate industry.

Changes and challenges are coming, creating a wall of worry for everyone, according to Andy Warren, director, real estate research, at PwC.

Warren spoke during a general session at the 2022 ULI Fall Meeting in Dallas, summarizing the results in the newly released Emerging Trends publication.

He pointed to new and improving opportunities in life sciences, data centers, self-storage, and adaptive use that can “help to remove some of these bricks” in that wall of worry.

With environmental, social, and governance [ESG] reporting, Warren said, “The more we know about what to report, the more we know we’re doing the right thing.”

The session then welcomed an esteemed panel to discuss what trends they are seeing as well as following up on previous comments and predictions they made in years past at this event.

On stage were Mary Ludgin, head of global investment research, Heitman; Andy Cohen, co-CEO, Gensler; Onay Payne, managing director, real estate, Lafayette Square; Michael Levy, CEO, Crow Holdings; and moderator Byron Carlock, practice lead for real estate, PwC.

Ludgin opened by taking on the big thought on members’ minds. She said the country is not in a recession, “but I expect to be in one soon. The rising Federal Funds rate is not breaking inflation. The Fed said they want to get to 6 percent, and now they are only around 3.5 percent. We’re beginning to see layoffs.”

Return to Office More Important Than Ever

The return-to-office mentality and building design have also greatly affected the global workforce.

Cohen said that design improvements for the return to office mean working toward “making it a destination and not an obligation. Workspace can become an experience multiplier.”

He said it plays an important role as business gets back to having influence over coaching and mentoring.

“We’re seeing that mentoring and coaching fell by 50 percent during the pandemic,” he said. “To think, a company that had 3,000 hires in that time, only half had those benefits. Employees want to return to have that interaction.

“No longer are you going to find rows and rows of desks. We’re creating variable interaction settings like living-room designs and cafés that encourage gathering. It’s got to be ‘we’ space, not ‘me’ space.”

Payne said that Lafayette Square is being “very defined and intentional about how we are building culture and nurturing our talent.”

Inequity Plaguing U.S. Prosperity

To address commercial real estate’s lacking reflection of the country’s population, Payne said that her firm’s workforce goal is 50 percent women and 50 percent people of color.

“We also thrive by giving our employees a sense of autonomy,” she said.

Payne said she sees inequity increasing throughout the United States.

“We need to increase social-economic mobility opportunities,” she said. “Today, children are less likely to be more successful than their parents economically. Dallas is a great example, where access to food, access to health care, and opportunities for mobility are not equitable.”

To help reverse these trends, Payne said that “we now have the metadata available that can show us how to [get better]. Statistics are not showing improvement, but today we’re seeing more commitments from firms and governments.”

Dollars put toward impact-oriented funds have increased in the past year from $150 billion to $250 billion, Carlock said.

“Pension funds, regulators, and company talent are demanding that companies think about improving social-economic mobility,” Payne said.

Finding Investment Opportunities

Carlock said that today there is the largest amount of dry powder ready to be deployed going into this downturn.

Levy said that there are solid opportunities in industrial and multifamily. “We all know that, but we’re seeing a greater focus on sustainability, housing affordability, and capital market volatility.

“Construction lending on attractive terms is dwindling, but this will come out as a positive in the future,” he said.

Ludgin said she is looking for contrarian plays such as self-storage.

“It’s not recession-proof, but it tends to bounce back faster than other sectors,” she said. “Medical office continues to be appealing given the country’s growing health care needs. We’re also looking to Europe, which is quite beaten down.

“There, seniors’ housing is a great opportunity. In the U.K., residents’ bathrooms are often located down the hall. In Germany, there are a lot of double-occupancy living units. A dagger is falling—don’t catch it, but be ready for it.”

The Role Proptech Is Playing

Property technology (proptech) became an $18 billion industry last year, Carlock pointed out.

When asked for examples of the role it is playing, Payne said that she finds institutional reporting to be a highly manual process. “We’re seeing how technology is helping us with this.”

Cohen said that smart buildings are greatly improving the resident experience.

“Cell phones are becoming residents’ concierge service,” he said. “Sensors are playing a bigger role in how residents live and how operators can be more efficient and predictive. Properties that take advantage of smart technology will be the big winners.”

Levy said that companies can struggle with garbage in, garbage out.

“Tech solutions are out there, but so many fail,” he said. “We’re seeing that a human element to this is what is making a difference.”

More Emerging Trends:

• Global Emerging Trends: Survey Shows Increased Short- and Long-Term Uncertainty for Real Estate

• Emerging Trends in Real Estate^® 2022: Flexibility, Convenience Will Shape the Next Decade

• A Year of Acceleration, Experts Say Regarding Emerging Trends in Real Estate® 2021

• Research Reports on ULI Knowledge Finder