BDO: 6 Global Real Estate Trends to Watch in 2023
Economic uncertainty, political conflict and pandemic recovery have created significant challenges for the real estate industry in recent years. These trends have caused major shifts in consumer behavior and required landlords and property owners across the globe to remain agile as they mitigate risk and navigate changing customer demand. To maintain a competitive advantage in 2023, real estate companies must stay abreast of a rapidly changing market environment. Here are six global trends for developers, property owners and real estate investors to watch in 2023:
1. Global housing shortage
Populations around the globe are struggling with a housing shortage. The short supply and high demand for residential real estate should spell opportunity for landlords, however elevated construction costs are being passed down to consumers, making housing even less affordable. The global housing crisis has also placed additional strain on the construction industry, which is still managing a labor shortage, ongoing supply chain disruption and high material costs due to inflation. This year will likely see continued housing shortages and obstacles to housing construction, which could lead to legislation from national leaders in support of residential real estate development. We are already seeing legislation take shape in the United States, India, Scotland and Africa.
Developers can capitalize on this new legislation by identifying where government incentives align with their investment priorities. A feasibility analysis can help determine whether investing in incentive qualification is worth the incentive’s benefit. For example, developers planning to build in the U.S. next year could use a feasibility analysis to determine if their intended clean energy investments line up with available credits in the Inflation Reduction Act. Managing budgets with intention will help developers take advantage of policy changes and navigate the housing crisis successfully.
2. Shifting population demographics
Around the globe, the priorities for homeowners and renters are shifting as the world recovers from a pandemic and contends with significant population changes. Migration to cities in pursuit of increased access to amenities and job opportunities could cause a staggering rise in urban development, while aging populations could have outsized impacts on healthcare real estate trends in coming years.
Many working people today are looking to settle in large cities and surrounding towns to increase their access to job opportunities. We are even starting to see a push toward secondary cities as remote workers leave crowded downtown areas for surrounding towns to maintain access to urban spaces while taking advantage of the quieter aspects of the suburbs. In some places, the push toward secondary cities has also been encouraged by the pandemic, as many residents left population-dense areas to work from home in less crowded locations.
Additionally, as the world’s population gets older and aging citizens require increased medical care, we will likely see increased interest in healthcare real estate. From assisted living to medical retail or “medtail” spaces, healthcare real estate will become a priority as countries attempt to provide resources for elderly citizens. U.S. investment in ambulatory surgical centers (ASCs) is already on the rise, and the European market for ASCs is expected to rise to $3.45 billion by 2027, up from $920 million in 2022.
As residents’ demands develop and access to urban spaces or medical support becomes a growing necessity, property owners should evolve alongside them. Landlords that monitor consumer trends and adapt their properties to provide access to these amenities will have an edge over their competition in the coming year.
3. Debt-driven acquisitions
So far this year, almost $175 billion of global real estate credit is already distressed, according to Bloomberg. This could pose challenges for lenders and borrowers alike in the year ahead as they grapple with rising interest rates, uncertain property values and a possible recession. Some lenders are even advising that borrowers sell assets to avoid foreclosure. At the same time, companies with more cash on hand will be poised to leverage debt to acquire those assets. Furthermore, as debt matures in 2023, we could see increased M&A activity as larger firms offer a lifeline to struggling companies running low on capital.
Whether a business is looking to make acquisitions or attract potential buyers, it would be wise for developers and investors to prepare for an influx of M&A activity. By establishing transaction criteria, expectations and limitations ahead of time, real estate companies can position themselves to take advantage of opportunities with fewer obstacles in their way.
4. Flight to quality concept in office real estate
The pandemic changed the way we work, leaving many offices vacant. This has spurred companies to downsize and migrate toward Class A properties, often leaving lesser quality office properties’ rent rolls even less attractive. We are already seeing Class B and C properties converting to other uses, such as residential. These conversions could prove to be quite profitable given the current affordable housing shortage.
It remains to be seen if economic and labor forces in 2023 will continue to push offices’ flight to Class A properties. However, we will likely see a slowdown in office real estate investment, although individual market dynamics will vary by location. Owners of Class B and C properties will need to unlock property potential to mitigate downside risk.
5. Increased trend toward onshoring
Political conflict, ongoing supply chain disruptions and shifting regulatory conditions are prompting many manufacturers across the globe to relocate facilities closer to home, according to the International Institute of Management Development. This “onshoring” or “nearshoring” trend has impacted some of the world's most in-demand industrial hubs. Many countries have enacted legislation like the U.S.’s CHIPS for America Act to incentivize domestic production of materials and products that were once imported. The European Union, for example, introduced the EU Chips Act which went into effect in the first half of 2023.
In the year ahead, we will likely see declining interest in traditional manufacturing hubs like China and increasing demand for industrial real estate in areas bolstered by legislative incentives. Industrial real estate can expect increased interest in the year ahead as manufacturers look into shifting production to domestic locations.
In light of onshoring trends, developers and landlords of manufacturing facilities should focus on differentiators like access to talent and quality of facilities. Property owners should also work closely with local governments to capitalize on any local benefits that may exist in addition to federal incentives for domestic production.
6. Impact of “just-in-case" supply chain models
While supply chain disruptions might be easing, the shift toward online shopping continues, resulting in ongoing demand for warehouse space. The worldwide prevalence of e-commerce has also made industrial real estate—and particularly warehouse real estate—an attractive investment. As companies attempt to circumvent supply chain disruption, the switch from the “just-in-time" model of logistics to the “just-in-case" models mean companies need more warehouse space to bring supply closer to their consumers. In the year ahead, we expect industrial real estate to remain steady even as other asset classes face headwinds.
Developers and landlords should market their facilities according to tenants’ priorities for warehouse space. For example, end-to-end supply chain visibility requires investment in logistics technology. Properties that are located relatively close to common supply chain hubs which are already equipped to facilitate process automation in warehouses will be particularly attractive.
As the world contends with economic uncertainty and evolving global conflict, the real estate market faces a variety of challenges and obstacles. But market conditions also reflect a wide array of opportunities, with industrial real estate heating up and demand for residential real estate remaining high.