A ‘magic season’ for development & redevelopment in real estate: Expert

Byron Carlock, PwC’s U.S. Real Estate Practice Leader, joins Yahoo Finance to discuss emerging trends in the real estate market and housing affordability.

Video Transcript

- We all know the real estate industry has been one of the pillars of our economic recovery. But the question is, for how much longer? We've got record prices and rising interest rates on the horizon from the Federal Reserve. They're just some of the risks to the industry.

Here to discuss emerging trends in the commercial real estate market is Byron Carlock, PwC's US real estate practice leader. Byron, good to have you here. I was looking through some of the findings. And I want to begin with office space because we know out of the pandemic-- means more and more people are going to be working from home. What is the appetite like right now for commercial real estate space?

BYRON CARLOCK: Well, so in the report, 73% said they would either be shedding space or adding space. So the answer is it's going to be both/and, not either/or. I do think that one of the results of the pandemic is going to be continued flexibility to allow associates to work from home, but still have ties to an office. And I think that's why some users of space will not be able to shed as much space as some of their CFOs might like. Many of them overdensified and will actually need more space as they spread out.

But I think more importantly, they'll be changing the way they use office to increase collaborative space, social time in the office. A visit to the office will become a more special occasion as opposed to a clock-punching expedition because work that can be done from home will be allowed to be done from home. But there will needs to bring people in for mentoring and teaching, cooperation, brainstorming, whiteboarding, business planning, product introductions. The office is not going away.

- Talk to me about location-- location, location, location, right? That's what we always hear about in the real estate industry. Have you seen a shift in where businesses are opening up or moving their spaces to?

BYRON CARLOCK: That's a great question. Yes, there's been a big migration. I think the most important that is obvious is the migration to the "smile" Southern states and the tax-friendly jurisdictions, as we see continued growth in Tennessee, Texas, Utah, Florida, and the exoduses from New York, Chicago, San Francisco, and, to a lesser extent, DC and LA. So yes, that is happening.

It seems that the bulk of it is associated with corporate relocation to tax-friendlier domiciles. But then personally, people have moved away from certain urban areas in search of affordability given the ability to work from home for a longer period of time.

- That makes sense. Talk to me a little bit about investment in real estate right now. Where are investors seeing opportunity? And has it changed pre-COVID to where we are at this moment?

BYRON CARLOCK: Great question. And this year's sentiment was very optimistic. In fact, it was optimism that exceeded 2019. But it makes sense. This recession was not the fault of real estate. We were in the middle of a transformation in retail going into it, and it only accelerated.

So the growth in industrial needs and the growth in multifamily needs has accelerated. And developers have the opportunity to access plentiful debt, plentiful equity, and high demand. So it's really a magic season for development and redevelopment.

Meanwhile, stabilized properties continue to trade at very high prices and lower cap rates. Cap rates are the return that you get your first year of owning a property. So the demand for real estate has increased so that capital doesn't appear to see any slowdown anytime soon because there is a lot of demand to be satisfied.

- Mm-hmm. Talk to me a little bit about housing affordability not only in the commercial real estate space, but I know your survey touches on single-family homes as well. We know for a long time it's been arrested of tight inventory and higher prices, albeit lower interest rates helping to buttress things. But do you see the affordability issue getting any better for potential buyers?

BYRON CARLOCK: Affordability is a problem. And I think it's interesting to note that that's probably one of the reasons that people have moved further away from the urban areas to find affordable housing. But the bottom line is we need more housing.

The single-family renter population continues to grow. Renting is a preference over ownership in certain demographic cohorts. And so the renting allows them access to single-family lifestyle without the burden of care of the property and a mortgage or your property taxes and bearing the cost of a mortgage themselves for a longer term ownership because it also plays into the desire for continued flexibility.

But I think that workforce housing, affordable housing are only two of the social issues that the real estate industry is really getting its arms around to try to solve, as we also address issues around ESG and diversity and inclusion. And so I think one of the big takeaways from this year's report is the industry's desire to be a catalyst between government spending, philanthropic spending, real estate private capital, improving our cities, and dealing with some of these social issues.

- All right. Well, look, these are some great insights. Byron Carlock of PwC, thanks so much for stopping by today and breaking it down for us.

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