Political Unrest Tops List of RE Risks

Real estate is facing many risks in 2024 with none more important than “political unrest/global economic health,” according to a new report from The Counselors of Real Estate (TCRE) that lists its top 10 concerns.

According to the 1,000-member organization, the industry faces an “extraordinary era of unpredictability.”

Following political unrest/global economic health on the list of 10 are “office occupancy and valuations,” “the housing shortage,” and “artificial intelligence (AI).”

“This past year has been challenging for some and opportunistic for others as the economy, office market and innovation continue to evolve and impact the market,” William McCarthy, CRE®, global chair of The Counselors of Real Estate, said in prepared remarks. “Additionally, the housing shortage and infrastructure issues continue to cause disruption.”

“This next year will be crucial to real estate with the upcoming election at the local, regional, and national level,” said McCarthy. “[We must now] navigate these disruptions with a purpose for developing solutions and a better understanding of how the issues may impact and change the many professional disciplines in commercial real estate.”

Additionally, on the heels of major bank failures, there is concern about weakness in the banking sector that could be compounded by CRE loan defaults. Loan delinquencies are now higher than they were at the start of the pandemic, and the expectation is that there are more defaults coming, especially in the office sector.

“Banks hold a lot of those loans on their balance sheets, and the effects of that bad debt are going to ripple through the broader market,” McCarthy said.

However, depending on where you sit in this market, “the next year could be extraordinarily difficult, or you could have tremendous opportunities.”

1. Political Unrest & Global Economic Health: “Geopolitical conflicts are rife with potential unintended consequences for real estate,” McCarthy tells GlobeSt.com.

“Three dimensions will need constant evaluation: duration, depth, and contagion. The longer hostilities persist, the more negative the consequences for investors.

“The Post-COVID economic rebound is inherently fragile and stressed, and the outlook for slow growth through the 2020s was the most probable path forward prior to the conflict in Ukraine and now the Middle East.

However, McCarthy said, the additional disruptions have raised the odds of a recession, and that’s not a good environment for recovering real estate. Monitoring the depth of a possible contraction should be on everyone’s radar.

“We have historically seen a tinderbox effect when military hostility occurs. Escalation and expansion represent further economic risks affecting investment markets, including real estate. Without speculating about when and how much contagion might occur, it would be foolish to dismiss its possibility and not prepare for the impact.

Here is the rest of the list with edited comments from TCRE.

2. Return to the Office? Occupiers, Obsolescence, and Devaluation – The future of what hybrid work looks like is still playing out with themes of flexibility, agility, productivity, and space reduction.

3. Global Housing Shortage – People need to live somewhere. It’s a basic necessity, and frankly, a simple concept that drives significant investment into all types of for-sale and for-rent residential real estate. Solving the nation’s housing shortage is not so simple.

4. Artificial Intelligence – This powerful new technology comes at a time when there is an incredible need to measure things accurately. Access to real-time data is more and more critical to investors in a dynamic market as they decide what properties they want to acquire, exit, or hold.

5. Labor Shortage – Everyone, everywhere, in nearly every sector, is reporting that it is difficult to find skilled, willing, and able workers. Layering on top of the worker shortage are a series of trends that are changing requirements for both workers and employers.

6. Migration – Although that great migration shift has been fueled by the pandemic and remote work, the fundamental driver behind that shift is simple affordability.

7. Economy, Interest rates, and Inflation – Are we in Armageddon? During the past year, the Federal Reserve has engaged in the tightest cycle of raising rates that we’ve seen in decades. The recent era of “free money” ended abruptly. The federal funds rate is at its highest level since 2007, and owners, investors, and developers across the commercial real estate market are feeling the effects of higher capital costs.

8. Supply Chain, Logistics and U.S. Onshoring – Container ships that stacked up outside of the California coastline during the pandemic galvanized action to build more resilient, efficient supply chains, which for many, was underway.

9. Pricing Reset – Basic math tells us that if the cost of capital increases, cap rates and property values should decrease. However, the pricing reset the market has been waiting for has been slow to materialize given the freeze in the transaction market with few reliable comps.

10. Infrastructure – The problems – and staggering costs to repair and upgrade – aging infrastructure in the US are well documented. The topic of infrastructure tends to start with the American Society of Civil Engineers, which has been handing out sub-par grades in the C and D range for the past 20 years.