The Hurdles Facing Real Estate Asset Classes in 2022

Coming off the heels of an excellent quarter for real estate investment, 2022 is shaping up to be a good year for development teams. 

In Manhattan alone, large investment sales added up to $6.2B in Q4 2021, the highest volume since the third quarter of 2008, according to Bisnow. There’s been plenty of talk about the market recovery in New York, and last quarter might signal ’that it’s here to stay.

But with any year, there are obstacles on the horizon that development teams should be aware of and plan for. Bisnow notes that fears of potential regulatory changes may have inflated the market’s explosive growth.

Is Multifamily Still a Safe Bet?

Multifamily housing faced a setback when the pandemic hit. Suddenly, living in a building with hundreds of other residents didn’t seem like such a good idea and many residents started to flock to more rural locations to escape dense city living. But as we move further away from the initial phase of the pandemic, multifamily has seen a rebound. 

According to CBRE’s 2022 Real Estate Market Outlook, multifamily housing saw around $213 billion invested into the space last year. CBRE expects at least a 10 percent increase in investment for multifamily housing this year, leading to $234 billion or more in investments. 

The excellent market conditions have some concerned about a possible, looming collapse. As David Perlman, managing director of capital markets at Thorofare Capital, tells Commercial Observer, “How much can rates go down and how much can pricing go up before you have a retreat in that space?” Perlman’s concerns stem from an aggressive market with investors chasing deals that aren’t as stable as you’d see in more traditional market conditions. 

A Partner at Bridgeton Capital, Solomon Garber’s concerns stem from the idea that more and more multifamily deals allow for little to no margin for error. He tells Commercial Observer that investors rely on ideal capital markets execution, with properties “priced to perfection.” There’s a naïve expectation that owners will operate properties more efficiently than the former owners or that property taxes will never go up.

On top of what industry professionals believe could happen, supply chain shortages, inflation, and interest rate spikes will all still impact multifamily developments in 2022. 

The idea of a multifamily bubble is only speculation, and other industry professionals are pushing back against that argument. Discussing the speculation and multifamily growth with Commercial Observer, Ann Gray of Gray Real Estate Advisors stated, “If people were buying unleased buildings and looking to flip them without tenants, then we’d be looking at dangerous territory. But projects are leasing quickly. They are not offering incentives. Rents are going up….so there are a lot of reasons why multifamily is still very healthy.”

While speculation isn’t necessarily something to act on, it doesn't mean your development team can’t take measures to prepare if a less than ideal market situation were to arise.

Life Sciences Market Restrictions

Multifamily isn’t the only asset class on a hot streak starting the year. A report from Newmark said life science is “at the top of the list of secular growth sectors of the economy,” which will only continue to pull in new capital. 

Development teams looking to capitalize on the growth of the life sciences asset class may not see the project go off without a hitch as many cities don’t have the planning and zoning rules in place to support it. 

According to Bisnow, the development of labs requires complex approvals and abnormal property dimensions and requirements. For example, a building may need higher ceilings and complex HVAC systems to support a life sciences development, making these projects an expensive and risky venture. 

This, combined with strict local building codes and inexperienced local governments, adds to project delays and roadblocks. Developers need to be aware of the local situation in the markets where they see the potential. While there might be opportunities to build, it might not be as easy as it appears. 

On the flip side, cities are working to meet the demand before developers start looking elsewhere. “If you don’t have space for them to grow and stay, and they want to grow and stay, it’s just not going to happen,” said Biocom LA Executive Director Stephanie Hsieh to Bisnow. 

With a demand that’s never been higher, real estate development teams need to be aware that city regulations can derail an excellent opportunity. It’s worth keeping track of the cities taking steps to clear the way for demand or acknowledging that intense zoning and building laws are hindering economic growth. 

Meet Demand While Markets are Hot 

While life sciences demand isn’t going anywhere, finding a location that meets all the necessary regulatory requirements can be a challenge. When you do, your team needs to act on the opportunity. There’s a need for development teams to be agile so that they can break ground on quality opportunities as they arise. The same goes for multifamily housing, especially in New York which will see the end of the 421a tax exemption in June which provides tax credits and allows for more zoning square footage to multifamily developments. 

Any preplanning hiccup or delay may cost your team an excellent life sciences opportunity or raise the prices of your apartment building development. On top of the typical budget overruns that tend to occur in real estate development, these hurdles all add up to lower returns for investors. 

This is where technology built for real estate teams can come in and make an impact. Development teams that take advantage of proactive intelligence technology can synthesize their historical project performance to inform their planning and decision making. For example, if you’ve ever done a life science conversion, you already have an idea of the zoning requirements needed. You’ll be able to quickly identify that a hot location isn’t going to resolve their strict regulations anytime soon, allowing you to look into other markets whose laws are more in line with your previous projects. 

This is insight many other developers won’t have. They’ll start a project under the assumption that the city laws are being amended to meet development demand, but months later, they’ve lost out on several opportunities that would have made more sense if they simply had the data in front of them. 

Proactive intelligence technology like Northspyre helps you capture life science and multifamily demand. The technology platform built for real estate developers optimizes project delivery for ground-up developments or conversions to deliver projects on time and under budget. See how Northspyre helps you bring in more revenue while the multifamily and life sciences markets are still red hot.