"It plays more to the graphic nature of certain cohorts to choose to rent as opposed to own, mostly because of their desire to continue flexibility."
Byron Carlock Jr. who leads PwC’s U.S. Real Estate Practice is back on our podcast and takes us through PwC’s latest Emerging Trends in Real Estate Report. On this episode, we will cover the top 10 trends impacting real estate today.
About Byron Carlock, Jr.
Byron Carlock leads PwC’s U.S. Real Estate Practice. With 28 years of experience serving the industry, Byron brings extensive knowledge of the full real estate life cycle including matters ranging from strategic planning and property transaction advisory to capital formation, and business plan execution. In addition, he has expertise in governance, board matters, mergers and acquisitions and corporate conflict matters. Byron has experience advising major clients including corporate owners and users, developers, hospitality organizations, investors and REITs.
Emerging Trends in Real Estae 2022 Report, to download report click here
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Adam Hooper (00:03) Hello and welcome, I’m RealCrowd CEO Adam Hooper, and this is the Real Estate Investing For Your Future podcast. Here we explore the latest in commercial real estate trends, insights, and investment strategies that passive investors can use to build real estate portfolios that last.
Disclaimer (00:21) All opinions expressed by Adam, Tyler and podcast guests are solely their own opinions and do not reflect the opinion of real crowd. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions to gain a better understanding of the risks associated with commercial real estate investing. Please consult your advisors.
Adam Hooper (00:43) Our guest today is Byron Carlock, Jr. Who leads PwC’s US real estate practice. With 28 years of experience serving the industry. He brings an extensive knowledge of the full real estate life cycle ranging from strategic planning and property transaction advisory. To capital formation and business plan execution in today's conversation Byron takes us through PWCs latest emerging trends in real estate report. As we covered the top 10 trends impacting the real estate industry today, you'll hear me say a few times during the episode, to be sure to check those show notes for a link to the full report. I highly recommend you download that, have it available for reference. Since we only covered a very small portion of the information contained. With that, we hope you enjoy today's episode with Byron. Byron, thank you so much for joining us again. I was just chatting with Tyler. It's been almost a year to the day since we had you on last time to talk about the 2021 emerging trends report. So thank you again for spending some time with us and going over a very, just very in-depth report this year. It's a big one.
Byron Carlock (01:48) Thank you, Adam. Thank you, Tyler. Good to be back.
Adam Hooper (01:51) So for listeners that maybe didn't catch the episode last year. Again, we'll have links in the show notes. I will preface this whole conversation with absolutely take a minute, find the report, download it, have it ready to review and certainly take a read through it. We're going to go kind of quick to cover the high points today. There's a ton of information in there super relevant to the industry and investments. For folks that maybe missed that episode Byron tell us a little bit about PwC. Tell us about the report and the work that you all are doing with Urban Land Institute
Byron Carlock (02:19) Sure. Well, this is the 43rd year of the report and PwC and the Urban Land Institute jointly publish it and release it at the fall meeting of the ULI each year. It’s a terrific publication that captures the sentiment looking forward into the coming year, by nearly 2000 C-suite executives from the industry. We really look across the markets, the capital flows, the economic environment, the product type. And really look at where investment and development seems to be well-poised for 2022.
Adam Hooper (02:57) And in that we'll cover today. You've always pull out the top 10 themes. Those are always so insightful and interesting to run through.Before we get into that today, though, maybe tell us a little bit setting the stage for that conversation. What have you seen in terms of the economy and the real estate market? Generally, since we spoke last year and how things held up through 2021 with Delta Variant, and COVID kind of coming back into play still this uncertainty, how things maintain generally for you all?
Byron Carlock (03:28) Well, Adam, the pandemic was rife with fear at the beginning. And then people began to realize that working from home and working remotely was an option productivity stayed high. The supply demand fundamentals in the real estate industry were actually quite strong going into the pandemic, but for the transformation that was already happening in retail. So this is the first recession in recent history that wasn't in some way caused by supply demand imbalance in the real estate market. We weren't at fault and the opportunity to see a rebound in the V-shaped recovery that we're seeing right now is good for the industry. Although we did go through some really, I think, strong consternation, wondering how long it was going to last and whether or not business was going to make it through the pandemic. Of course, hospitality, restaurant related real estate really suffered. But if you look at the growth of e-commerce and the continued retail transformation, we began to see that the way we use real estate was going to change and the acceleration of that changed moved forward more quickly during the pandemic.
Adam Hooper (04:43) And a couple of things maybe to dig in on there. So this notion of the crisis that we went through was, again, we've talked about a lot on the show is an accelerant of some of these trends that were already under foot. Are there any big trends that you guys have seen that are maybe new because of this, that weren't just an accelerant or maybe an amplifier of some trends that are already in place. Anything that surprised you when looking at the report or just generally over the last 18 months?
Byron Carlock (05:11) Absolutely. Adam, I think flexibility is something that's going to be built into our schedules, our work-life balances for some time. And I think we're going to see remote working become part of the weekly routine. The survey suggests that the magic number is between two and a half and three days a week in the office and the remainder working remotely. So far, it looks as though productivity is remaining high. There are some downsides associated with that, with respect to mentoring and cultural inculcation, product innovation and discussion of a new products, white boarding brainstorming. So visitation to the office will become a new experience. That'll be more collaborative and social and mentoring and teaching. As opposed to heads down work. I think it's too early to put the nail in the coffin of the 8:30 to 5:30 workday. Because frankly, the workday has become 24/7 and you get to decide where and how you connect. But productivity seems to be surviving the transformation and remote work and flexibility seem to be here to stay for awhile.
Adam Hooper (06:25) Yeah, and I think that's something we've certainly seen. Just with the in we'll talk about in the themes is just the, the nature of, of how we use the space. Right. I think that's still yet to be determined. But that flexibility is one of those key themes that underscores a lot of your themes. You mentioned a V-shaped recovery there. What have you seen with transaction volume in, and again, obviously it's hard to paint such a broad picture, but asset class by asset class, notwithstanding generally, have you seen transactional volume tick up to pre COVID levels? How did that look? What did that dip look like through the crisis and where are we at today?
Byron Carlock (07:04) Transaction volume is spiked and pricing has definitely improved to pre pandemic levels. In industrial and multifamily, it's exceeded pre pandemic levels. Rents are back up to pre pandemic levels and above in New York, which people had predicted the death of New York. There's a beginning to be a boomerang to the urban areas. I think all three major service providers, you know, JLL, CBRE and Cushman are all saying transaction volume has spiked. It's too early to share 2021 numbers we're in the middle of it still, but there is a bit of panic in the transaction market right now that the tax law changes will be punitive to real estate. So, sellers that were on the fence are rushing. There's also been fear of discussion of 1031 exchange is going away. So, sellers are working to complete transactions in order to take advantage of that before or if it goes away. So yes, transaction volumes, high pricing is high, and the industry is rebounding nicely.
Adam Hooper (08:05) We'll touch on that towards the latter part of your themes. So maybe we can jump into those. I know we've got a lot to get through here in a relatively short time. So, let's start with this again, structure of the report. You guys cover Top 10 Themes. Always with some clever cheekiness to the names. So let's start, with the first one here. Flexibility and convenience drive the next decade. What we just talked about, right? Rethinking how we use the space beyond work? It goes to shopping to home to health. Tell us what you guys are thinking about there?
Byron Carlock (08:39) Yeah it's really the new lifestyle. Adam, I think everyone went into the pandemic trying remote communication wondering how it would work and it worked pretty well. How many of us even knew what Zooming and Google Meet were two years ago? Now it's part of our daily routine. And we're talking about mental health impact of zoom fatigue. And so it's going to be part of our work lives, but it's also going to allow us to, stop and go off screen to run to the grocery store or go to a doctor's appointment and get right on. I think most people I'm hearing say are working more, but they're working more efficiently. The saved time in commutes is offering more time for work productivity. But like I said, the visits to the office don't go away. This is not a matter of either or, it's both, and, and the both, is bridged by flexibility.
Adam Hooper (09:39) Yeah. And I think, again, that's something that just to me personally. I think office space has been with the most interesting areas of our industry to try to forecast what's going to happen to it, right? Again, how much of this remote is going to stay. As you mentioned the social, the collaborative aspect, the mentoring aspect of it, the new product development ideas. How do you maintain that? Just as our own company? Right? How do we maintain that culture of innovation and collaboration when you're remote based? Right. Does the office and become more of this nexus for collaborative activity and social activities? And how does that use look? How do you remain that and retain that flexibility to do that in remote environment? I think that's definitely an interesting one.
Byron Carlock (10:23) Less than we're human creatures, we want to interact. I think technology is allowing us to say that the punching the clock eight to 5:30 is no longer a phenomenon that has to be realistic and we can keep productivity up, but the need to be together for teaching learning and cultural inculcation is critical. The great resignation we're experiencing is largely because of the lack of stickiness to culture. As people have redefined their work-life balance issues. Many boomers decided to go ahead and leave the workplace earlier than planned. They looked at their lifestyles and said, you know what, I'm close enough to retirement. I'm going to go ahead and do it. And I think that was nearly half of the resignations we've seen over the last several months. And the others were folks that have decided to look at work differently. The idea of living where they want to live. Working how they want to work has changed the profile of the daily schedule. And that's probably here to stay for a while.
Adam Hooper (11:31) Yeah. And I think that's what you guys, you go into the report is it's not just the workplace. Right? It's how does that shift that maybe it was originated? The nexus was a change in the workplace, but that's forcing this change to homes, right? It's forcing the change to healthcare. It's forcing to change to shopping habits. It's forcing the change to all these different components that are related. are all of those combined as one interrelated aspect, or will some of those go back to normalcy? How are you thinking about that going forward?
Byron Carlock (12:06) So I'm seeing right now, it's a triangle of technology. People's strategy and real estate strategy circled by the company's operating strategy. And if you think of that pictorially, it's how we're all living. And the workforce environment matters, but we may use it differently. The technology that enables our productivity really matters and it affects how productive we can be on any given day. And then the people strategy side is if you don't have those, it affects your ability to retain, recruit number one, recruit and retain people because they are expecting. This kind of new world order as to how they interact with their employer and their workplace.
Adam Hooper (12:51) Yeah. And I think that is again the recruiting side of it, again, speaking from our position. We've added a fair number of people this year, it's an interesting balance of trying to figure out how do you describe that to potential candidates of. Are you remote? Are you going to have a return to the office? You know are we hiring across the country or globally? Very interesting conversations to be having for sure. That segues into the second theme. Which is work anywhere and office reset. Right? Extension of what we're talking about, right? The use of space. Yes. You're going to have maybe less square footage that a company needs to lease to house that same number of people. How they're going to use the space is going to be a higher square footage per employee. So how do those dynamics play into this overall demand for the office space market going forward.
Byron Carlock (13:49) So it's like a burden was lifted off of shoulders that people have to live in a urban area and find ways to commute into the city every day. And that burden allows people to now say, okay, I'm going to live a little further out. I can have a place that might be more affordable. And if I have to commute in two or three days a week, that's better than doing five or six. And that's the big reset. And you saw a huge surge in suburban housing sales. You saw some people are saying there's a rural renewal opportunity as people move to more remote and affordable places, which are very interesting because many of those had been abandoned. We had some third, fourth, fifth, and smaller rural cities shrinking for years, but had good infrastructure and might still be within drivable reach or trainable reach to an urban area. In addition to that, you had folks moved to resort locations, in mountain locations, and say, I'm just going to figure out how to do it from here. So it's been a migration. We're now watching the boomerang back and you're seeing, that happened in the cities that folks thought were going to be permanently damaged, but they're not. I think Chicago and San Francisco have some struggles that they'll be managing for some time. But New York, Northern Virginia, Maryland, DC, downtown DC, struggling, but Northern Virginia is hot as a pistol, Miami, LA are all coming back in their urban preeminence. You're also seeing some urban and rural growth that we've not seen in a while. And I think that's probably a good thing.
Adam Hooper (15:33) Yeah. And that was one of the big talking points early on was the relocation out of metros. Right. That was the big migration. The big cities were going to die, it seems like we're not, that is necessarily coming true. And also in the report talk about and maybe we can explore a little bit of contrast. You're not all jobs can be done from home, right? Not all jobs can afford this kind of remote environment. How are you seeing the nature of work, handle that? And in this division between folks that are able to work remote and folks that are not based on just the nature of the work.
Byron Carlock (16:12) So many of our clients are profiling. The work that their folks are doing to determine who needs to be in the office, full-time who can be remote all the time. And those that are on the continuum in between. And I think that is a fair way to analyze how to manage the space requirements and the load, and to think about how people gather in the office for the work that they do need to do there. And I think it gets it back to the point I made earlier that we're redefining how we use our space. Peak of the pandemic, 84% of the CFOs, we polled said they were going to shrink their footprint. And then by January of 2021 51% of them were saying, oops, we may need to expand because we over densified and now we need to spread out and we need to use our office differently because when people come in, they expect it to be a gathering place for important meetings and collaboration and social time and food time. And that's what people are doing. The enlightened users are adapting their space to this new gathering place, office country club, if you will, and then saying, when you need to do your heads down work, when you need to do your financial analysis, when you need to build an investment book, that's fine to do it from home. Go do your heads down, work there. But when you're in, we're going to make it worth your while to be in the office.
Adam Hooper (17:37) I'm assuming it's too early to try to get any metrics around square footage per employee in that new use of space.
Byron Carlock (17:46) It is, I think that vaccine spreads and the boosters are done and we calm down that we're not going to have a pandemic 3.0 or 4.0 or successive issues. The densification may not entirely go away, but I think people will by nature spread out, they won't be blowing out each other's birthday candles. I think the contact will be a little more remote. We'll be more conscious of sanitation in the office and air quality. I think some of those elements are going to stick with us for a while. But the reality is right now, we're still dealing with a sublease overhanging office. That's one of the larger we've seen since the savings and loan crisis. And so working through that sublease inventory will probably mean we won't see as much office construction in our major cities and supply and demand will rebalance. And in that rebalancing, some people will shrink and some will expand, but I don't think we'll over densify again. I don't think people are comfortable. There's a little bit of wariness about sitting in a cubicle with a hundred square foot footprint.
Adam Hooper (18:54) Yeah. And I think even just the nice part about being remote is having that focus time. Right. And understanding how this trend of open office space is incredibly distracting to focused work. I know that's been something I've appreciated during this time is having a quiet space where I can just focus and get some work done. I think we'll see more of a return to independent focus work, or even some private offices, right? Either from a health and exposure concern, or just the ability to focus and get some work done. Then again, more of a social component to the main use of the office space. So we kind of covered the third point there work anywhere, live anywhere. Let's go to the fourth point housing crisis, Redux, affordability both in, for sale and for rent product through the roof. You talk a little bit about in the report, let's all try to get on the same page and what is the actual problem here once and for all? What is a problem?
Byron Carlock (19:53) Well, we went into the pandemic about 7 million units under house. With many millennials and gen Z still living at home. So household formation has stalled. We are under supplied grossly. I think we may have a million, 400,000 units planned coming up. We still have a lot of housing to do and most of it is subject to increased costs, labor shortages, and supply chain slowdowns. So the housing issues don't appear to be going away anytime soon. However, home builders are highly motivated to satisfy the demand. And it's a bit of a developer's Nirvana right now with cheap debt, abundant equity and big demand, but we've got to really drill down on the way we entitle land, how zoning, how we think about neighborhood equality and I'm very intrigued by some of the cities like Detroit that are allowing three for one, and four for one, zoning on tear downs, tear down one unit and be able to build four town homes. I think we need to do more of that and rethink the way we plan and plot our cities. And that's a local municipality issue. There's a group in Washington called Up for Growth. That's trying to educate zoning officials and city planners on the benefits of overcoming nimbyism, not in my backyard, developments that they can really make neighborhoods more vibrant. And examples of neighborhood mixed use as opposed to gated communities and the opportunity to tear down dilapidated properties and build new as well as rethink lot size. It's going to take that for us to get the number of units that we need to quote the American dream of allowing for home ownership. But in saying that there's also a reduced focus on home ownership, as we look at the growth of the bill to rent communities. And that's playing into this resistance of a new demographic to not necessarily want to settle down in one place, have the lifestyle of home ownership, but not the responsibilities and obligations. And that's a growing industry that is now become obviously institutionally recognized. And our lives are changing in regard to that.
Adam Hooper (22:23) We're recording this right in the midst of Zillow, announcing that they're getting out of the I buyer market. Right. They're going to be trying to liquidate their 7,000 homes that they've acquired. Is that business model, is that done? I mean does that seem like a viable business model into your point of single-family foreign product becoming institutionalized. It has been getting more institutionalized over the years. Now we're going to have another big traunch of this, home pool, likely going to a big institutional buyer. Is that a long-term trend? Is that ever going to change? How does that affect the home ownership rate affordability and where we're trying to get to that? Ultimately solving this big supply demand imbalance of numbers of units.
Byron Carlock (23:07) Well it's getting headlines in most local publications where housing prices have spiked that as a percentage of homes sold, it's still a relatively small percentage, but I think it's a trend worth watching because it's a real trend. I think it plays more to the graphic nature of certain cohorts to choose to rent as opposed to own, mostly because of their desire to continue flexibility, which was our number one point today. They'll go somewhere and try living there. And if they like it, they might ultimately decide to stay and be a home buyer, but they liked the flexibility. And that's true. I think we've also got to think about overhauling our credit scoring system for home ownership and the way we look at qualifications. If we are going to rethink broadening the ability for the home-ownership opportunities to be available without creating problems that we did in the great financial crisis. And so, I think all of those issues are on the table, as we think about the future of home ownership.
Adam Hooper (24:11) Yeah. And in the report again, folks, make sure you download and take a read through. There's some interesting aspects to that. I think we had one of those that we're seeing. A lot of startups these days and some friends of ours have started some companies in the space to help with that initial purchase, right. That maybe you don't have the savings built up to afford that down payment. There's some really interesting programs out there now that will finance that for you essentially, you needed to become an equity holder in the home, or they'll work out some kind of a rent to own program. So there are some interesting developments from that side to help with the affordability issue on the housing side. Not necessarily solving the rental cost issue yet, but that's a whole other series of podcasts. I'm sure we could talk through. So going on to number five. Retrofitting cityscapes, how have cityscapes changed? Maybe you were just talking about that a little bit in terms of rethinking urban planning and more mixed use, maybe more pedestrian friendly, city environment. Where do you all see there?
Byron Carlock (25:08) I think the big news there is it's going to be accelerated as we think about what happens with the coming infrastructure bills. There'll be a rethinking of improvements as a result of fixing divert issues, as well as rethinking new opportunities for greenspace, re densification, rethinking neighborhood planning, expanding city footprints. I think that's all very exciting.
Adam Hooper (25:34) And do you see. Straddling, both what we were just talking about affordability and rethinking, maybe how cityscapes are planned or use going forward. Do you see more of an opportunity to solve the housing affordability issue through densification of more urban environments? Is it going to be more spread into suburban environments? Where do you see some of the opportunities within that as it relates to either urban or suburban.
Byron Carlock (26:00) Well, I think in the urban, I think we'll see the cores expand. One of the things I hear a lot of folks talking about in the DNI area is rethinking the way we've divided our cities racially to try to create more inclusive neighborhoods where interstates and roads have bifurcated elements of society. And I'm very excited about the fact that we are thinking about ways to make neighborhoods more inclusive. Through rethinking our infrastructure. And I think that's that will open up new neighborhoods. I'm from Dallas, Texas, and the I 30 has divided society for a very long time. And our current mayor is opening up a really great development, south about 30 that is hoping to bring population south the way we did taking population over the Trinity river into west Dallas in the last 10 years. And I think other cities are also thinking about those unnecessary divides that can be smoothed out and actually enlarge the urban core. In addition in the suburban areas, you're seeing many cities pop up. Alpharetta in Atlanta is a vibrant exurb core now Frisco in Dallas. And those exurban communities will become mini cities with still access to the urban core when needed. That's been true up and down the assailant lines of the Northeast for a long, long time. And I think high speed rail connections can make that happen more efficiently. As we think about connecting regions through rapid trasit. The Texas high speed rail commission is saying that's finally going to be a reality. The Orlando to Miami, improvements in the Northeast core, along the bestseller lines. I wouldn't be surprised if we see California reinvigorate discussions between San Francisco and LA. And so connectedness will make a difference between ex-urban and urban. And that's pretty exciting.
Adam Hooper (28:02) And you mentioned Alpharetta and Frisco, both in Georgia and Texas, little different land use, strategies there. And then what we see over here on the west coast. So how much of that do you think is going to be required too open up more of that, right? Like you said, kind of getting through some of the nimbyism, from top-down. What is reality, do you think of getting into a more flexible land use strategy going forward? Is that on the table now?
Byron Carlock (28:30) Well, that's why I was mentioning the group that's funding up for growth to educate that it's not a bad thing, because the reality is it's either car or trains, bicycle lanes or more exhaust. It’s not are we going to do it? It's kind of, we have to do it.
Adam Hooper (28:49) Yep. Which kind of gets into point number six, climate risks are on us. You have a stat in there. The property sector is responsible for up to 40% of the energy use and carbon emissions that’s a pretty big component of the global emissions spectrum there. Let's talk through ESG, right? I mean, that's just something that our industry has been maybe a little bit slower to take up than some other, the financial industries out there. What are you seeing in terms of how our industry is looking at ESG and how we're reacting to the contribution that the property industry is making towards these issues?
Byron Carlock (29:27) It took a huge spike in importance in this year survey up to 8,200. And so that's a big awakening and it's very important. I grew up in her Trammell Crow organization. When I was in the industry before I came over to PWC, Mr. Crow used to have us put bumper stickers on our cars that said, trees are the answer. And that was in the seventies and eighties. And it really is awakening that, greenspace can overcome the ravages of too much concrete. But we've gotta be focused on it. We've got to add more. We've got to put more solar into our planning technologies, allowing us to do that. But more importantly, the tenants and investors are requiring it. And so lead certification is really table stakes for investment consideration. And for many tenants, building owners are going to have to decide if their building is going to stay relevant or not. 80% of our office stock was built in the eighties or before. And some of those buildings will fall into irrelevance unless there are improved redeveloped. The sustainability resilience and impact of the carbon footprint are going to be very important for each building's consideration going forward.
Adam Hooper (30:42) So 80% of the office stock was built prior to the 1980’s?
Byron Carlock No in the eighties or before.
Adam Hooper (30:49) In the eighties or before. Okay. So that's a huge amount of our built environment that was constructed at a time where this was certainly not an issue. That’s going to be a phenomenal renovation, restoration project to get that much office stock-up to speed.
Byron Carlock (31:11) Well, I think it's also an opportunity. I think this next cycle, Adam is going to be all about development and redevelopment, and it's going to coincide with infrastructure spending infrastructure spending typically gives the industry a 1.2 to two times a multiplier. And so this is our cycle to rein vision and re-imagine our cities and make them better and stronger and more resilient from a climate perspective. But in that redevelopment, that'll be the acknowledged with it. Some buildings don’t make it more and need to be repurposed. So, some of those office buildings will become apartments, which are badly needed for the housing stock. Frankly, some of them may need to be demolished and started over to a higher and better use. That's typically the history of the real estate industry to evolve to highest and best.
Adam Hooper (31:58) Yeah, that's again, that's just a staggering number. fascinating. So, okay, I know we've only got you for a few more minutes here, so we can see if we can get through these 10 and maybe we'll get you back on for some of the investor sentiment issues a little bit later. So, after climate, we're going into prop tech and changing the way real estate is done, I will say. And in my seat being, almost nine years into this company, now it has been absolutely fascinating to see how the nature of prop tech and venture investments and just interest in the real estate industry has changed from 2012, 2013 to today. It's been absolutely fascinating to watch. So, I'm curious what you all are seeing in terms of the current state of prop tech and how that's changing the real estate space.
Byron Carlock (32:40) Well, real estate was a late adopter to technology, but now there's some $18 billion of new investments. Just this year into prop tech activities. Many of them relate to energy efficiency. Many of them relate to improving construction techniques, reducing waste, improving the supply chain, et cetera. But the reality is technology is making its headway into real estate in a big way with big investment. And it will make big gains. You think about the use of websites and leasing during the pandemic, really accelerated folks deciding where they were going to live with virtual tours and DocuSign contracts and virtual leasing, and that all the result of new Prop Tech innovations, property management systems have improved investor relations and bookkeeping systems have improved for the industry. So technology is making a big inroad and that will only continue.
Adam Hooper (33:35) Yeah. And I think the adoption and the access to data and being able to. I think our, again, our industry has been relatively slow to figure out how to leverage that data, right. How to make sense of that data, then apply it to the, to the operations. I think that's still the very early days of, of how to make sense of all that data, which is again, another huge area for growth and for efficiency creation in our industry. For sure. Number eight, one pandemic, divergent, outlooks. You’re talking about different sectors, different markets, different product types, different labor markets. What are you seeing with this one experience that we all went through collectively now, hopefully the other end of that has so many different paths coming out of it.
Byron Carlock (34:20) It does. I mean, it's changed our behaviors in many ways, as we've talked about. It's a real bifurcation in product preferences. I mean, you look at the difference between industry attractiveness of multi-family and industrial versus the slower recovery for a hospitality and the continued transformation in retail, our human interactions have changed our daily activities have changed them. If you're in the office, that's one set of behavioral priorities. If you're at home, you're on the screen most of the day. And the pandemic has affected each of us differently. I think we're going to be dealing with these behavioral and workforce changes for some time.
Adam Hooper (35:11) Okay, two more to go. Number nine, everyone wants in to your point before seeing transaction volume spike back up, there is a ton of money that's chasing real estate on the sidelines right now. Isn't there?
Byron Carlock (35:23) There is allocations by the institutions, the entry of more aggressive investment by high net worth and ultra high net worth family offices. The attractiveness of the U S from foreign investors. There is plenty of money on the equity side, the banks did not have problems during the pandemic. They were healthy. And so there's plenty of debt and there's a huge community of non-bank lenders that continue to offer liquidity to the space. And then, as I mentioned earlier, the demand is driving it. So the underwriting is not too hard to do with today's supply and demand dynamics. if you are looking to invest in the space, but allocations are up substantially. And the allocations to the alts sector in the wheel of allocations among institutions and funds, is up at least 400 basis points from 10% to 14, that’s mostly real estate and private equity and some are going up to 20 and some up to 22. And you realize that real estates, institutional attractiveness, it's got a permanent spot on the allocation wheel and those allocations are going up.
Adam Hooper (36:31) And there was a lot of capital that was raised early 2020. Even prior to that in pre pandemic that was getting ready for opportunistic buys in distress. And certainly, throughout the pandemic, we thought there was going to be this massive wave of distress. And you mentioned that in the report that the distress that really wasn't, it never really materialized. Are we through that? Are there still some risks of, of distress? Is it, has that turned the corner?
Byron Carlock (36:58) Where do you expect the distress to be? As you read the report, what came out at you as an area that might have distress?
Adam Hooper (37:07) Some of the retail recovering sectors but the obvious one being malls. Right. Are there some of the retail sectors that maybe could have another impact as that continues to shift to e-commerce that interplay, hospitality seems like it's on the rebound, right. But that's fairly fragile. You're depending on the health side of the crisis that we're coming through an office, right? There's still a huge uncertainty around office. I don't know that anybody can really forecast yet what that looks like. So, maybe those would be the three naturals, I guess I would turn to in terms of area of distress, certainly not multifamily, industrial, single family. Those are going to be pretty solid.
Byron Carlock (37:45) 100%, I think it's about segmentation and relevance. And so, if in the hospitality space, we saw the resurgence of resort hospitality really spike as people began to want to get out and especially to coastal resorts. Luxury hotels are doing quite well right now. I don't know if you've stayed in one recently, but rates are up substantially. The big problem for hospitality recovery, as well as the restaurant industry's recovery is labor. That's going to slow that recovery, sadly, select serve did pretty well in its rebound out of the pandemic. I think the slowest recovery will be the big convention centers as it takes a while to plan those large conferences and convince. On the retail side, though, we became more dependent on service retail and neighborhood retail and grocery anchored retail. And we chose whether we wanted to go in or have it delivered to us or pick it up curbside, but we didn't stop eating. In fact, a lot of us ate too much and a lot of us are trying to try to decide if we'll ever fit back into our suits and tux again.
Adam Hooper (38:48) There's always hope. There's always hope.
Byron Carlock (38:50) There's always hope. Yes. And so I think the relevance question and the segmentation question will drive, which ends of those product types recovered. Yeah. Or, have to be repurposed to redeveloped.
Adam Hooper (39:06) Right. Which again, opportunity there for sure. So, let's see if we can hit number 10, a new age of uncertainty with one of our close out questions, which is what keeps you up at night in regard to the real estate market.
Byron Carlock (39:19) I think what bothers me right now is this fear of inflation, whether it's temporary or long-term and the impact of labor and whether we're going to have enough people to build and enough people to staff, what is built. There's a real talent shortage in most areas of the industry, right now. And so I think talent and costs are the things that are worth watching. There's, always the black Swan of what happens with bad actors in cyber. What happens in China's approach to Taiwan and Willow black Swan internationally, or geopolitically slow us down again. But I think the real concerns right now are, elevated cost of labor.
Adam Hooper (40:03) And then to close it out. What's has you most optimistic about the real estate market? Looking forward to the next 2, 3, 4 quarters into 2022?
Byron Carlock (40:13) I am really excited about re-imagining our cities by combining the efforts of private investment infrastructure, investment, and philanthropic investments. As we really rethink the ways we want to make our cities better. I'm incredibly encouraged by the industry's response to being a catalyst for social change. As we deal with safety in the streets and security and quality of life issues. And re-imagining zoning and curing the healthcare deserts and retail deserts of our cities. As we try to find ways to create more affordable housing and workforce housing. I think the real estate industry is playing social arbitrary to betterment. Using a borrowing from him, Mr. Crow quote, again, from my earlier years, he used to say, people think we're in the real estate business. We're really as real estate practitioners, we're in the community betterment business. And I really see our industry rising to that task of being in the community betterment business.
Adam Hooper (41:19) I think that is a fantastic place to end the episode today, Byron, I really appreciate your time wanting to let the listeners know how they can learn more about this report and what the work that you guys are up to with PwC and ULI.
Byron Carlock (41:31) Thank you. You can go to the website, www.pwc.com and print out your own copy and go through it. It’s a pleasure to be with you, Adam. Thank you, both you and Tyler, and I'm happy to do this anytime.
Adam Hooper (41:44) Perfect. Well, we got the second half of the report we get to go through, so we'll get you on the docket going through investor sentiment and talking through a little bit more specifics about markets to watch and different asset classes. So you've been super gracious with your time Byron. Appreciate it again. And we'll catch ya, here before not too long.
Byron Carlock (42:01) Thank you so much. Take care.
Adam Hooper (42:02) All right, everyone. That's all we've got for today with Byron Carlock from PwC. Thank you again so much for coming on. Hope you enjoyed the episode as always. If you have any questions or comments, please send us a note to podcast@realcrowd.com. And with that, we'll catch you on the next one.
