Economic experts and real estate veterans gathering for an Urban Land Institute-San Antonio event Jan. 10 said economic uncertainties will continue to cause more challenges than bright spots for the real estate industry in 2023.

ULI-San Antonio held its annual real estate outlook and emerging trends luncheon at the Tobin Center for the Performing Arts.

Guest luncheon speakers agreed uncertainties surrounding the Federal Reserve’s ongoing efforts to curb inflation, the employment rate, and trends regarding migration within the United States and remote work are among the major factors affecting residential and commercial development.

PricewaterhouseCoopers and ULI recently released their 2023 emerging trends report that reviews industry insiders’ outlook on real estate investment and development trends, real estate finance and capital markets, property sectors, metropolitan areas, and other real estate issues throughout the United States and Canada.

Analyst Leah Waldrum said many of the survey respondents expressed cautious optimism, a willingness to ride out downward trends in the real estate industry, and a plan to reposition their ventures for opportunities for stronger returns and sustained growth for the long run.

Waldrum said overall real estate fundamentals have changed, but not so much so that industry stakeholders—from lenders and investors to residential and commercial developers—cannot still look forward to better times, especially in Texas, which remains a hot real estate market.

“If you’re looking at the long view, it’s not time to panic yet,” she said.

According to Waldrum, some aspects of the real estate industry are returning to typical prepandemic patterns, while other aspects have shifted to a “new normal.”

Part of those shifts includes where people are moving for jobs or other opportunities. As such, several Sun Belt metropolitan areas, including San Antonio, have emerged as markets to watch regarding the strength of their local real estate opportunities, Waldrum said.

There are other factors to consider, Waldrum said, including the retail sector bouncing back from pandemic challenges and issues lingering in the hospitality industry.

Waldum said while online commerce saw a surge during the height of the pandemic and remains strong, more shoppers are coming back to brick-and-mortar retail businesses but not yet in significant numbers.

However, business travel rates may not return to prepandemic levels until the mid-2020s because many businesses and organizations find virtual meetings and conferences more efficient and cheaper, Waldrum said.

Waldrum also said the continued movement toward people working from home appears to be long term. She added according to various sources, fewer than half of workers actually come into an office on a given day in major markets nationwide.

“This maybe a permanent shift that’s a higher percentage than previously anticipated,” she said.

Because many workers still have not returned to working in an office full time and do not appear likely to return anytime soon, if at all, 10%-20% of office real estate stock nationwide may needed to repurposed to entirely removed from availability, Waldrum said.

Regarding housing, Waldum said housing affordability declined by 37%, and average rents rose more than 15% nationwide.

“It’s difficult seeing this trend reversing in 2023,” she added.

Waldrum said capital for financing new real estate projects or renovations to existing properties might be harder to secure in 2023 because of economic uncertainties, which may make things harder for homebuilders to bolster the amount of residential spaces across the country.

Waldrum said, however, things such as the passage of the Infrastructure Investment and Jobs Act and the Inflation Reduction Act of 2022 could help to boost factors such as climate resiliency in structures and increase the availability of jobs related to renewable energies.

This, in turn, could lure or keep luring people to key markets and result in better real estate prospects in those communities, Waldrum said.

“The next couple of years may be bumpy, but we will likely come out of the other side in an environment where the best operators differentiate themselves,” Waldrum said.

Ali Wolf, chief economist for Zonda, the largest new home construction data company in North America, said while overall wages have increased 5.3% and unemployment has dropped to 3.5% nationwide, price stability remains a big problem for the real estate industry.

“We haven’t seen enough progress here,” Wolf said, adding so long as the federal government tries to lower inflation to about 2% nationwide, the Federal Reserve will remain restrictive and interest rates will stay high.

This, Wolf said, will continue to affect residential and commercial developers. Increases in home sales have spurred more than 60% of Texas homebuilders to offer incentives to prospective homebuyers to get single-family homes off the market at a faster rate.

Wolf also said San Antonio is among a rising number of major U.S. metropolitan areas where people trying to sell their home keep dropping their prices in order to better entice prospective buyers.

“You can’t continue to sell your house at a price 5% or 10% higher than your neighbor’s house. The market has changed,” Wolf said.

Because of lingering affordability issues, more prospective homebuyers said they are inclined to move into smaller existing homes and improve those properties at rates cheaper than buying a home that is new to the market.

“This might be the golden decade for remodeling,” Wolf said.

Despite an overall trend of rising rental rates at multifamily properties, such rates seem to be stabilizing and even dropping in some areas, Wolf said. She added San Antonio’s multifamily rental market is 93% occupied, compared with 96% occupancy one year ago.

Wolf agreed with Waldrum that people and employers continuing to move to Texas will help to keep the state a favorable real estate market as a whole.

David Adelman, principal at local development firm AREA Real Estate, and JLL Capital Markets CEO Mark Gibson sat for a final discussion at the ULI-San Antonio luncheon. They agreed current unprecedented happenings in the economy do generally make for plenty of higher risks for real estate financiers these days.

“It’s unlikely we’ll go back to those times,” Gibson said of prepandemic factors and numbers that fueled a strong economy.

Gibson said developers can still find new capital, but given current interest rates, such numbers may not be favorable to them.

Gibson added even with current inflation, he feels confident the overall efforts to curb inflation are headed in the right direction, citing positive industry factors previously provided by Wolf and Waldrum.

Adelman said he feels more developers and financiers should take risks in 2023, despite current economic troubles.

“It’s all systems go at my shop,” Adelman said of his company’s current and planned developments, such as the recent opening of San Antonio’s first Voodoo Doughnut shop at one of AREA’s properties, 400 E. Houston St. in downtown.