Reflection on the Year 2023 in Real Estate
The year 2023 was marked by some notable developments in real estate that should set the stage for an intriguing 2024 and the years to come.
In the residential real estate sector, 2023 witnessed an increased sense of urgency to reevaluate existing zoning and land use regulations to grapple with the housing shortage crisis. In particular, New York City Mayor Adams’ proposal called the “City of Yes for Housing Opportunity” included city-wide zoning changes that could introduce 100,000 homes in the next 10 years.
As rent has skyrocketed to the dismay of many New York residents, this proposal would encourage mixed-use developments and affordable housing initiatives that could potentially provide some welcome relief. That said, this plan has seen criticism on both sides. Ultimately, a concerted effort to increase housing — in particular, affordable housing — is poised to continue into 2024 and into the near future.
In the commercial real estate sector, 2023 saw continued effort to salvage the office spaces that once dominated Manhattan’s real estate market by converting them into residential spaces. But this has seen many hurdles due to the costly nature of the conversions and higher interest rates than recent historical norms, as well as overly burdensome legalization requirements.
Notably, while there were attempts to resurrect the recently expired 421-a tax abatement for developers in some form or fashion, we have not seen anything material transpire due to lack of broad support.
However, this may be the year that we see real progress for new, incentive-based legislation due to a confluence of events, such as the ever-increasing shortage of affordable housing and the impending wave of mortgage maturities in 2025-2026, which would either require borrowers to either pay off the remaining balance or refinance their loans.
To that end, we have already witnessed some high-profile names “turn in the keys” to their commercial properties to lenders. Even so, a higher frequency of this trend would not produce a desirable outcome since it would create ripple effects and cause financial strain on an already delicate economy that’s dealing with the effects of inflation.
For this reason, lease renegotiations, remote work policies, and issues surrounding force majeure clauses continue to be key areas of legal concern, although, in our experience, it has become less so than in previous years as people are starting to adjust to a more normalized, post-pandemic world. In any case, in 2024, we expect more moderate responses should there be similar unforeseen events.
Meanwhile, although the Biden administration has proposed (though not yet passed) key changes to the recent 1031 exchange rules, it may be an initiative that the administration revisits, in some or fashion, down the line. Due to 2024 being an election year, it’s unlikely they will do so late in the term. But, if there is a second Biden term, it may be early on its agenda.
Finally, there continues to be an increasing emphasis on sustainable and environmentally conscious real estate practices. With climate change concerns gaining momentum globally, lawmakers and legal practitioners turned their attention to crafting regulations that promote energy efficiency, green building initiatives and the integration of eco-friendly technologies within real estate developments. This trend should continue for the foreseeable future.
Overall, the main question in 2024 is whether there will be political will to address the pressing housing issues. These issues affect everyone, whether you rent, buy or own real estate. At this point, it’s too early to tell, but there do seem to be clues that point to notable progress in 2024.
