The three most pressing areas of concern for the commercial real estate sector this year and looking ahead to 2023 are the effects of inflation and interest rates, geopolitical uncertainty and the impact of hybrid working, respectively, according to the latest Top Ten Issues Affecting Real Estate. report of Real Estate Advisors.
The group noted that “the real estate industry is facing an extraordinary era of unpredictability”.
Marilee Utter, the group’s global chairman, added in a prepared statement that “(T)his past year has been both dynamic and turbulent for the property industry. But now we are seeing the longer-term effects of the pandemic on housing,” along with inflation levels and interest rates at their highest levels in 40 years.
In the report’s section on inflation and interest rates, Professor Timothy Savage, Ph.D., of the New York University Schack Institute of Real Estate, noted that “the macroeconomic signals are decidedly mixed.” Ongoing stock market volatility is a concern, but on the other hand, April saw a solid increase and job growth remains strong.
Despite concerns about a recession, Savage concludes that “a recession is unlikely in the near term. The immediate economic threats remain the ongoing pandemic supply chain issues and policy mistakes.
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Geopolitical risks for real estate range from war in Ukraine to COVID infection rates in China causing production shutdowns there, wrote Constantine “Tino” Korologos, of New York University Schack Institute of Real Estate, who is also director of Leonidas Partners LLC. He noted, for example, that Ukraine and Russia jointly export 30% of the world’s wheat supply and are also major exporters of key fertilizer ingredients.
Remote work is here to stay, pushed by the pandemic, which has also accelerated trends towards online retail, wrote Cassandra Francis, director of KARIATIDSChicago-based strategic planning, real estate and construction consultants.
More than that, however, and alongside the Great Resignation, we are seeing great decentralization as remote workers seek lower housing costs and other benefits away from major metropolitan areas.
The fallout, Francis notes, is potentially immense, citing a recent study by Colombia University and NYUwhich estimates a 32% drop in the value of office buildings in the United States in 2020 due to hybrid working.
She proposes that “collaboration between asset owners and managers and employers… will be crucial in providing flexibility in the game of musical chairs that is underway in the real estate sectors. A company’s ability to expand, contract, sublet and terminate prematurely, while quickly offering more attractive flexible/shared workspaces, can ultimately be correlated with its ability to survive….
Lots of worries
The seven concerns that make up the rest of this year’s top 10 are:
4) Supply chain disruption, which will continue to drive up costs and lead to a realignment of supply chain and warehousing strategies.
5) Energy concerns, including rising insurance costs and increased investment in onsite energy resilience.
6) Labor shortage constraints, which indirectly impact real estate markets, as occupiers can rent less space if they lack workers to run their business.
7) The great housing imbalance, as markets that have been unable to provide housing at lower cost have pushed renters into the suburbs.
8) Regulatory uncertainty, driven by the emerging conflict between preventive state legislation and local control over land use.
9) Cyber Security Disruptions.
10) ESG requirements force change and drive innovation in the design, development and construction of new buildings, as well as the renovation of existing stock.
In April, Intelligent Buildings LLC Advisor Member Tom Shircliff discussed why commercial buildings in the United States needed better protection against growing international cybersecurity threats.
Membership of The Counselors of Real Estate is selective and by invitation, although commercial real estate practitioners with 10 years of proven experience may apply. Worldwide, only 1,000 professionals hold the CRE designation.
Read the full report by Real Estate Advisors.