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On balance, 2022 has been a good year for commercial real estate. S&P Global estimates transaction volumes will total $800 billion, with the industrial, retail, and multifamily asset classes driving activity. This year also saw less proven property types like cold storage, data center, and life sciences emerge as investment magnets.
However, like the season, the sector cooled off considerably once the summer ended. The U.S. economy has become increasingly unstable in recent months, which unnerved financiers and dampened consumer purchasing enthusiasm. The uncertainty of the marketplace has made long-term real estate visibility increasingly murky, but it’s still possible to forecast the progression of some recent industry movements.
Here’s a look at the three biggest trends that will shape the commercial real estate sector in 2023.
Economic Uncertainty Will Continue to be a Problem
Even ten months into 2022, economists still haven’t reached a consensus about whether or not the U.S. is in a recession. But most think economic uncertainty is having a negative impact on most sectors of industry, including commercial real estate. Consequently, most leaders in the space believe that the turmoil will hurt its financial performance in 2023.
Deloitte surveyed 450 executives representing real estate owners, and investors found that sustained high inflation will undercut earnings. Similarly, ULI Real Estate Economic Forecast predicted that America’s 2023 commercial real estate transaction volume would be $735 billion, down from $846 billion in 2021. The organization’s outlook also anticipates that America’s GDP growth will decline by 0.9% in 2023, which aligns with the increasingly popular view that a recession will happen sometime next year.
J.P. Morgan Chase also believes a recession is on the horizon and expects demand could fall across all asset classes. With real estate capital becoming more expensive, mortgaging and refinancing activity will slow. The Mortgage Brokerage Association noted that the change could reduce financing within the segment by 18% by the end of this year.
But that doesn’t mean there will be no opportunities within the sector. J.P. Morgan anticipates prospective homeowners will opt to rent as single-family residences have risen in price by 43.7% in the last two years. The drop in home buying interest and the undersupply of houses in America could drive demand for multifamily rental properties.
The Return to the Office Will Gain Momentum
In response to the coronavirus pandemic, businesses worldwide transitioned their workforces to function remotely to stay open amid social distancing mandates. Two years later, 26% of U.S. employees work from home, and many believe they have become more productive, healthier, and happier. However, a new trend kicked off to bring employees back to the office, and the data indicates the movement will gain momentum in 2023, which will have a meaningful impact on the office building segment.
Goldman Sachs and J.P. Morgan Chase, two of the world’s largest banks, recently recalled their teams to their physical workplaces. The financial services giants acted partly to protect their cultures; Goldman’s leadership believes in-house apprenticeship is key to its past and future success, and J.P. Morgan’s chief executive believes remote work undercuts productivity and idea generation.
That sentiment is not limited to the Big Apple’s financial sector; CEOs from many large corporations representing multiple industries want their teams back at the office. East Coast office building tenants have also become more interested in having their workers operate in-house this year.
Many U.S. employees are still committed to working remotely or on a hybrid schedule. If the return to the office trend emerged in 2021, it might not have gained momentum outside of one region. Inflation and unemployment rates have grown, so workers are incentivized to accommodate employers. As a result, demand for office space will intensify in 2023.
Green Building Development Will Become a Priority
This summer, the Biden administration signed the Inflation Reduction Act (IRA) into law, a piece of legislation that has big implications for the real estate sector. The IRA contains multiple incentives to stimulate environmentally friendly building projects in the U.S. to curb the sector’s significant contributions to the country’s overall carbon dioxide emissions. Given the state of the U.S. economy and the return to the office trend gaining momentum, green building development is on track to become a prominent trend in 2023.
With financing becoming more expensive and harder to get, developers need to make their projects as cost-effective as possible.
The IRA’s tax credits – for carbon sequestration and solar panel installation – can make renovation and ground-up projects financially viable. The new law also supports less capital-intensive green project development measures like using sustainable building materials and connected HVAC systems that use less energy. As inflation is making the entire development process more expensive, embracing eco-friendly policies gives developers a way to regain some control of their budgets.
The adoption of ESG standards has become a priority for America’s real estate investment trusts (REITs). Nareit recently revealed that 43% of U.S REITs made adherence to ESG policies a funding requirement in 2020, but the number rose to 59% in 2021. Consequently, competitive development firms will ensure there are no obstacles between their projects and every available source of capital in 2023.
In addition, green building development is gaining more popularity as a strategy to bring remote workers back to the office.
Many companies are looking to lure their staff back in-house by implementing open floor plans and adding amenities like gyms and meditation areas. Firms are also upgrading their ventilation systems to make employees feel safe in the post-COVID workplace, a best practice recommended by ESG experts. Similarly, office building tenants have been advised to make ESG-compliant changes like reducing the use of artificial lighting and installing LED bulbs as part of the return to the office push.
A recent BOMA survey found that 71% of building owners and managers want to invest in new health and safety improvements. And 67% of its respondents plan to enhance their on-site amenities. Notably, the survey’s participants expressed a hunger for sustainability despite the looming recession.
The perfect storm of federal support, growing industry support, and tenant preference will make green building development a major commercial real estate trend in 2023.
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Tag(s): Real Estate Development
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