What’s Fueling Commercial Real Estate Development Recovery?

It isn't surprising that a global pandemic negatively affected the commercial real estate industry. 2020 saw a recession and abrupt halt to many ongoing projects as the world figured out how to move forward. Nearly two years after the shutdowns, commercial real estate is on the mend.  

According to CBRE's US Real Estate Market Outlook 2022, the recovery is generally in full swing, although some sectors are progressing faster than others. The pace of GDP growth will slow in 2022 after 2021's exceptionally high level but will remain above the long-term trend line for the US. Alongside low-interest rates, strong economic growth will provide highly supportive conditions for commercial real estate development projects.

Can we attribute this rapid turnaround to the industry learning to operate within pandemic restrictions? Or the societal impacts of the pandemic starting to lighten? A mix of the two? 

Although no industry professionals are complaining about the turnaround, it's worth investigating the rebound to get a sense of where real estate development is headed and uncover if we're genuinely on to greener pastures. 

Adapting to Life with COVID-19

Predictably, the more people get back to traditional living, the more stabilization the commercial real estate market has seen. More companies feel comfortable having employees in the office and there's generally less concern about going out and interacting with others. This newfound comfort has mainly stemmed from the improvements to healthcare for those who have caught the virus as well as vaccination efforts.

Further indicating a higher level of comfort in living with an ongoing pandemic, multifamily housing has largely recovered from the early days of the pandemic, with vacancies hitting 4.7% in the third quarter of last year, which is roughly the level we saw in 2019, according to JP Morgan. 

Although the course of the pandemic remains unpredictable, like the new variants as delta and omicron taught us, the severity of impact on society also appears to be reduced from the initial wave of the pandemic. The assumption moving into 2022 and beyond is that the impact of the pandemic will continue to wane. 

And while we’re seeing recovery due to fewer restrictions and normalcy resuming, we can't overlook the fact that normal now will be a little different than it was pre-pandemic. According to JP Morgan, office space still has an uncertain future as more employers and employees embrace a hybrid in-office, at-home workday approach. 

While that may make office space seem riskier, hybrid approaches still require office space investment. Even large tech companies that made 100% remote work promises have been investing in office space in major cities, signaling that offices will remain a part of the work experience. 

The State of the US Economy 

As the commercial real estate market recovers, so has the US economy. According to CBRE, in terms of GDP, the US has fully recovered from the pandemic-induced recession of 2020. CBRE expects GDP to expand by a historically strong 4.6% in 2022. With the Infrastructure Investment and Jobs Act and social spending proposals under consideration, we may see the growth exceeding 2022 growth forecasts.

Even when the omicron variant caused millions of workers to call out sick, a recent US jobs report showed that the job market recovery remained on track. According to the NY Times, employers added 467,000 jobs in January. The report was contrary to economists' projections, who expected the new variant to lead to a decline in jobs. It's a good test case for how the US may deal with any more COVID curveballs that may come in 2022.

And while signs are pointing to a stronger, stable economy in 2022, there are still negative effects that’ll linger from the past two years. JP Morgan notes to watch out for inflation interest rate hikes, labor shortages, and increased costs for construction materials. That being said, CBRE states that they do not foresee interest rates rising sharply enough to disrupt property markets.

A strong economy will only fuel the industry’s recovery as the year progresses. 

Policy Changes

As the government puts policy into place to aid economic recovery, commercial real estate stands to benefit. According to CBRE's US Real Estate Market Outlook 2022, the Infrastructure Investment and Jobs Act includes $550 billion on infrastructure spending over a ten-year period which is expected to boost commercial real estate this year and beyond.

Bisnow points out that the sector of commercial real estate that may see the most significant impact from the bill is industrial real estate. More extensive, better roads will be built to speed up the movement of packages, especially on the final leg of the e-commerce supply chain, which leads straight to consumers' doors. Improvements to ports will help prevent global logistical nightmares like we're currently experiencing due to the pandemic.

Updates to infrastructure mean one less expense to worry about during development as developers are usually on the hook to fix what's falling apart near their project. National Multifamily Housing Council Senior Vice President of Government Affairs, Cindy Chetti, explains to Bisnow that every dollar spent on the street grid, electric grid and water supply is one that developers don't have to pay themselves.

Technology Adoption

The narrative is well known at this point that when the pandemic hit, the commercial real estate industry, which has historically relied on legacy systems to manage projects and properties, struggled to adapt to the circumstances. Over the past two years, there's been a significant acceleration of PropTech adoption. Speaking with The Real Deal, CEO of RXR Realty Scott Rechler said, "Covid hits and the trend you thought was going to be a three, five, ten-year process accelerated overnight,"

Rechler, like many real estate experts, is convinced that commercial real estate technology will play a critical part in the commercial real estate industry's full recovery. Commercial property owners invested quite a bit into proptech over the past few years to help support health infrastructure, enhance sustainability and accommodate flexible leases and hybrid work models. But Rechler believes that the industry is only in the "second or third inning" of PropTech adoption,

2021 commercial real estate technology received $9.5 billion from investors and venture capital as of mid-November 2021 and as of August 2021, proptech M&A deals totaled more than $18 billion — on pace to easily surpass the $21.9 billion transacted last year.

Brad Griewe, co-founder of Fifth Wall, the largest venture capital firm focused on the global real estate industry, makes it clear to The Real Deal that "This record-breaking flow of capital into the category demonstrates that the real estate industry is embracing and deploying technology, and proptech is no longer a niche investment area," 

2022 is shaping up to be an exciting year for the commercial real estate industry as many of the factors caused by the pandemic are either waning, being actively solved for, or causing an old-fashioned industry to change for the better.  

Looking to see how technology can improve your firm's operations? The Ultimate Guide to Commercial Real Estate Technology will provide you with a birds-eye view of the different types of real estate technology available to help your team succeed before, during, and after you break ground on every new project. Download it here.