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CBRE recently published a dismaying long-term outlook for the commercial real estate market. The organization’s researchers believe record inflation, interest rate hikes, and an impending recession will lower asset values and diminish investment and leasing activity this year. The firm expects all property types will see a 5 to 7% value drop while funding volume will slide by 15% from 2021.
But its forecast isn’t all doom and gloom.
By the third quarter, inflation should decrease significantly, prompting the Federal Reserve to lower interest rates and make capital more accessible. CBRE also anticipates the 2023 recession will be far less severe than the 2008 financial crisis, meaning demand for commercial real estate could increase in 2024. Because of the asset class’s strong fundamentals, analysts believe the sector will enter a growth cycle that will endure through the 2030s.
However, capitalizing on the industry’s forthcoming transitions will require careful planning, precision analysis, and dynamic operational agility.
While gaining those advantages in a highly competitive marketplace might seem exceedingly complicated, Ernst & Young released a report in 2020 that dispels that notion. The firm believes real estate development teams can improve their workflows and project outcomes by implementing property technology (proptech) software. Moreover, because of recent major shifts in the industry, onboarding new solutions as quickly as possible has become more urgent.
Why Modern Proptech Software Is an Essential Tool for Development Firms
Advanced process automation solutions have significantly impacted several knowledge-based industries in the last decade. Researchers have found that artificial intelligence and data analytics tools enable teams to significantly cut costs, decrease risk, enhance flexibility, and accelerate workflows. Most importantly, these technologies can produce unique and meaningful insights from large datasets about potential business performance drivers and new revenue streams.
Unfortunately, real estate developers are unusually resistant to adopting modern proptech software despite its many benefits.
EY’s report reveals that the industry’s slowness in modernization isn’t due to disinterest. Almost 70% of organizations viewed applying new technology to their operations as a high priority in 2020. But only 61% had embraced one advanced solution back then, while 32% had onboard two tools to improve their competitiveness. Based on the consultancy’s data, uncertainty is the biggest contributor to the sector’s technological enablement gap.
Understandably, the cost is a big factor in developers’ hesitancy to upgrade their digital tools, with many decision-makers expressing concern about getting a worthwhile return on their investment. EY also found that 53% of senior leaders believe their teams lacked the skills to utilize proptech software. There’s also a pervasive belief in the industry that if their legacy programs still work, adopting new software isn’t necessary. Some executives worry that implementing new solutions would be overly time-consuming and potentially allow competitors to outpace them, even if better returns are possible.
While those concerns are reasonable, they reflect an outdated perspective.
Ultimately, EY’s researchers conclude that proptech software doesn’t just give teams an edge on the old-fashioned filing cabinet cowboys. When implemented correctly, it’s an essential tool for development teams because it can help lower costs, increase profitability, and refine the process of delivering real estate projects.
In the years since the publication of EY’s report, its determinations have proven correct as thousands of developers have embraced new technology solutions to maintain competitive relevancy. In addition, leading software platforms have become more sophisticated, adding robust software integrations that make onboarding fast and straightforward and daily usage easy and seamless.
In the modern landscape, proptech solutions offer other benefits; stability and growth amid unprecedented market conditions.
How Proptech Software Facilitates Real Estate Development in 2023 and Beyond
If there’s one thing that the last few years proved, real estate development is a fast-moving business. Because taking a project from conception to delivery can take years, it moves slower than some other industries. But the coronavirus pandemic, materials and labor shortages, geopolitical conflicts, and economic volatility have shaken its foundations. The sector’s established market cycles have been disrupted, its tried-and-true methodologies have become outmoded, and its demands for operation agility have skyrocketed.
After work-from-home became normalized in response to the pandemic, the office real estate sector went into a tailspin. Indeed, Kastle Systems declared in June 2020 that a 43% vacancy rate for workplace buildings across the country could be the “new normal.” Nevertheless, J.P. Morgan Chase and Goldman Sachs have recently poured billions into the segment because they see long-term value in the traditional office model.
The hotel segment saw a historic drop-off in activity following the COVID-19 outbreak before bouncing back in early 2022. The public’s long-suppressed desire to vacation drove the market’s annual income to an estimated $178 billion. But mounting consumer anxiety about the economy abruptly curtailed its recovery last fall. Though it has very different drives and risks, the industrial real estate market ran into similar ups and downs in the 2020s. The segment experienced record surges in sales volumes and rents thanks to a pandemic-related e-commerce boom. Unfortunately, the bubble burst this spring as recession anxiety provoked a significant decrease in consumer spending.
The multifamily segment saw a 99.1% jump in annual investment sales in the first six months of last year, only to fall by 89% in the second half. The market’s sudden instability created the most widespread negative leverage in the United States since the Great Recession. However, sky-high home mortgage rates and the rent-by-choice trend are slowly fueling the sector’s recovery.
On top of everything else, CBRE estimated construction costs rose 14.1% year-over-year in 2022 as opposed to the usual 2 to 4% yearly increase.
The confluence of Black Swan events in the early 2020s has affected commercial real estate in complicated ways. Established market cycles have become unpredictable, and traditionally reliable property types are no longer safe bets. Because of all that disruption, identifying opportunities, predicting future costs, and creating new project scenarios have become more complex and labor-intensive than ever.
It also means the traditional software tools commonly used in real estate development are no longer fit for purpose. Though still functional, they lack the capacity and capability to crunch millions of data points needed to facilitate successful project delivery. Charting a course through the contemporary real estate landscape requires fast, robust solutions that harness the power of A.I., automation, and analytics to eliminate guesswork, uncover opportunities, and predict cost overages.
Developers that previously got away with trusting their experience and instincts to navigate uncertain terrain can’t wait to modernize any longer. Several external events have increased the market’s complexity and the basic requirements for relevancy.
As EY’s analysts predicted, proptech would be the future of real estate development, and the future is now.
Want to learn more? Download our 2023 Project Manager Survey to find out why leads from across the country struggle with the technology enablement gap.
Tag(s): Real Estate Technology
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