As the commercial real estate industry faces uncertainty, the influence of inflation and interest rates is the leading concern this year according to the article, “The Top Ten Issues Affecting Commercial Real Estate” by the Commercial Real Estate Counselors. The Federal Reserve has undertaken aggressive monetary actions to tame inflation. Any action sufficient to temper wage and price growth will surely cool the economy. A slowing economy will reduce all types of real estate transactions, from development and construction to sales leasing and lending, impacting nearly all commercial real estate professionals.
Here are the top 10 issues affecting real estate this year:
1 INFLATION AND INTEREST RATES
The U.S. Federal Reserve is now singularly focused on inflation. Combined with sustained geopolitical risk and vanishing fiscal stimulus, tightened monetary policy will place upward pressure on cap rates and market volatility. The threats to continued economic growth remain the pandemic and policy error.
2 GEOPOLITICAL RISK
Today’s risks would be the war in Ukraine, additional production shutdowns due to elevated Covid infection rates in China, or local politics surrounding rent regulations and sustainable development and renovation requirements. These risks generally materialize as volatility due to uncertainty about the future impact on economies and financial markets.
3 HYBRID WORK
Covid accelerated trends that were already emerging, including remote work, online retail, and migration to warmer climates and tertiary urban markets. In the aftermath, government, businesses, and individuals now find they must adapt and evolve in light of this de-concentration of the workforce, while addressing the increasingly underutilized built environment concentrated in urban areas.
4 SUPPLY CHAIN
In the real estate sector everything from routine repairs and maintenance to property improvements to new construction were greatly impacted by the pandemic disruption. Delays in deliverables, rising costs, shortage of labor and lack of materials are influencing nearly all companies and their related real estate. As the world became more efficient and practiced just-in-time production, warehouses held less product to increase efficiencies. Once the need for those products stopped and production ceased due to a global pandemic, reserves were not prepared for the rush of demand as e-commerce erupted across the globe.
Energy conservation, including reform, sustainability, and renewable energy, has been an ongoing topic in real estate for over 50 years. What is different now are organizational commitments to environmental initiatives that have resulted in a sudden rise in demand for alternative energy. The result has been sustainability initiatives that address energy consumption, demand management, renewable energy, clean energy, and carbon reduction.
6 LABOR SHORTAGE
Covid benefit programs ended long ago, yet the worker shortages have only grown. The pandemic prompted many workers to reassess what type of work they want to do, under what conditions, and for what pay – or even whether to work at all. As a result, firms are finding it increasingly difficult to retain their workers who are quitting jobs in record numbers in search of better pay or opportunities.
Numerous factors contributed to the shortage of new supply in the last decade: land availability; increasing costs for land, labor, and materials; an increase in regulatory barriers, by way of fees, or longer and more complicated entitlement processes; and community opposition to development, also known as NIMBYism, particularly for larger apartment developments. Affordability continues to be a growing and widespread issue which has been amplified by recent double-digit price increases in both the owned and rented segments of the market.
Real estate owners and operators seek to plan, develop, and operate real estate assets in a regulatory environment that is largely free from rapidly changing regulatory compliance requirements and development standards. Changing regulations can add substantial time, risk, and cost to completing development projects and can also impose new and often burdensome operating restrictions on existing properties. The current regulatory environment at all levels of government—federal, state, and local—throughout the United States increasingly lacks the desired clarity, stability, durability, and predictability that is important to real estate owners and operators.
9 CYBER SECURITY
There are material risks for investors, owners, operators, and occupants. Risks include insurance gaps relating to nation-state attacks and for-profit ransomware, as well as from ill-equipped building managers and contractors. We are entering the perfect storm from decades of tech buildup, lack of skill sets, cultural ignorance, savvy bad actors, and a dependency on commercial real estate as critical infrastructure.
Government regulators around the world are increasingly passing laws, rules, and ordinances regarding the performance and disclosure of real estate assets according to environmental, social, and governance (ESG) criteria. These requirements are forcing real estate investors to measure and report their assets’ energy and water use, waste, carbon emissions, and climate change risks.
This article appeared in our company newsletter in December of 2022. Please click here to download the entire newsletter.