The year 2023 is unfolding with unique challenges for commercial real estate companies and investors, but there is a silver lining. As 2023 gets underway, current CRE trends are reshaping the industry and forcing employers to be strategic about their hiring and expansion plans.
In the changing environment, it is critically important to understand where the commercial real estate is heading, what the current risks and challenges are, and how to leverage the challenges for greater benefit. Smart companies understand that changes in commercial real estate can be quite advantageous if these CRE trends are handled properly.
The Challenges Facing CRE
With inflation rates nearing 40-year highs and uncertainties regarding the future of office spaces and retail. Furthermore, there are supply chain issues to deal with and interest rates are increasing, prompting investors to be vigilant. Macro-economic forces, such as national and international geopolitical issues, market volatility, inflation, and interest rate hikes, may also impact commercial real estate.
Geopolitical issues, including the war in Ukraine and sanctions on Russia, have resulted in significant global economic implications that affect US markets. The resulting supply chain issues and sanctions are driving up food, shelter, and energy prices along with the headwinds of record-high inflation.
According to research by Deloitte, rent has gone up by 7.5% from 2021, and the owners’ equivalent rent of residences increased by 6.9% from the previous year, affecting affordable and workforce housing, as well as market-rate housing. Higher interest rates, which may negatively affect commercial real estate owners, may also cause potential homeowners to remain renters for longer, presenting an upside for multifamily owners and investors.
Some experts believe these challenges may lead to a mild to moderate recession this year, which would be more traditional than the pandemic-induced economic impact that mimicked that of a natural disaster on a national scale. Full recovery would take place over years, not months, and impact all asset classes. However, other experts predict a soft landing with only a mild cooldown.
The Opportunities CRE Can Leverage
Despite these challenges, there are some bright spots in the commercial real estate market. Analysis from JP Morgan reveals the unique opportunities each property type affords in the near future. Multifamily properties are currently the highest performing asset class, with multifamily vacancies at a five-year low as of the last half of 2022. While multifamily owners and those CRE companies who specialize in this space are not immune to cost increases, they can adjust rents annually, if not monthly, to account for market changes.
Demand for affordable and workforce housing continues to outstrip supply, so creative solutions to increase affordable housing, such as modular construction, mixed-income properties, and unique capital solutions, are needed.
As e-commerce continues to grow, the need for warehouses and industrial space increases. E-commerce accounts for less than 20% of retail sales, so there is room for growth. This sector is delivering record amounts of new warehouses, and investments in last-mile distribution complexes and drones are on the rise. However, industrial space may be challenged by longer leases, which only account for 2%–3% inflation.
Retail performance largely depends on location and retail category. For instance, neighborhood shopping centers in densely populated residential areas continue to perform well, and B- and C-class malls are being redeveloped into mixed-use properties that include apartments, restaurants, movie theaters, and experiential retail locations. Retail in city centers has been slow to bounce back due to the reduced number of people working in downtown offices.
The future of office buildings remains uncertain. However, none of the regions across the US have seen vacancy rates dip below their pre-pandemic Q4 2019 levels. In some cases, the right location with the right amenities, such as optimizing floor plans for collaboration, offering private outdoor space, and adding onsite services like childcare and catering, may bring employees back to the office.
CRE Hiring Trends Going Forward
Amidst the changing landscape of the workplace, the Commercial Real Estate (CRE) industry has the opportunity to adapt and thrive. While employee expectations have evolved since early 2020, companies should view these CRE trends as an opportunity to attract top talent by embracing the trend of remote or flex work.
In many parts of the world, talent markets remain fiercely competitive, with employees taking advantage of favorable job markets and still-rising wages. Additionally, the pandemic has sparked a shift in population as many people have relocated to areas that accommodate remote working arrangements. CRE companies should recognize the trend towards remote work as a permanent shift in the industry, which could help them attract and retain top talent.
By prioritizing the needs and expectations of employees, CRE leaders can create a more inclusive, diverse, and attractive work environment. Many respondents plan to focus on initiatives such as DE&I, health and wellness benefits, and regular remote work options. However, there is still a gap in prioritizing measures such as workplace redesigns, flexible schedules, and career growth opportunities that could help CRE firms further enhance the talent experience.