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The pandemic sent ripples of disruption throughout the real estate industry, and effectively turned markets on their heads. Now, as we reflect on what’s happened since the onset of Covid, it’s clear that change is still in the air. The way people live and work is undergoing a transformation. The effects of this transition will play out in the markets for years to come.
For a full picture, we must add in the recent economic fluctuations and rising interest rates. Inflation rates are the highest they’ve been in 40 years. Global influences, including the war in Ukraine, will impact prices on commodities such as food and fuel.
Here’s a look at what to be aware of in commercial real estate as we adapt to this new phase.
When the pandemic sent workers home, many discovered advantages in their new situations.
The trend is changing the landscape of professional real estate spaces. Prior to the pandemic, just 4 percent of jobs that pay at least $100,000 were carried out remotely, accordingly to research from The Ladders. Fast forward to today, and you’ll find 8 in 10 are working remotely at least some of the time. Just 2 in 10 can be found in-person all the time at work, according to a Gallup survey. With more people spending time at home, some residential markets have seen a boom.
While workers may connect more frequently from home, they aren’t shunning the office forever. In fact, some find respite in a desk at their employer. It gives them a chance to escape distractions at home. Thus, a growing number of workers are opting for hybrid arrangements. They work from home at times; other days they come to the office for meetings or to find focus.
Leaders and managers prefer hybrid work, according to research from Gallup. Seeing employees in person encourages team building and can boost organizational morale. Frequent office time gives supervisors the opportunity to instill and maintain the company’s culture.
Given this, some employers are seeking to create environments that attract employees. Expect to hear of collaborative spaces, catering services, exercise areas, and community or game rooms. These benefits may require redesigns within buildings, renovations, or structural changes.
This desire to promote amenities and wellness is causing many to lean into Class A buildings. These trophy properties may fare better than Class B and Class C. Outdated or older spaces might not have the capacity to meet the demands of today’s office workers.
The remote and hybrid trends mean that many companies don’t need the same amount of footage that they used before the pandemic. However, office buildings are often attached to long-term leases. Organizations could have months or years remaining in their contracts.
To adjust, some companies are consolidating. It’s not uncommon for offices to sublet spaces. When their leases expire, those with fewer space needs will look to downsize. We can expect less occupancy, with property owners searching for new ways to attract tenants.
Amid an uncertain economy, real estate leaders are divided when it comes to revenue expectations. According to a 2022 Deloitte survey of chief financial officers (CFOs) of major commercial real estate owners and investors, 40 percent predict an increase. Nearly half (48 percent) think revenues will decline in the coming year, and 12 percent are forecasting no change. These estimations denote a drop in confidence compared to earlier years. In 2021, 80 percent of CFOs expected revenue to increase in 2022.
Due to the hesitant forecast, more real estate leaders are looking for ways to lower costs. While only 6 percent of CFOs planned to make cuts in 2022, more than 30 percent aim to reduce expenses in 2023, per the Deloitte survey. This could impact operating plans during the coming months. Managers might be asked for ideas and solutions to lower the monthly costs of running facilities.
Some communities are looking for ways to turn unneeded office space into residential. However, the switch isn’t always immediate. Zoning codes might not allow for conversions. In New York City, efforts are underway to create 500,000 new residential units by 2030. To convert spaces, the zoning codes will need to be reworked.
Beyond this, some buildings simply don’t have floor plans that can convert to residential. They might not have proper light and air requirements. Some investors will wait until the price is right. When planning to cover the cost of a major conversion, they’ll need to find a number that fits into their business plan. If tax abatements surface, it could influence the decisions made regarding renovations.
Increased interest rates have affected transactions and deal volume in real estate. It’s becoming more expensive to borrow money and banks are growing conservative. In some markets, the value of buildings is declining. Owners may find they are upside down and unable to maintain their debt service payments.
As rates go up and values come down, investors will look for great buys. In 2022, commercial properties fell by 13 percent, according to Green Street data. Many buyers are pausing to see if the prices continue to drop. When figures hit a certain point, they’ll act. This may mean more instances of distressed property sales.
Well-informed investors will be seeking low-priced properties that can be repositioned. After the sale, this could mean renovations or modifications. During the project, new owners might be looking for ways to create efficiencies and streamline costs. Facility managers that have great ideas and insight to share could be viewed as a key team player.
James Nelson is Principal and Head of Avison Young’s Tri-State Investment Sales group in New York City. During his 25-year career, Nelson has sold more than 500 properties and loans totaling over $5 billion. Nelson is also a serial real estate investor and has launched two real estate funds with total capitalizations of over $350 million.
Rachel Hartman helps Fortune 500 companies and executives share their message. She has penned content for national and international publications, along with household name companies and global industry leaders. Her work can be seen in outlets such as U.S. News & World Report, where she is a weekly contributor.