DEVELOPERS SHOULD BREAK GROUND NOW WHILE CAPITAL IS CHEAP

By Lynn Pollack | February 01, 2022

Inflation is as high as it’s been in years, but that’s with respect to goods and labor.

Developers should break ground on new projects now, while the cost of capital remains low—despite rising inflation, according to one industry expert.

“The question my clients ask me almost every single day is, do I put the shovel in the ground today or do I wait a year from now when we might see lower inflation. The bottom line is it’s better to put the shovel in the ground today,” CBRE’s Spencer Levy told CNBC last week. “Yes, inflation is as high as it’s been in years, but that’s with respect to goods and labor. But the cost of capital is still relatively low.”

Levy predicts that demand will keep pace and shortages in housing and industrial will persist into the next year, and says “the cost of capital is lower today than it will be a year from now.”

When asked if we’re approaching bubble territory, Levy said he isn’t worried.

“One of the great things about the commercial real estate industry is that it’s somewhat self-regulating with the respect to the type of construction you’re seeing, he told CNBC most construction is in high-demand, low-supply property types like industrial and multifamily, not in sectors like office or retail.

“As a matter of fact, if you take a look at last year, we saw unbelievable rent growth in multifamily and industrial, the areas where we’re seeing the most construction,” he pointed out. And while that rent growth won’t continue at the same eye-popping levels we’ve seen as of late, Levy told CNBC he expects advanced growth in 2022 and beyond as long as rate hikes stay within the three- to five-hike band most experts are predicting.

“Long term, modestly rising interest rates and inflation has actually been good for commercial real estate, both for rents and for property values,” he said. But “if we’re wrong on these three, four, five rate hikes, and it’s much worse than that, then you should be concerned. But if it stays in that band it’s a very favorable environment for commercial real estate.”

In fact, Levy says that even if the 10-year Treasury goes up by 100 basis points, “that’s still an incredibly low cost of capital by any measure.”

Still, it is hard to ignore that headline inflation is up 7.1% from last year, the biggest uptick since 1982.

“The Fed looks a bit panicked,” CBRE’s Richard Barkham, Global Chief Economist and Global Head of Research, said last month. “At the moment, we’re at peak inflation and I suspect it will stay there for the first half of the year and then begin to ease. It should settle back in the 2 to 3 percent range by year’s end, which is still higher than the pre-pandemic norm of about 1 to 2 percent.”

Barkham says “three rate hikes this year should be enough,” noting that while the hikes will “unnerve” the stock market, strong corporate earnings will support them.

By Jeffrey J. Smith | November 17, 2021

Economic, social, and digital disruptions combine to force a change in how CRE is developed, financed, and used

As we turn the corner on 2021, hopes that we would be doing the same on COVID-19 have stalled. The Delta variant has clouded the near-term outlook as vaccination, masking, and social distancing requirements have impacted commercial work and gathering facilities. The commercial real estate (CRE) industry is positioned at the forefront of the recovery: Office employers are balancing productivity and safety; retailers face critical turning points in an evolving industry; residences are competing for tenancy amid shifting migration patterns and heightened affordability concerns. Meanwhile, companies face increasing demands to prioritize environmental, social, and governance (ESG) issues, aging technology infrastructures, a tightening labor market, and increasingly differentiated competition. How the CRE industry proceeds into early 2022 could set the foundation for its success over the next several years.

Here are the key findings from Deloitte’s 2022 commercial real estate outlook:

Despite some financial concerns and an evolving regulatory environment, optimism around fundamentals prevails. Eighty percent of respondents expect their institution’s revenues in 2022 to be slightly or significantly better than 2021 levels.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate. Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Many CRE firms are focusing on retrofitting properties and repurposing spaces for alternate uses to maximize value. However, only one-quarter of respondents say their companies are substantially increasing technology investments to bolster portfolio and asset management capabilities.

Sustainable properties are often key to a better tenant experience; building partnerships to provide new offerings to tenants can also enable real-estate-as-a-service (REaaS). Over three-fourths of respondents say their companies will likely expand partnerships with or invest in proptechs, which could help firms deploy the REaaS delivery model.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape. The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most CRE companies are in the early stages of addressing climate risk; respondents indicated sustainability concerns, and the need to address them were priorities in this year’s survey. But in the wake of the pandemic and community demands for more equitable playing fields, CRE leaders should also prioritize social issues and diversity, equity, and inclusion (DE&I) initiatives. The CRE industry has a long way to go to achieve equitable representation.

As the CRE industry develops long-term, return-to-work strategies, flexible working arrangements, organizational purpose, and demand for technology skills will shape the talent landscape.

The tight labor market is bringing workforce issues to the forefront, such as well-being, ESG, and adopting a more individualized approach to where work gets done (remote/office/hybrid). Our survey indicates CRE employees want their firms to be more purpose-driven.

Most firms continue to depend on legacy technology systems, which could hamper progress and their ability to innovate.

Eight in 10 respondents do not have a fully modernized core system that could easily incorporate emerging technologies.

Real Estate Industry Services