In 2022, spiking interest rates, inflation and a war in the Ukraine brought considerable change to commercial real estate and the U.S. economy overall. With interest rates and values eventually stabilizing, and all stakeholders rethinking the highest and best use of their property and capital, this year promises to be an interesting one, too. Here are 10 trends likely to shape the events and transactions of 2023.
In U.S. cities that zone commercial real estate, developers are prodding city councils to consider rezoning some districts to residential, said Shaun Pappas, a partner at Starr Associates LLP.
This trend has been underway for some time in Manhattan. Pappas believes it will become a greater movement as commercial vacancies increase and residential real estate continues being squeezed. With the housing market stifled by rising mortgage rates, creating more housing development opportunity could ease home prices.
Almost 40 percent of U.S. greenhouse gas emissions derive from building construction and operation, said Eve Picker, crowdfunding platform SmallChange.co founder & CEO. Developers and property managers must ensure building efficiency and sustainability, or risk being ignored by tenants and financiers alike.
“The new normal isn’t just about embracing ‘green,’ it’s about avoiding ‘red,’” Picker said. “If your operational or development costs start to show up in that color from a maintenance or climate risk standpoint, you’ve got no hope of being in the black.”
As companies look to rebound from the pandemic, tax credits and incentives should play an even more vital role in launching projects, said Nancy Cox, partner and real estate industry leader for Top 50 accounting firm The Bonadio Group. To maximize profits, CRE execs will need to consider Low-Income Housing Tax Credits, Qualified Opportunity Zones and Historic and Brownfield Tax Credits, she said.
In the coming year, commercial real estate buyers and sellers will encounter a more stable market likely to furnish buyers with greater options, said Tomas Sulichin, president of the commercial division at RelatedISG Realty. The market, he believes, will be characterized by a slight increase in inventory.
“In the past years, buyers and tenants have been at the hands of owners and landlords,” he said. “We will soon see a market stabilization. These are all good signs of a healthy real estate market, which is cyclical.”
Commercial real estate owners will aim to ink golden anchor tenants to long-term leases, Pappas said. “There’s a big push for long-term leases with significantly established tenants in restaurant spaces, technology or other types of ‘experience’ leasing, such as large fitness centers and spas,” he noted.
“I see commercial landlords looking for those types of tenants that are established and sacrificing significant rent or providing significant tenant allowances so they can lock in long-term leases.”
With high interest rates producing elevated cap rates and declining asset values, there will be insistence on higher returns on real estate investments than on alternatives providing less risk and more liquidity. “Illiquidity demands a premium, and that’s become more and more apparent as rates rise,” said Ran Eliasof, founder & managing partner of Northwind Group.
“We’ll see more transaction volume take place in 2023,” he continued. “Some lenders will force the hands of borrowers to make the transactions a reality, and there’ll be refis of deals done four years ago…not everyone will walk away happy.”
Prospects for office real estate will continue to be clouded, with occupancies lower and office tenants re-evaluating their needs in the face of remote work.
“It may get worse before it gets better; that trend will hold,” said Mitch Rosen, managing director and head of real estate for New York City-based Yieldstreet. “I think there’s somewhat a race to the bottom on price for some of the more inferior buildings. You’re not competing anymore on what the tenants are looking for. You’re competing on dollars. There are tenants for that appeal, but not high enough quality or quantity.”
The pandemic deepened economic pressures and social inequalities existing before COVID-19, leading Americans to seek greater access to amenities, activities or job opportunities nearer their homes.
“The idea of the 15-minute city, where you can do all things you need to do within 15 minutes, has taken off since the pandemic,” said Karin Brandt, founder & CEO of coUrbanize, a community engagement platform for real estate development.
ESG’s impact on real estate will be reflected in an increase in brownfield cleanups. In New York State, for example, the Brownfield Cleanup Program incentivizes the remediation and redevelopment of eligible contaminated properties by letting taxpayers reduce their taxable income by the cost of eligible cleanup expenses in the year they’re incurred.
“The credit is for between 22 and 50 percent of qualified remediation project costs and/or 10 to 22 percent of eligible construction costs,” Cox explained. “The credit percentage varies based on the version of the program the project qualifies for and the level of contamination.”
The credit can be claimed for various time lengths depending on credit component following the issuance of a certificate of completion by the New York State Department of Environmental Conservation.
Some forget, Rosen said, that there is still plenty of dry powder in real estate that will need to be invested in the next 24 months, referring to the “tens and hundreds of billions” raised in 2021 and 2022.
“It will be a flight to quality, better assets, better markets,” he said. “If you own superior assets the liquidity should be better than in tertiary markets and poorer assets. A rising tide lifts all ships. The first to see that investment will be the better-quality assets.”
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