10 Commercial Real Estate Market Trends and Forecasts to Watch in 2023 – Commercial Observer

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The annual Allen Matkins View From the Top brings together the West Region’s top commercial real estate surveyors, owners, investors, developers and brokers. Now in its 15th year, View From the Top remains a key source for market trends and forecasts. Here are this year’s best takeaways from this year’s CRE brain trust:

  1. The tailwinds are stronger than the headwinds for capital markets entering the next pricing cycle. According to Michael Van Konynenburg, Chairman of Eastdil Secured, although capital markets have been choppy, the positives outweigh the negatives in the current environment. With rising replacement costs, rising rents, a very strong labor market, strong balance sheets, limited over-indebtedness and high liquidity ($4.1 trillion on deposit at the Fed), commercial real estate is doing well. positioned for strong momentum in the second half of the year. Konynenburg recalls that historically, CRE behaves well in an environment of rising rates. But until FOMO starts to kick in, trades will tend to be more “tailor-made” placements.
  2. Return to work is not going away. There are a number of unforeseen challenges affecting commercial real estate companies as well as the rest of the country, including the war in Ukraine, inflation, rising rates and the prospect of a recession, but the work-from-home syndrome is still a priority for most CEOs. As Owen D. Thomas, CEO and Director of Boston Properties, points out, “It’s now about balancing power – management versus labor.” He thinks the question is divided by industry, function, seniority and geography. For TMG Partners Chairman and CEO Michael A. Covarrubias, the issue continues to evolve as it has evolved from fear of the COVID-19 virus to cultural change. Thomas points out that there is a dramatic performance gap between the East Coast and the West Coast. New York City is doing well, but San Francisco’s business district is suffering, with so many tech companies still working from home, declining Asian tourism and homelessness. Thomas sees the main business districts becoming more versatile. “We must work together to reactivate cities through the arts, restaurants and the entertainment industry,” he said. Covarrubias sees the industry becoming more project specific. “There are four types of recession: global, American, real estate and my building. Real estate is a local business. »
  3. The reinvented office space is the magic sauce. As the retail and residential sectors make a strong comeback, Kilroy Realty Corporation CEO John Kilroy sees commercial real estate developers moving more cautiously. “For people to make decisions and be aggressive, they have to have confidence and right now there’s not a lot of places to feel confident.” With inflation, an inconsistent tax system and so much political rancor, there’s not much stability to be found. “Companies act like most families,” Kilroy said. “If you’re uncomfortable about something, you wait, and that’s the pattern we see.” In this type of environment there are great buying opportunities to be found, mainly for newer buildings. With the demand for activation and extraordinary amenities, old buildings are obsolete. By retaining what worked best in the office space and incorporating what makes working from home desirable, reimagined offices can be a wonderful work environment and a wonderful human environment.
  4. A rising tide lifts all boats. Elizabeth Hart, vice president of Newmark, believes what the pandemic has taught us is the need for collaboration, cross-selling and sharing best practices, to create the best communities for tenants and to develop the real estate industry as a whole. According to Andrea Pierce, managing director responsible for the management of offices and industrial assets in the United States, Starwood Capital Group, “We are seeing such positive momentum thanks to the willingness of the owners, service providers and law firms of work together as peers, not competitors.” The flight to quality and experience continues, with tenants seeking a new or reinvented space with large windows, full amenities and more open space to allow for greater collaboration, while activation also remains a key driver . Prefab suites are in high demand; there’s not much point in renovating because tenants want an efficient space that’s ready to go from day one.
  5. Rent is no longer the only driving force. In these uncertain times, companies are not basing their rental decisions solely on rental costs. Upgrades and Concessions now play a key role. According to Robert Paratte, Executive Vice President of Leasing and Business Development, Kilroy Realty Corporation, “Tenants have more questions beyond rental rates, like, What is my workforce like? I want to be located? Is my space ready to go?” There will likely be more aggressive pricing on a lease-by-lease basis rather than sweeping rate cuts. As high interest rates only go not go away anytime soon, experts on the Major Western Region Leasing Markets panel expect the next six to nine months to provide some clarity on the way forward.Ultimately, until employees return on a regular basis, companies cannot and do not make decisions.
  6. There is hope for investors. While all the major bubbles – crypto, SPAC, tech stocks and real estate – have all but burst, there are positive investments to be found. According to Stephen Van Dusen, Managing Director of Eastdil Secured, “From an industry perspective, the fundamentals are the best – industrial, multi-family and also across the alts – data centres, single-family construction for rent and student housing.” For those in debt, loan maturities are coming at a very difficult time. But, according to Christopher Peatross, Founder and CEO of Swift Real Estate Partners, “Low unemployment means hope in the office market. If we bring people back to the office, that could change quickly. Public markets say asset values ​​will move, while private markets aren’t there yet. “There is an abundance of opportunity ahead,” said Jonathan Lange, senior vice president, Los Angeles area, Boston Properties. “We feel it more on the side of the public. Our stocks are approaching the pre-pandemic close, which is very compelling for us and our teams as we consider how we deploy capital. »
  7. Back to the future.The Western Region Investment Sales Markets panel also looked at potential topics for 2023. With inflation (hopefully) subsiding, the war in Ukraine ending and employees returning to the office, there will be opportunities. We will know the definition of distress and the high level when it comes to inflation. Rates will be improved, the lending environment will be better, and debt markets will work better. The industrial and multi-tenant sectors will do well. We’ll talk more about adaptive reuse – converting offices to life sciences, residential and hospitality. “In times of uncertainty, you have to have conviction,” Van Dusen said. “A lot of transactions happen early in the cycle. It will look and feel a little different, but we will be moving in the right direction.
  8. The haves and the have-nots. In times of uncertainty, there is a flight to quality. “In these times, quality really reigns supreme,” said Eliott Trencher, senior vice president and chief investment officer, Kilroy Realty Corporation. “We will see winners and losers across the various sectors as well as increased bifurcation between high and low quality assets.” Peatross sees the haves at around 15% of the market and the have-nots at 85%. “We have to start the rental. Banks won’t lend if they don’t see leasing,” he said.
  9. Development is progressing despite continued supply chain and staffing shortages. Although construction costs remain high and schedules face long delays, projects continue to be built and delivered, particularly in industrial and life sciences. Due to staffing shortages, the eligibility process in some jurisdictions can now take 18-20 months, compared to 8-10 months before Covid. Applications that once took 30 days can now take 60-90 days to be approved. However, the developers continued to be served by their contracts, with force majeure clauses involved in many discussions. Thanks to long-standing, trusted partnerships with contractors, issues are resolved without major disruptions. “Our goal is not to put our contractors out of business,” said Sam M. Cheikh, Managing Director, Asset Management and Asset Development, Hines Interests Limited Partnership. “When cost escalation issues arise, we try to partner with GCs as much as possible so that everyone is happy at the end of the day.”
  10. Allen Matkins UCLA Anderson Commercial Real Estate Survey. Although the first nine months of the year have been sluggish for the real estate sector as a whole, the results of this year’s commercial real estate survey give rise to a feeling of optimism. Across all four asset classes, sentiment for the industry continues to be positive. Retail trade is experiencing mild optimism in most markets. Retail markets in San Francisco and Los Angeles are still grappling with the work-from-home dilemma, but the booming housing market will help. There is also a slight optimism in the multi-family sector. Office sector sentiment is neutral in Northern California and pessimistic in Southern California, although the slowdown is seen as temporary. Companies see real value in getting employees back to work and believe it will be embraced again as they recognize the benefits of culture, loyalty, creativity and mentorship.

For more information and insight into the California and national commercial real estate market, please visit www.allenmatkins.com/realestate.

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