Commercial real estate has seen significant changes over the past few years. COVID-19, changes in the technological landscape, and high inflation have all affected investors and lenders.
As investors head into 2022, it’s important to consider some of the top commercial real estate market trends. These trends can impact investors and lenders tasked with financing commercial real estate.
One of the most clear-cut lessons learned during the COVID-19 pandemic was that remote work offers a truly sustainable model.
In March 2020, many businesses were forced to adapt to a work-from-home approach quickly. Many companies anticipated a return to the office within a few weeks. However, as the pandemic dragged on, people became more accustomed to using tools like Zoom or shared drives to perform their normal duties in their home environment.
Many companies believed that remote work would only be necessary for a few weeks. In some cases, employees still haven’t returned to the office. Companies that have reopened their doors have often received a muted response. Others have adopted a hybrid approach, only requiring their employees to come into the office a few days a week.
As companies mull over the consequences of continuing to lease office space, the commercial real estate sector will likely see a continued decline of investor interest in office space. Small businesses that are agile and able to fully operate in the cloud will represent the best investment opportunities.
Larger companies will likely keep their doors open. However, this may still represent a change to the traditional model. Employees may only come into the office a few days a week. As a result, larger companies may seek smaller spaces (and lower rents) by rotating their staff regularly.
While demand for office space may decrease, industrial property will likely see a surge. As more retail businesses have closed their traditional storefronts in favor of eCommerce models, there is a greater need for warehouse properties to store goods until they can be shipped to consumers.
The U.S. has experienced considerable pressure on its supply chains, primarily due to COVID-19. Production companies have had to delay shipments due to factories being closed. Shipping lines have been hit hard by staff impacted by sickness. Unanticipated increased demand for items has knocked the supply chain completely out of balance.
As the desire for goods purchased over the internet increases, a place to store those goods will be necessary. This demand will lead to additional investments in industrial warehouse facilities.
In a recession, normally, the availability of capital falls. Yet, the COVID-19 pandemic has proven to be an exception to the rule. Investment funds remained available for many real estate properties, especially industrial, multi-family, and self-storage categories.
The abundance of capital for real estate investment will keep the sector strong. Smart investors will take advantage of the lower interest rates to invest in properties that have the potential to increase in value.
Adaptive reuse is a real estate term used to describe turning large properties that have lost tenants – such as closed shopping malls – into viable properties modified to fit other needs in the real estate market. Real estate investors can choose to redevelop a property rather than allowing it to become unkempt or a blight on the local neighborhood.
Investors can develop adaptive reuse properties into apartment dwellings, office spaces, or industrial warehouses. Investors can approach local zoning authorities for approval to establish a new type of property in the existing space.
If revitalization is done right, redeveloped properties can add a fresh look to older neighborhoods. An outdated office building modified into a new apartment building can invigorate the entire neighborhood.
The architecture and redesign of the building can provide new tenants with a prime location in a downtown area. This opportunity represents a win-win for commercial real estate investors, cities, and potential renters alike.
Another example of adaptive reuse is the development of coworking centers in properties that once served industrial purposes. Coworking is a trend that is growing, especially as many smaller offices have shut their doors completely.
Coworking centers allow remote workers to access a dedicated desk and helpful amenities while connecting with other remote workers. A well-designed coworking center with modern architecture, high-speed internet, and an on-site snack bar can attract remote workers who want to get out of their houses a few days a week.
Environmental, social, and governmental (ESG) initiatives have increased in the past few years. These initiatives have driven a shift toward diversity, philanthropic living, and climate change countermeasures. More investors are now considering how a property can potentially meet ESG goals.
Climate change is one influencing factor for investors looking at industrial commercial real estate properties. They want to invest in locations that have the potential to offset pollution and other climate change drivers.
As more individuals become concerned about climate change and its effects on everyday life, it becomes increasingly likely that new laws will be introduced to combat the problem. Properties that are purchased in areas with significant environmental impact will likely see a steep decline in value unless they can adapt sustainability measures to quickly to new legislation.
From a diversity standpoint, there is a serious effort underway to develop new properties in historically poor or run-down locations. Revival of blighted areas is another area that ESG initiatives seek to improve upon. Investors will continue to see venture opportunities for properties in these locations in 2022.
In November of 2021, inflation increased to 6.8%, the country’s highest rate since June of 1982. Although inflation has been caused by various factors – including rising demand, wage pressures, and supply chain disruption – it remains to be seen whether the Federal Reserve will act to raise interest rates.
Inflation has been the most prevalent among gasoline, food, shelter, and vehicles. It remains to be seen whether the inflation rate is temporary and will return to a rate below the target of 2% per year. If it does not, the Federal Reserve may increase interest rates, which will lead to further costs for commercial real estate financing.
In July of 2021, President Biden signed the largest infrastructure bill seen for decades. It dedicates $1.2 trillion toward rebuilding, constructing, and improving new and existing roads, bridges, broadband, and water systems. From a commercial real estate investment perspective, the bill may prove to be consequential.
The bill’s main purpose is to improve and expand transportation systems across the nation. As projects are implemented and completed, roads will improve, accessibility will increase, and poor areas may see new development.
Improved broadband and water systems may also enhance investments in rural locations.
When commercial real estate is accessible to revamped infrastructure, investors may see an increase in value. New opportunities may abound for savvy investors willing to wait to see a return until infrastructure projects are completed.
The COVID pandemic has accelerated the acceptance of work-from-home technologies and eCommerce more than ever before. You can expect to see further technological change as artificial intelligence (AI), the Internet of Things (IoT), and cybersecurity measures continue to increase their foothold in the world.
How technological innovation will impact commercial real estate investment remains to be seen. As in prior technological upheavals, such as the widespread availability of the internet, changes may affect various industries differently.
As an example, retail was one of the first industries to feel the brunt of technological change with the introduction of Amazon in 1995. The company was initially launched as an online bookseller, but within ten years, it had significantly affected the ability of local and big-box bookstores to compete effectively.
As Amazon further grew to include products of almost any type, other traditional retail stores fell by the wayside. The companies that weren’t ready to embrace new technologies lost out. Skilled commercial real estate investors can learn from the Amazon model.
Astute investors should stay abreast of technological changes that could affect their investments in the future.
Since commercial real estate investments tend to be held for longer periods than other investments, such as stocks, it’s important to consider how future technology could impact your investments down the line.
There are many considerations for commercial real estate investors to ponder before deciding on the best options to meet their goals.
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