Report says CRE leaders expect post covid resurgence

In May, law firm DLA Piper released the 2022 edition of their Annual State of the Market Survey report, highlighting that “optimism about the future of commercial real estate (CRE)” remains strong despite the headwinds the industry faces.

The survey on which the report is built was conducted in February and March of 2022, by collating and analyzing input from CRE leaders and professionals in the US – specifically their take on matters including “pandemic recovery, economic outlook, attractiveness of investment markets and overall expectations over the next 12 months”. This input is further contextualized with additional research, presented the report.

Highlights

Overall, the report [PDF] shows “increased bullishness”, with “more respondents in 2022 [having] a higher level of confidence for the real estate industry’s next 12 months”.

Findings from the report also include that 73 percent of respondents are “expecting a bullish market”. This is consistent with 2021 expectations. “However,” they added, “this year, respondents reported feeling a higher level of confidence in a bull market over the next 12 months; 33 percent described their bullishness as an 8 or higher in 2022, compared to just 16 percent in 2021.”

Top contributing reasons include the apparent availability of capital in the market, with over half of the respondents citing this as the main source of their confidence.

Viewed per sector, Commercial Property Executive says in their analysis of the report, “Industrial (66 percent) and multifamily (57 percent) remain the property types that investors believe offer the best risk-adjusted returns over the next 12 months.”

Shaping CRE

Inflation and interest rate changes were ranked most likely to have an impact specifically in the CRE market in the coming year, but ecommerce, migration of workers out of city centers, and the “redesign/reimagining use of office and other commercial spaces” were also common responses.

Concerns remain

Top concerns included interest rate increases (cited by 26 percent of respondents), inflation (18 percent), as well as the Russian invasion of Ukraine.

US gains and advice

Finally, respondents to the survey said they felt the US would be seen as a safe and stable option, attracting non-US investment. “During times of uncertainty – like the pandemic or the conflict in Ukraine — investors often flock to safe havens,” the report reads, adding “a well-defined legal system, transparency and proven economic resiliency” are among the US’s assets.  

In the face of global uncertainty though, the report authors caution that CRE professionals and firms must “remain agile and prioritize adaption, with an eye towards staying ahead of the curve”.

SOCIAL: Do you see the US CRE market as a safe haven in times of global uncertainty? How do you expect inflation to make itself known in your CRE specialty?

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Forecasted mortgage metrics for 2022 show strength in commercial, multifamily

According to a forecast from the Mortgage Bankers Association (MBA), 2022 is set to be a record-breaking year with mortgage borrowing and lending activity for commercial real estate (CRE) assets surpassing one trillion USD. The figure was released during the MBA’s annual CREF Finance Conference and Expo , where several industry experts discussed the way forward for CRE this year.

The general feeling seemed to be that 2022 will build on the overall strong figures from 2021, carrying forward the market momentum despite concerns from some about headwinds from the current rates environment. As with last year, specific asset classes are again expected to steal the show in terms of growth metrics.

Multifamily and industrial: Still real estate darlings

One of the strongest performers is multifamily, with a large part of the one trillion USD forecast attributable to properties in this class. Lending for multifamily is expected to make up 493 billion USD of the overall total, a 5% increase on 2021’s 470 billion USD.

Speaking at CREF, Angela Mago, president of Key Commercial Bank Real Estate Capital at KeyCorp, stated that multifamily and industrial are still favored asset classes, adding: “You will see stability there.”

Building on 2021’s foundation

The ongoing demand for these asset classes is unsurprising, given their recent performance. In 2021, both classes recorded record-breaking metrics for rent growth according to Moody’s Multifamily and CRE in 2021 analysis.

For multifamily, Moody’s reported that: “asking and effective rents grew by 7.5% and 7.9%, respectively.” These figures present the highest growth rates on record since the start of quarterly data recording in 1999. Multifamily vacancy rates also dropped to pre-pandemic levels by Q3, making these properties an increasingly sure-footed investment. 

The third quarter also posted some strong gains for industrial, with vacancies falling to 8% and effective rents reaching 1.9%, the strongest quarterly growth for the class in five years. In particular, warehouses turned out to be one of 2021’s savviest investments.

Moody’s reports that vacancies for warehouse properties dropped to 7.5% by Q3 and effective rents rose a staggering 3%, the highest upwards shift in over 10 years.

Future forecasts

Looking ahead to 2023, MBA predicts similarly high numbers, with commercial borrowing and lending expected to exceed 1 trillion USD for the year. Multifamily remains their top contender and with around 474 billion USD in lending anticipated.

Worth bearing in mind, however, is that there’s always the potential for a market shift, so we’ll be keeping a close eye on incoming predictions as we move ahead in 2022.

SOCIAL: How are multifamily vacancy rates and rentals adjusting in your area? And do you anticipate that the trend will continue?


What’s happening in… Vancouver?

Vancouver, in British Columbia, is one of Canada’s most well-known and densely populated cities. It is positioned on the west coast, just 45km north of the border with the United States. Some 650 000 people live in the “city proper”, while the larger metropole (bearing the name “Greater Vancouver”) is home to almost 2.5 million people. Vancouver is reportedly Canada’s most cosmopolitan city, with an ethnically and linguistically diverse population.

The city is a popular destination for the film industry (nicknamed “Hollywood North”), and for tourists, as well as enjoying a reputation as a cultural hub with many galleries, museums, and theatres. With a busy port, rail network, and as a nexus for the transcontinental highway, Vancouver’s economy was built on trade, and has expanded to include film and TV, tourism, raw materials, construction, and technology. Recently digital entertainment and the green economy are also driving GDP growth.

Post-pandemic landscape

Like most of the world, Vancouver was rocked by Covid-19, with business shutdowns and job losses. However, it was relatively more resilient than other Canadian metros. The region’s gross domestic product (GDP) is expected to bounce back by 6.8% in 2021, and forecast to grow by 4.1% in 2022.

By September 2021, however, the Vancouver region’s employment figures had recovered in absolute terms. The Vancouver Economic Commission says: “Some jobs have migrated sectors; retail & hospitality are still recovering, while other sectors – such as tech and construction – have gained jobs.” Employment in the Metro Vancouver area hit 101.3 in September 2021, the highest figure in the country and “finally surpassing pre-pandemic levels”.

Property watch

Vancouver is the country’s most expensive residential market and the most expensive place to live, which means that while it enjoys high scores in quality of life metrics, it has priced a lot of younger buyers out of the market. It enjoys high demand, and is considered a strong commercial real estate (CRE) market – especially for the multifamily and office sectors.

Software and data provider Altus Group says CRE investment in the Vancouver market area “saw a significant surge in the second quarter of 2021”, adding that the robust multifamily and apartment market is “fueled by the highest apartment rental rate in Canada, a shortage of rental product in the construction stage, and the anticipation of border openings to international students and immigration in the near future”.

Commercial vacancies naturally increased during the pandemic (increasing from 4.4% in late 2019 to 7.5% in late 2020) and the “return to office” expectations  of 2021 was tempered by news of variants and secondary outbreak waves.

Companies seeking space in the city are increasingly looking to develop former industrial space in the east, according to Business in Vancouver, with particular interest from firms in high tech and the medical and life sciences. They are however competing for space with a powerhouse industrial segment. In Q1 and Q2 2021, investment in the industrial market in Vancouver surpassed $1.1 billion, and lease pricing reached a new record high of $15.50 per square foot.

Flood and extreme weather, coming for commercial property too

According to The Washington Post – drawing from the studies presented at the world’s largest climate science conference in December 2021 – extreme weather events as a result of climate change are here to stay, and will get worse. The word from researchers is brace yourselves for a “new era of climate disasters”.

The new normal forecasts

Just last month, Malaysia experienced torrential rain and flooding, Australians were told to prepare for extreme heatwave conditions, and South Africa experienced golf-ball-sized hail in the middle of summer.

Extreme weather has already had huge ramifications for residential property – planning, building, and critically insuring – and the global commercial property sector must grapple with the same set of issues.

Residential and commercial

In the US, a new report from nonprofit, First Street Foundation and engineering firm, Arup suggests that an estimated “730 000 retail, office and multi-unit residential properties face an annualized risk of flood damage”. The risk assessment they used did incorporate fundamentals like sea-level rise, but – the researchers told CNBC – “focused more on flash floods, also known as pluvial flooding”.

According to NOAA’s National Centers for Environmental Information, there were 22 separate “billion-dollar weather-related climate disasters” in the United States in 2020.  

Financial and investing implications

First Street Foundation previously worked with Realtor.com to enable flood scoring for all US-based residential properties, and tools like this and other research models are increasingly going to be a part of the real estate developer’s toolbox.

Harvard finance lecturer John Macomber – writing in the Harvard Business Review – says that “climate risk has become financial risk”, and he argues that owners and developers have five options open to them for risk mitigation or “in investing in resilience” as he calls it. These are “reinforce, rebuild, rebound, restrict, and retreat”.

The challenge, he concludes, is “to look ahead, not behind, and to make these choices with intent”.

A new reality: AR and VR in CRE

The way the modern world interacts with physical space is changing. We’ve gone from “bricks and mortar” to “bricks and clicks” as the e-commerce revolution transforms retail, and all our devices are now talking to us and to each other. 

The increasing utility of virtual and augmented reality is another contender for our attention as their applications in the commercial real estate (CRE) space become more apparent. These technologies promise to revolutionize the way we do business and interact with both our clients and real estate itself. 

In this latest part of our series on emerging tech, we take a dive into some of the applications of these new tools and how they can be used to enhance CRE operations.

Reality defined

For many of us, the difference between virtual reality (VR) and augmented reality (AR) is a little fuzzy, so let’s start there. Augmented reality, according to the brains over at MIT: “superimposes virtual enhancements on real-world scenes in real-time.” 

In practice, this might mean you’re walking around with an app that works through your phone camera and ‘adds’ images or information to the real world around you – like superimposing a dinosaur into your living room, or wayfinding markers and digital info onto the world around you.

Virtual reality is a little different in that it creates an entire world or scene that you can explore, usually with the assistance of techs like VR headsets and haptic gloves. So, think about viewing an entire virtual mall or building site, or the interior of a space you are leasing out.

The terms are often used interchangeably, and they do overlap to some degree, but they aren’t synonyms. Fortunately, splitting them into neat little boxes is not a prerequisite for understanding how AR and VR can be used to enhance real-life CRE.

Space that virtually sells itself

One of the biggest advantages VR and AR offer is the ability to virtually show spaces, even before they’re built. This means marketing efforts can kick off earlier in the development process, and potential clients get a better, more immersive sense of what a property might look like before there’s even a door to step through.

Existing spaces are also increasingly being digitized through the tech produced by companies like Matterport which specialize in 3D capture. Properties can be staged and shown as a digital, interactive experience that really gives potential buyers a sense of what a space looks like. Recent studies on residential properties using the tech showed that having a virtual tour meant that, on average, a property closed 31% faster and sold for 9% more.  

Aside from the obvious financial upshot of those numbers, VR tours also mean less time spent physically traveling to and from sites. That can be a huge bonus for both CRE professionals and clients. Brokers can guide prospective tenants towards a higher number of property options and help those clients curate a shortlist of candidates they’d like to see in person, raising the likelihood of making a deal.

Built to (digital) spec

Other areas where VR is making an impact are in architecture and construction. Modeling buildings under development in VR means that any potential problems can be identified before they’re, literally, cemented in place. Plans can also adapt and change easily, and creative solutions can be “tried on for size” before committing to them. Having a digital model also serves as a point of truth that a team can return to during lengthy development projects. All of which translates into savings in time, money and materials.

Once construction is complete, buildings outfitted with appropriate sensors can also generate a digital twin – a virtual copy of the building and its systems. This is a real-time model of the building and can include information like power usage, air quality, temperature, and occupancy, among other factors. Using this data, it’s possible to streamline a building’s operations to meet energy efficiency goals and once again, reduce costs. 

Of course, this is much easier to include as part of a new development. One of the challenges to the wide-scale implementation of this tech is aging building stock, which is costlier to outfit or retrofit with the necessary hardware.

Real-world enhancement

Meanwhile, returning to VR’s more grounded cousin, augmented reality has some interesting applications of its own. Large furniture suppliers like IKEA are already using the tech to help buyers model furniture, or entire room designs, through an app. In CRE, this kind of functionality could see use when staging a space – along with the option to present multiple versions of the room or site to potential buyers. 

As mentioned above, AR is also being used for wayfinding. Using digital sensors, a busy mall or office space can be outfitted with virtual markers that visitors can follow to their desired destinations. Retail, in particular, stands to benefit from the ability to guide shoppers to specific areas or products – all while providing additional information and support through a phone-based app.

Steady growth on the cards

As far back as 2016, Goldman Sachs predicted that the global AR and VR market would be worth $80 billion by 2025. While current estimates from Statista are a little tamer – with VR predicted at $12 billion and mobile AR at $26 billion – the trajectory of the industry is clear. 

Consumer demand for AR and VR enhanced experiences is likely to climb as these technologies gain traction, and the value to CRE professionals is obvious. All of which makes this a curve well worth getting ahead of for the savvy brokerage.